The banking sector has experienced a strong growth in past a few years. The rising interest rates owing to tight monetary policy enabled the banks to enjoy a high profitability.
Soneri Bank was incorporated on September 28, 1991. Its first branch started operations in Lahore on April 16, 1992 followed by Karachi branch on May 09, 1992. The bank has now a network of 89 branches spread all over Pakistan including the Northern Areas, where no other private bank has ventured so far. Four of its branches are exclusively offering Shariah compliant products to the customers.
The Fareesta family, owners of Rupali Bank holds a controlling stake in the bank. The bank offers a range of corporate, treasury and retail banking related products with an emphasis on trade related services. SNBL's key focus is to encourage exports and a major portion of its advances portfolio - nearly 40% - is related to exports financing.
At present, the bank's equity stands at PKR6.610bn and the total assets of PKR76.854bn at the end 2007. SNBL's credit portfolio is characterized by low advance-to-deposit ratio over the years. The lending practice of SNBL is prudent and conservative in terms of asset quality. The bank has a paid-up capital of Rs 4.11b and has fulfilled the requirement of Rs 4.0b till the end of December 2007. The credit rating of the bank assigned by PACRA is "AA-" for the long term and "A1+" for the short term with positive outlook.
RECENT PERFORMANCE (H1'08)
In the half year ending H1FY08, the bank declared a profit after tax of Rs 464.5 million which is 7% less than H1FY07 (Rs 497 million) mainly due to a fall in net interest income after provisions. Net interest income: The net interest income was up by 19.8%, in these six months of operation due to rising interest rates in the face mushrooming inflation.
The increase in interest income of 8% was unmatched by a mere 3% increase in interest expenses as the bank was able to recruit low cost deposits. The provisions against non-performing loans increased manifold, due to a change in provisioning in method by the State Bank of Pakistan, resulting in a 16% fall in net interest income after provisions.
NON-INTEREST INCOME: The non-interest income rose by 34% driven by 33% growth in fee and commission, 23% increase in foreign currency trade income and 12 times growth in dividend income. Similarly, the non-interest expenses rose by 28% primarily due to increase in administrative costs. Putting everything together, it shows 21% lower profit before tax in this half year.
Comparing quarter wise profitability, it's noticeable that from first quarter, the net interest margins have fallen chiefly due to amendments in regulations such as a minimum 5% return on deposits, removal of Forced Sale Value benefit (this benefit was removed in third quarter of FY07 therefore this has to be taken into account when comparing quarterly profits), increase in discount rate to 13% and other worsening economic conditions.
The total assets grew by 6% on the back of 80% surge in lending to financial institution and 14% increases in Advances. In six months the textile and synthetics were extended 35% advances as compared to 32% in FY07. And similarly, the non-performing loans have also shown a 26% which is way more than the industry average of 7.8%. This factor has to be considered on an urgent basis as it could a threat to future profitability and bank's asset quality. Considerable fall of 22% is seen in investments, which chiefly due to reduction in PIBs and T-Bills by an amount of Rs 1.28 billion and Rs 653 million fall in TFCs.
Total liabilities grew by 8% to Rs 74.72 billion backed by 5% growth in borrowings and 8% in deposits. Deposits consisted of 23% growth in non-remunerative, which helps to rescue liquidity problems of the bank and 4% in remunerative accounts. The non-remunerative accounts don't need any returns so the minimum 5% return on deposits regulation has been marginalised.
The ROA and ROE are 0.69% and 6.9% respectively are lower than industry averages of 1% and 10%. Profitability ratios show that the assets and equity are underutilized and need to improve, as it could be a matter of concern for the shareholders. The ADR was 71% (67% FY07) which shows that it has used up some of its liquidity to extend loans but that almost with the industry trend as the liquidity is shrinking due to increasing competition among banks and increase in National Savings Scheme rates.
FINANCIAL PERFORMANCE FY07Soneri Bank Limited declared PAT of Rs 1 billion (EPS: Rs 2.43) in FY07 compared to Rs 0.985 billion (EPS: Rs 2.39) in FY06 reflecting a positive growth mainly due to an upsurge in non-interest income.
Net interest income of the bank grew by 9.6% to Rs 1.93 billion in 2007 over Rs 1.76b in 2006 owing to an increase of Rs 4.7bn in the net advances of the bank. The growth in the advances was 13% in 2007, which helped the bank to maintain its growth momentum. In this year, the provisions for non-performing loans increased by almost six-fold from Rs 36m (2006) to Rs 234m (2007). This is mainly due to removal of FSV by the central bank in calculations of provisions. Although, this is a one-time affect and subsequently provisions will not increase by multiple times.

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Financial Highlights
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Year end: Dec            2007 (Mn)  2006 (Mn)  Change  (Rs)  Change (%)
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Net Interest Income          1,937      1,767          170          9.6
Total Provisions               234         36          198          650
Net-interest Income
 after provision             1,702      1,731          (29)        1.68
Non-interest Income          1,067        754          313        41.51
Profit before tax            1,476      1,448           28         1.93
PAT                          1,000        985           15          1.5
EPS                           2.43       2.39         0.04         1.67
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Non interest income of the bank augmented by 41.5% to Rs 1,064 million which is the major contributor of overall increase in profit before tax (Rs 1,476m) despite NPLs provisioning. This helped the bank to maintain its profitability. The non-interest income of the bank increased by PKR313m during the period ended at December 2007. The share of dividend income of non-interest income has been shrinking as the 'gain on security sales' takes up the lead.
