NIB Bank Limited (formerly NDLC-IFIC Bank Limited) is a scheduled commercial bank and is principally engaged in banking business as defined in the Banking Companies Ordinance, 1962. It was incorporated in March 2003 as a public listed company. It is listed on all the three stock exchanges of the country and has a network of 244 branches (2007: 240 branches).
In June 2005, Temasek Holdings of Singapore, through its indirect subsidiary, Bugis Investments (Mauritius) Pte Limited, acquired over 70% shares in the capital of NIB Bank. Temasek, the investment arm of the government of Singapore, is a premier international investor in the process of establishing a pan-Asian banking presence.
Its first investment in Pakistan is in NIB Bank and in terms of amount, it is the largest non-privatisation investment by any foreign investor in a bank incorporated in Pakistan. This foreign investment also showcases the confidence of foreign investors' interest in Pakistan's banking sector and will greatly improve not only the image and performance of NIB Bank but also Pakistan's investment profile.
On December 31st, following the approval from SBP, NIB successfully merged with Pakistan Industrial Credit & Investment Corporation Ltd (PICIC) and PICIC Commercial Bank Ltd (PCBL). With total assets swelling up to Rs 176.7 billion, advances to Rs 82.2 billion and deposits to an amount of Rs 116.7 billion the merger resulted in formation the seventh largest commercial bank in the country in terms of distribution network. The network will help bank access under-banked segments and also offer cross-sell products to half a million customers of the merged bank. The stable and lower cost deposit base of PICIC will allow NIB to grow advances without having to raise deposits at a high marginal cost. The merger also resulted in making PICIC Asset Management Company managing almost Rs 20 billion, which is now a subsidiary of NIB. The bank is looking forward to merge this subsidiary with National Fullerton Asset Management Company (NAFA). This will result in Pakistan's largest asset management company. NIB, pending regulatory approval, will also acquire 100% of Global Securities Pakistan Limited, which is one of Pakistan's leading corporate finance and stock brokering firms. Post acquisition, the investment banking and advisory business of global, which is responsible for more than 50% of all privatisations in Pakistan, will be divested and merged into the Corporate and Investment Banking Group of NIB, creating a new area of growth for the bank. Furthermore, after the merger the bank also got 30% shares of PICIC insurance company, a 3 year old listed general insurance company.
RECENT RESULTS 1H10
NIB Bank had shifted focus to SME and consumer segments after the merger with PICIC. This strategy in recent times has backfired due to the worsening economic situation in Pakistan along with the recent floods whose aftermath will be felt amongst all sectors for some time to come. Therefore, the major detrimental factor for the bank in 1H10 had been the heavy increase of NPLs, especially in the SME sector.
Mark-up earned during 1H10 was 4% lower than the same period in 2009. This was primarily due to mark-up reversals related to the increased NPLs. Mark-up expensed in 1H10 increased by 4% due to increased borrowings pertaining to securities activities. The net mark-up income was lower by 98%. The lower net mark-up income was offset to some extent by increased non-mark-up income which was higher by Rs 331m from the same period last year mainly due to better earnings from foreign exchange activities and the sale of the bank's shares in National Fullerton Asset Management Company Limited. Administrative expenses increased by Rs 650 million in 1H10 over 1H09 due to the full impact of depreciation and maintenance costs of the new technology platforms along with the effect of high inflation in the country. The charge for provisions was Rs 1,826 million in 1H10 compared to a net reversal of Rs 479 million in 1H09. While portfolios deteriorated in all segments, the biggest increase between the two periods was in the SME segment.
Total deposits grew by Rs 5,384 million between December 2009 and June 2010, showing an increase of 5.7%, mostly on savings account and deposits by financial institutions. Investments declined by 19%, while the advances increased marginally by 5%.
NIB faced a loss after Taxation of Rs 1.9 billion as compared to a PAT of Rs 579 million in the same period last year.
BANKING INDUSTRY IN FY09
As a consequence of reducing inflation, the State Bank of Pakistan eased its monetary policy with a 250 bps lowering of the discount rate during 2009. Consequently market rates fell sharply during the first half of the year before stabilizing over the last six months. Liquidity is expected to remain tight with higher private sector credit off take and continued borrowing by public sector.
Nevertheless, the results of stress tests reflect system's strong capacity to endure extraordinary shocks in major risk factors and avert the emergence of any systemic risk.
Although, heightened credit risk due to general slackened economic environment, showed slight improvement, but overall economic conditions, power supply situation, and security environment remained fragile for the period.
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Table 1.1: Highlights of the Banking System
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(Billion Rupees)
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CY04 CY05 CY06 CY07 CY08 Sep-09 Dec-09
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Total Assets 3,043 3,660 4,353 5,172 5,627 6,105 6,529
Investments (net) 679 800 833 1,276 1,080 1,593 1,753
Advances (net) 1,574 1,991 2,428 2,688 3,183 3,119 3,248
Deposits 2,393 2,832 3,255 3,854 4,217 4,483 4,787
Equity 202 292 402 544 563 641 662
Profit Before Tax (PBT) 52 94 124 107 63 70 91
Profit After Tax (PAT) 35 63 84 73 43 42 54
Provisioning Charges 11 19 22 60 106 64 85
Non-Performing Loans 200 177 177 218 359 422 432
Non-Performing Loans (net) 59 41 39 30 109 128 125
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INVESTMENTSThe asset mix of the banking system shifted towards the investments due to the ongoing economic slowdown in economy. During the quarter under review, the investments posted a strong increase of 10 percent. The investment portfolio of banks particularly investments in government papers and bonds of PSEs grew significantly and took the major share of the increase in banks' asset base.
