KASB Bank Limited was incorporated on October 13, 1994 as Platinum Commercial Bank Limited. The name of the bank was subsequently changed to KASB Bank Limited on February 21, 2003, when the majority shareholding was acquired by the KASB Group.
The merger of Khadim Ali Shah Bukhari & Co and KASB Leasing Limited into the bank increased the paid-up capital of the bank to Rs 1.293 billion as on December 31, 2003 complying with the regulatory requirements. The bank also owns a 100% stake in KASB Securities (Pvt.) Limited and KASB Technology Services Limited. Currently, the KASB Bank operates through its network of 73 branches in 21 major cities of Pakistan. Its shares are listed on all the three stock exchanges of the country.

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Name of company:     KHADIM ALI SHAH BHUKHARI (KASB) BANK LIMITED
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Nature of Business                                        Banking
Ticker                                                      KASBB
Market Capitalisation                               3,989,195,499
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BANKING SECTOR OUTLOOK (CY05-CY08)
Pakistan has a progressive and dynamic financial sector, which has grown rapidly particularly in the last few years, in response to the mounting financing needs of the economy. In response to financial liberalisation reforms initiated in the early 1990s to develop a sound and competitive banking system, a number of private banks appeared in the banking arena. Till CY06, the burgeoning economy served as a cause and a consequent to the development of the banking sector. The demand for loans was on peak and repayment capacity of borrowers was strong. The size of the banking sector stood at Rs 4.3 trillion till the end of CY06. NPLs to loans ratio for the sector registered a decreasing pattern over the last few years.
Resilience of the banking sector underwent a testing phase during CY07 when the benign macroeconomic environment of the previous four years started to show considerable signs of strain. The current macroeconomic environment is characterised by a decline in GDP growth, growing macroeconomic imbalances, relentless upsurge in inflation, depreciating domestic currency, and monetary tightening by the central bank.
Despite the heavy provisioning on account of incremental NPLs during CY07 and H1-CY08, withdrawal of the benefit of the Forced Sale Value (FSV) of collateral against the non-performing loans during CY07, the banking sector in Pakistan showed strong resilience to early headwinds on the back of a robust capital base and healthy profitability. Key performance indicators present a healthy picture of the sector during CY07.
The bottom line continued to remain in a comfortable zone, with after tax return on assets (ROA) of 1.5 percent for the year: a more sustainable level of profitability compared with the peak level of 2.1 percent in CY06. The overall net profit of the banking sector for CY07 was Rs 73.3 billion. This was shared across a large number of banks, as 23 out of 39 banks, with a cumulative asset share of 87.2 percent, have their respective ROA at more than 1.0 percent at end CY07.
During the period Jul-December of 2008, the private sector credit off-take from the scheduled banks declined by 26 percent due to cautious approach of the banks, liquidity crunch, slowdown in economic activity, hike in lending rates and frequent demand stresses. The full-year profits of CY08 were, however, lower than profits for the last couple of years. The overall profitability was neutralised due to more than proportionate increase in operating expenses and increased provisioning for the loan losses. NPLs have been on the rise, mainly due to poor economic performance of the economy and the withdrawal of FSV benefit therefore resulting in worsening of asset quality ratios.
Financial performance of KASB from CY05-CY08
Profitability: In 2005, KASB incurred a loss of Rs 273 million. In 2006, in compliance with the minimum capital requirements prescribed by the State Bank of Pakistan (SBP), the bank has decided to merge with International Housing Finance Limited (IHFL), a company in which Nasir Ali Shah Bukhari, sponsor/director of the bank holds 64.33 percent shares. The year 2006 brought about significant changes for the bank. The entity adopted a new logo and signage, which was in alignment with re-branding endeavour of the bank. 2006 also saw the witness of introduction of several consumer products.
The progressive movement of the bank along with the conducive economic environment helped the bank improve its bottom line factor immensely that it was able to emerge out of post-tax loss in 2005 and earn a post tax profit of Rs 137 million in the same year. Even though net interest earned registered a fall of 11% during 2005 and 2006, the bank was able to earn good returns of non-interest sources like sale of securities and dividend earned. This was in line with overall healthy economic activity. The reversals of previously recorded provisions registered a 2596% decline, thus contributing positively towards profits. Operating expenses registered an increase but only moderately and hence didn't dampen the profits.