As depicted from the non-interest revenue break up of SNBL, the bank does not rely on the stock portfolio instead its non-interest revenue comes mainly from fee income and gain on sale of securities. There is a significant increase in income noted from gain on sale of securities. The 'securities profit' is taking the contribution of income from "dealing in foreign currency". On the other hand the income from fee and commission was on a slide.
The profit after tax has grown by 1.5% in the year 2007 as compared to the 7.1% and 41.4% in 2005 and 2006 respectively. The profit trend has been falling in last few years. The falling profitability of Soneri Bank is in line with industry but more severely affected than others.
Considering 2007, the return on assets of the bank stood at 1.36% while the industry maintained a 2% ROA. As compared to the industry (23% ROE), the Soneri had an ROE of 16.37% which is way less than the competing banks. The bank did not pay cash dividends; shareholders were left with option to accept bonus stock of approximately 30% (99 million shares).
The bank deposits have been growing. In the year 2007 alone, they recorded a growth of 13.5% that inflated the deposits to Rs 60 billion (2006: Rs 53 billion). This was the period when the banks didn't make as high profits as those of previous years'. However, since the tightening of the monetary policy in 2006, the interest rates raised and the growth in bank's earnings have declined. As a consequence there has been a decline in profitability industry wide.
The bank's assets have also grown to Rs 76.8 billion in 2007 a growth of 8.7% (2006: Rs 70.7 billion). A growth in balances with other banks was the main force behind this assets swell up. The profits again have not been able to meet the assets growth. Resultantly the ROA has declined from 1.47% in 2006 to 1.36% in 2007. Compared to industry average of 2.1% Soneri lacks behind by a fair margin and needs to catch up by making better use of its assets.
The bank issued new shares worth Rs 997 million. This equity injection was done to meet the reserve requirements of the SBP and to finance its expansion plans. Overall the bank's equity grew by 27.8% in 2007 to become Rs 6.61 billion. The advances by the bank have seen an increase of 13% to come to a level of Rs 40.15 billion.
The NPLs increased drastically in the year 2007, in continuation of the trends seen in previous years, the banking sector witnessed an upsurge in NPLs in FY07, which negatively affected the profitability of banks. Main factors contributing to the increasing NPLs include:
-- Slowdown in economic growth and the political stability
-- Increasing trends in interest rates
-- Withdrawal of Forced Sale Value (FSV)
Economic growth, overall, has been badly affected by increased power and political crises. This has negatively affected the export targets especially that of Textile sector, which happens to be the largest borrower and defaulter of bank loans. Due to further tightening of monetary policy, interest rates have increased. This, in addition to increasing inflation, has adversely hit the borrower's repayment capacity, which has increased the NPLs. The NPLS to advances ratio was 2.16%, which is in line with industry. The banking industry suffered by the change in policies therefore, the profitability fell marginally.
Soneri Bank has shown fair market performance in the period under consideration. Listed on KSE-100 index, the price of the share has increased by 2.5% from Rs 48.76 in 2006 to Rs 49.97 in 2007. The price increase is accompanied by growth in the bank's profitability has resulted in P/E to stay at 20.40 to 20.56 (2006 to 2007).
This year, Soneri was moderately traded share with the average daily volume over the period 2006 to 2007 being 765,435. Also MV to BV has declined from 2.92x in 2006 to 2.45x in 2007. This largely is the result of increase in the bank's equity. The bank paid the last dividend in 2005 worth Rs 165 million (dividend cover=5.57).
The bank has been on the conservative side with its dividends retaining profits for reinvestment in bank's expansion. The yield on earning assets more or less remained the same, mainly due to an increase in interest rates for advances accompanied by significant growth in advances. Both increase in interest rates and higher deposits, had a marginal effect as the cost of funding the earning assets increased side by side. Thus the yield on earning assets showed a small increase.
Although the investments grew by Rs 2.45 Bn (15%) in 2007 but apparently the investments didn't show any increase as the percentage of total Earning assets composition. Similarly, the advances contribution to total Earning assets slightly rose due to an increase of Rs 4.7Bn (13.5%) in advances.
Lending to financial institutions showed a slight decreasing trend and continued with it. Over the years the debt-to-assets ratio did not show any significant change as the newer assets were financed from the debt money. The debt to equity ratio declined as there was an increase in equity from new shares issue.
FUTURE OUTLOOK Domestic, as well as international credit crunch is severely affecting the profits of Banks. The banks are constantly facing pressure from strong regulations from State Bank and new entrants like Barclays and RBS.
The liquidity position worsened in Pakistan economy after the reversal of many international investments and measures like increase in Cash Reserve Ratio (9%) and Statutory Liquidity Ratio (19%). After the much hue and cry, it's announced by the State bank to reduce CRR by 200 basis points in two phases.
This will rescue the banks from current liquidity trap but it isn't a long-term measure. In the long term as per State Bank's requirement of minimum capital requirement of Rs 23 billion, many mergers and acquisitions are likely. The bank is putting efforts into increasing its branches from 90 and to diversify into markets to sustain profitability.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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