National Bank of Pakistan is the largest commercial bank of Pakistan. The bank handles treasury transactions for the Government of Pakistan as agent to the State Bank of Pakistan. The bank has a branch network of 1,232 branches in Pakistan and 18 overseas branches including the Export Processing Zone Branch. It also provides services as trustee to National Investment Trust including the safe custody of securities on behalf of NIT.
National Bank of Pakistan was established on November 9, 1949 under the National Bank of Pakistan Ordinance, 1949 in order to cope with the crisis conditions which were developed after trade deadlock with India and devaluation of Indian rupee in 1949. Initially, the bank was established with the objective to extend credit to the agriculture sector. The normal procedure of establishing a banking company under the Companies Law was set aside and the bank was established through the promulgation of an ordinance due to the crisis situation that had developed with regard to financing of jute trade.
It commenced its operations from November 20, 1949 at six important jute centres in the then East Pakistan and directed its resources in financing of jute crop. Its Karachi and Lahore offices were opened in December 1949. The nature of responsibilities of the bank is different and unique from other banks and financial institutions. The bank acts as an agent to the State Bank of Pakistan for handling the provincial and federal government receipts and payments on their behalf. The bank has also played an important role in financing the country's growing trade, which has expanded through the years as diversification took place.
RECENT FINANCIAL PERFORMANCE H1FY08
NBP realized an income of Rs 7.88 billion in H1FY08 which is 13% lower than H1FY07 of Rs 9.01 billion. On comparing the half-year results (YoY), the net mark-up income augmented by 16% mainly due to the growth in volumes. The increase in net interest income was offset by manifold increase in provision for NPLs, which resulted in 17% decrease in net mark-up income after provisions. The NPLs rose due to removal of the FSV benefit which was done in the third quarter of FY07 and its effects were apparent on profitability by an amount of Rs 3.1 billion therefore this factor has to be taken into account to compare quarter-wise profitability as this benefit is not there in H1FY08.
The non-mark-up income rose by 84% owing to the increase in fee and commission (23% over H1FY07), dealing in foreign exchanges (326% over H1FY07) and gain on sale of securities (106% over H1FY07) which combined with only 28% increase in non-mark-up expenses positively contributed to total profits. The increase in "other income" was mainly due to Rs 987.610 million of compensation for delayed refunds from income tax. (Note No 12)
Despite the 13% decrease in PAT the total profits for appropriation rose by 30% due to accumulated profits of previous years. The sliding profitability trend is in line with banking industry's performance. The rising interest rates have led to increased NPLs and slowdown in advances, specially in the consumer segment. The diluted earnings per share for the half year fell to Rs 8.79 to Rs 10.05 due to lesser PAT in H1FY08 and also because the earnings per share have been adjusted for the bonus share issue for the period.
The total assets grew by 4% to Rs 795.85 billion in H1FY08 which was collectively contributed by a growth in cash and balances with other treasury banks (32% over FY07), cash with other banks (18% over December 30 '07) and advances (10% over FY07). The advances included Rs 45,935 million NPLs which were up by 20% from Rs 38,318 million (December FY07) the increase is way more than industry average of 7.8%. Consequently, the NPLs/advances ratio also stood at 12% which is higher than industry average of 8%.
The investments in line with the industry trend, fell to Rs 172.67 billion which is 18% lower than Dec'07, mainly due to a reduction of Rs 41.17 billion in market Treasury Bills. The entire impact of T-bills was not apparent as investments also included Rs 8 billion Term Finance Certificates issued in this half maturing in FY13. Total liabilities augmented by 6% in H1FY08 due to increases in bills payable (75% over FY07), borrowings (35% over FY07) and deposits (5% over FY07). There was barely any growth in Savings deposits and in fact a 2% decrease in fixed deposits. However, the non-remunerative accounts, such as current deposits grew by 9% providing the bank low cost funds.
During the first half the bank issued a 10% bonus shares with a value of Rs 815,432 Million and a cash dividend of Rs 7.5 per share. The average share price in H1FY08 remained near Rs 220 per share which could have been better if the stock market hasn't been into turmoil. The ROA of NBP was 1.01%, which is exactly in line with industry average. Whereas the ROE is only 6.86% in comparison to 10% of the industry which implies that NBP raised capital through equity which is most preferred form of fund in Pakistan. ADR of NBP (60%) is below the industry average (65%).