This situation, improved year on, as evident by the higher profit earned in 2007, marking an increase of 44%. This year witnessed the development of proper control mechanisms (ie risk management, internal control and internal audit), and heavy investment in the core banking system. Net interest income registered an incredible increase of 74%. The acquired business of IHFL contributed Rs 7.106 million to the operating income and Rs 4.245 million to the profit after taxation of the bank for the year ended December 31, 2007 as the bank has obtained the control of IHFL as at November 22, 2007. Profit after tax increased by 44%. Accumulated loss brought forward from CY05 dampened the high earnings, but a turnaround was experienced as even after the loss adjustment, some profit was left over and hence added to the retained earnings.
The year 2008 started as a year of intrinsic and fast growth. However, the market situation and the economic scenario changed drastically towards the middle of the year. As the global economic meltdown started shedding its affect on the banking sector, State Bank of Pakistan tightened its monetary policy and altered banking regulations to stricter standards. To meet the new requirement of a higher minimum capital requirement, schemes of amalgamation of merging KASB Capital Limited and Network Leasing Corporation Limited with and into KASB Bank Limited were initiated and subsequently sanctioned.
The negative economic sentiments, the heavy impairment charges and associated rise in provisioning eroded the bank's profitably considerably, as evident by the drastic dip in its profitability for the CY08. The bank netted an after-tax loss of Rs 972 million, plummeting from a positive return of Rs 197 million in CY07. Impairment cost shoot up 847% relative to 215% increase in the former year. Non-mark-up expenses also recorded an increase of 56% relative to 37% in CY07.
There was considerable increase in the balance sheet size with the Total Assets increasing to Rs 51,799 million (2007: Rs 40,890 million, an increase of 26.6%), advances increased to Rs 32,240 million (2007: Rs 25,143 million, an increase of 28.2 %), and Deposits increased to Rs 35,087 million (2007: Rs 33,131 million, an increase of 5.9%).
EARNING RATIOS
The earning ratios project a dismal picture of the bank's operations. The bank managed to pick up from a negative 15% return to its equity in CY05 to a positive 6% in CY06 as it posted a positive after-tax profit after a negative one in the former year. However, it was unable to uphold the upward trend and ROE declined to 5% in CY07. As the equity of the bank steadily increased from Rs 1.7 billion in CY05 to Rs 9.3 billion in CY08 in line with the prudential regulation of higher MCR, an associated rise in return was lacking.
The ROA ratio hovers around 0% for the period under consideration. Despite an upward trend of earning assets (lending to financial institutes, advances and investments), the bank was unable to earn a significant net interest income. Low yielding earning assets and contained business volumes and corresponding high provisioning inhibits the bank to earn high returns.
ASSET QUALITY
Despite annual increases in the deposit base, the bank managed to control NPLs around Rs 1 billion between CY05-CY07. However this drastically shot up to Rs 6 billion in CY08. This has been in line with the industry trends. But the ballooning figure poses a serious risk to the bank.
NPLs to advances ratio declined consistently between CY05 to CY07, showing that the bank employed a prudent credit policy to control its NPLs and higher level of advances, relative to NPLs. However, the situation reversed in CY08 as higher interest rates (owing to higher KIBOR rates) caused a huge number of defaulters resulting in a jump in the ratio, as NPLs accounted for around 20% of advances.
LIQUIDITY
Bank's earning assets to total assets have grown at more than industry averages. It shows are comfortable trend, indicating that its earning assets are maintained at a consistent level during the period under consideration. However advances constitute a major chunk of these advances rising to 76% of total assets in CY08 from 69% in CY05. This indicates increasing volume of business but may prove to be risky given the recent tendency of defaulting in the economy. It's important that the advances are cushioned against deposits to ensure that bank has liquidity available. Financials reveal that the advances of the bank have grown at a faster rate than the deposits and hence the high ADR ratio.
DIVIDENDS
KASB Bank has not announced any dividends between CY05-CY08, mainly due to its inability to wipe out its accumulated losses. Price of its share has been contained between Rs 10 to Rs 20. Earnings per share though positive, is insufficient to attract potential investors.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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