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Financial Highlights - NBP Rs '000
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H1 '08 H1 '07 Chg (Rs) Chg (%)
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Interest earned 28,016,571 24,036,424 3,980,147 17%
Interest expensed 9,080,762 7,770,541 1,310,221 17%
Net interest income 18,935,809 16,265,883 2,669,926 16%
Provision against NPLs 5,053,479 -481,685 5,535,164 -1149%
Total Provisions 5,034,097 -505,825 5,539,922 -1095%
Net interest income
after provision 13,901,712 16,771,708 -2,869,996 -17%
Total non-interest income 7,561,677 4,110,275 3,451,402 84%
Total non-interest expenses 8,789,682 6,880,392 1,909,290 28%
PBT 12,673,707 14,001,591 -1,327,884 -9%
Taxation 4,792,274 4,989,035 -196,761 -4%
PAT 7,881,433 9,012,556 -1,131,123 -13%
Basic/Diluted EPS 8.79 10.05 -1.3 -13%
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H1 '08 Dec '07 Chg (Rs) Chg (%)
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Deposits 621,341,765 591,907,435 29,434,330 5%
Advances 372,766,231 340,322,100 32,444,131 10%
Investments 172,665,033 211,142,868 -38,477,835 -18%
ADR 0.60 0.57 - -
NPLs 45,935,000 38,318,000 7,617,000 20%
NPLs/Advances 12.32% 11.26% - -
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In FY07, NBP posted a PAT of Rs 9 billion which is 12% higher than FY06. If we look at the quarter wise profitability it was on a rise till 3QFY07, but in the last quarter, the State Bank of Pakistan removed the benefit of FSV, which approximately affected the profits of NBP by Rs 3 billion. Therefore, total provisioning of the bank showed massive increase of 99% during the year and reached at Rs 4.7b as against Rs 2.3b in FY06.
The total assets stood at Rs 762.12 billion as on December 31, 2007, which is 20% higher than FY06. The driving factors of assets growth were 51% increase in investments, 163% increase in operating assets and 8% increase in advances. Advances mainly concentrated on consumer finance and agriculture, which has been grossly around Rs 32 billion disbursement during the period FY06-07. On the other hand, the NPLs also showed considerable growth of 6.2% to an amount of Rs 37 billion which can be a threat to future profitability.
The deposits grew to Rs 591 billion in FY07, which is a phenomenal growth of 18% over FY06. The increase in deposits has been in the low cost deposits, such as current accounts (41% growth since FY06). The growth in deposits was mainly due to higher cash inflows into economy and more liquidity in the market.
The ADR ratio has been on the rise in previous few years which shows improving liquidity of the bank. However, in FY07 ADR declined 57.6% from 63.0% due to a strong growth in deposits over the advances. NBP has posted an ever-increasing profitability over the last few years. In FY07, the pre-tax profit increased to Rs 28.06 billion, an increase of 6.6% over the last year. Earning per share jumped by over 11.7% from Rs 20.88 in 2006 to Rs 23.34 in 2007.
An increase in pre-tax profit was achieved through strong growth in core banking income. Net interest income increased by Rs 3.5 billion (11.5%) due to better yields and volume driven growth spurred by increase in consumer loan portfolio. Dividend income and capital gains also made a healthy contribution as it increased by Rs 371 million and Rs 1,145 million over 2006 respectively mainly owing to higher dividends from NIT Units as well as capital gains recorded on sell of 10% NIT Units.
If we look at the previous years of the bank, there was a major jump in profitability in CY05, when its profits after tax nearly doubled. This was in fact caused by a more than 100% increase in interest income, when the interest earned on loans and advances to customers and institutions increased from Rs 10 billion to over Rs 21 billion.
This phenomenal growth in CY05 in fact eclipses the otherwise spectacular growth that occurred in other years. Profits rose by almost 50% in CY04, and by almost a third in CY06. This growth in profits is also not reflected that well in earnings ratios because assets, and equity also showed a steep upward trend during these years.
The advance to deposit ratio (ADR) for NBP has declined over the past few years, signifying a decrease in the bank's liquidity position. This has been a trend exhibited by the banking sector as a whole, and is caused by the fact that while deposits have shown a healthy increase over the years, advances by banks have grown at an ever greater rate, overcoming the rise in deposits. Industry ADR stood at 70.3% in CY06 as compared to 66.5% in CY05 and 61.5% in CY04.
The major upward trend in deposits throughout the industry has been the result of the heavy economic activity during recent years fuelling the demand of consumers and the private sector for credit. These increases have occurred across all categories, over both short and long terms and in both local and foreign currencies.
The industry has also shown a trend towards increasing deposits in banks, a major cause of which is, of course, the booming economic activity, apart from higher foreign inflows in the form of worker remittances and FDI, as well as expanding branch networks, product innovation and better efforts at marketing.
In fact, the growth in deposits in the top five banks, including NBP, has actually been less than that in the next five banks. The deposit growth in public sector commercial banks is second highest in the industry, behind local private banks.
Growth in NBP's deposits has been fluctuating over the years. These increased by 9% in CY03 and 18% in CY04, but decreased by half-a-percent in CY05. However, deposits showed a resurgence in CY06, showing an increase of 8.3%, thus standing at over Rs 500 billion.
This irregular trend is mostly caused by institutional deposits, which decreased in CY05 but then showed healthy growth in CY06. Customer deposits have shown a steady increase over the years. They increased by Rs 8 billion in CY05, and a significant Rs 31 billion in CY06. Within customer deposits, fixed deposits have posted higher growth than savings deposits.
NBP has maintained a pretty steady proportion of earning assets to total assets, earning assets growing at a slightly higher rate than total assets. Within earning assets, investments actually decreased by about 10% in CY04 and in CY06, while on the other hand advances have maintained a healthy growth rate of 37%, 22% and 18% in CY04, CY05 and CY06 respectively.
The result has been that advances have increased from 58% of earning assets in CY04 to 61% in CY05 and 66% in CY06, of course leading to a corresponding decrease in the proportion of earning assets constituted by investments. Industry figures substantiate this trend, where in CY06 advances increased to 55.8% of total assets from 54.4% in CY05, while investment portfolio decreased from 21.9% of assets to 19.2% in the same period.
In addition, 60% of the growth in banking assets in CY06 was accounted for by growth in advances. Apart from consumer and private sector credit, NBP also lends extensively to the agriculture sector and is the largest lender to this sector.
The earning assets have shown both increasing returns and increasing costs. As discussed earlier, NBP has increased the ratio of advances to investments within its earning assets, which has also increased the bank's risk-weighted assets. This trend can be interpreted as a trend towards improving the yield on earning assets on the back of leverage provided by the higher capital adequacy ratio. The yield on earning assets improved from 8.2% in CY05 to 9.5% in CY06. Cost of earning assets increased from 1.62% in CY04 to 2.28% in CY05 to 2.75% in CY06.
Non performing loans (NPLs) of the bank showed a downward trend till CY2005, decreasing from Rs 39.77 billion in CY03 to Rs 36.10 billion in CY04, to Rs 33.74 billion in CY05. This followed an industry-wide trend, where NPLs decreased to Rs 177 billion in CY05 from Rs 211 billion in CY03. Thus, NBP in particular and the industry in general has been able to contain credit risk despite aggressive growth in advances to consumer and private sectors. This is also shown by the downward trend in NPLs as a percentage of advances.
There was an increase in NPLs, however, in CY06. However, this cannot be attributed to relatively less monitored and regulated loans issued, since interest rates showed a significant increase in the period, while the high levels of indebtedness affected the ability of the market to absorb loans. Industry figures show that the downward trend of NPLs slowed down during this period. Industry NPLs stood at Rs 175 billion at the end of CY06.
Disaggregated industry analysis revealed that there were plenty of fresh NPLs incurred during this period. However, extensive write-offs and recoveries managed to reduce the overall level of NPLs. NBP has Special Assets Management Group dedicated towards the monitoring and recovery of NPLs. NBP has shown strong market performance in the period under review.
Listed on the KSE-100 and KSE-30 indexes, the shares of the bank have shown significant turnover. However, since FY07, the share prices have started falling in line with the decelerating profitability of the banking sector along with economic turmoil that the country is facing.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for
Business Recorder.DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].