DEPOSITSDeposits of the banking system posted a strong over-the-quarter growth of 6.8 percent (YoY 13.5 percent). The banking system has been facing a strong competition from Central Directorate of National Savings' (CDNS) schemes in mobilizing deposits but flow of funds to CDNS has somewhat pacified which helped banks to attract substantial growth in their deposit base.
ADVANCESThe advances of the banking system registered healthy growth of 4 percent over the December-09. Due to low aggregate demand in the economy, high borrowing costs on account of tight monetary policy, and the increased credit risk in the economy, banks' lending to private sector declined on YoY basis.
PROFITABILITYThe profitability of the banking system improved over the last year mainly due to high net interest and non-interest income. However, high provisions and increasing administrative expenses impeded the overall profitability. The profitability, however, varies across banks. Improvement in ROA for banks with large assets base as opposed to small sized banks indicates that earning performance of the banking system is concentrated towards large sized banks with small sized banks under stress.
NPLsThe growth in NPLs substantially decelerated during the quarter under review; 2.5 percent QoQ growth to Rs 432 billion. The slowdown in loan infection rate preserved the banks' earnings from significant dint, which has been the hallmark of last few quarters. Infected portfolio increased marginally by 2 percent during December-09 due to decrease in NPLs of some banks.
FINANCIAL PERFORMANCE (FY03-FY09)In 2009 NIB declared a profit after tax of Rs 691 million on an unconsolidated basis, a significant improvement over 2008. This improvement is a reflection of the steps taken by the bank in 2008 when it brought in additional capital of Rs 12 billion and took a conservative provisioning approach to safeguard against future economic volatility. These results have been achieved through better performance in all areas; loan and low cost deposit growth, reduction in cost of funds and tight control over provisions and operating expenses.
On a consolidated basis, NIB delivered a profit after tax of Rs 1,494 million. The difference of Rs 800 million between the unconsolidated and consolidated results is primarily due to improvements in the value of the funds of PICIC Asset Management Company as a result of the recovery in the equity markets.
NIB now has 223 branches in 60 cities across the country, serving over 600,000 customers. 222 branches are dedicated to the Bank's Retail, SME and Small Businesses, in which 120,000 new customers were added and new loans worth nearly Rs 10 billion were disbursed during 2009. The bank also increased its lending to top tier corporate and public sector customers, to whom over Rs 11 billion of loans were disbursed. Consequently, loans in the bank's core segments grew by 24% over 2008.
NIB succeeded in reducing its cost of funds by 266 bps over the year, by adding Rs 10 billion in current and savings accounts which now form 59% of the deposit base, up from 44% in 2008. At the same time, the Bank achieved a planned reduction of Rs 28 billion of expensive term deposits which it had taken at the end of 2008 and in early 2009. As a result total deposits reduced by Rs 10 billion. The bank continues to focus on generating lower cost deposits as a cornerstone of its strategy and plans to launch innovative deposit products in 2010.
Net mark-up income in 2009 increased by 23% over 2008 as a result of better quality loan growth and improvement in spreads. Conservative approach in provisioning against NPLs leads to a diminution of 94% in provisioning done against NPLs in FY 09. Provisioning stood at Rs 524.5 million in FY09 compared to Rs 8.83 billion in 2008. Under the head of Non-markup income, fee, brokerage and commission income registered a nominal increase of just 8% in 2008. But bank achieved substantial capital gains increased by 208% over 2008 both in the debt and equity markets through leveraging market opportunities however these were offset by reduced foreign exchange income caused by higher premiums and lower market volatility. The income from foreign exchange reduced substantially by 83% in FY09 as compare to FY08. Dividend income, which was considerably high in FY08, also reduced by 75% in FY09. Non-mark-up income was thus maintained at the previous year's levels excluding the impact of a 1-time dividend of Rs 750 million received from PICIC Asset Management Company in 2008. To match the non interest income, non interest expense lessened by 36% mainly on the back of 17% decline in administrative expenses and 138% reduction in other expenses incurred by the bank in FY09, thereby making a positive impact on the bottom line of the bank.
NIB Bank's Total Assets size grew from Rs 178.9 billion in 2008 to Rs 208.1 billion in FY09, increasing by 16% YoY basis. Although advance increased merely by 5%, investments on the other hand rose by 74% to Rs 62.4 billion in FY09. Major investments of Rs 42 Billion took place in Market T-bills accompanied by PIBs, ordinary shares, sukuk bonds, Modaraba certificates and TFCs. This depicts a shift in the asset mix of the bank, in compliance with the industry trend, which focused more on investments in government papers and securities as compare to riskier advances. Furthermore, sluggish economy coupled with the low demand also caused the advances to remain somewhat stagnant. Total Assets growth in FY09 is also backed by increases in other assets, which grew by 79% as compared to 2008.
Over the years assets have shown a positive growth with a landmark increase of 281% in FY07 to Rs 176.65 billion and subsequently an increase of Rs 2 billion in FY08.
Gross advances increased by mere 2% in the period 2009 to an amount of Rs 100 billion. Net advances stood at Rs 84.02 billion, which is 5% higher than FY08 (Rs 80.3 billion) but it has to be observed that in reality the Total Advances surged by Rs 4 billion. The decrease in Net Advances owes to sluggish economy, lower demand and cautious stance by bank to protect against risk of NPLs in new advances. Short-term advances remained similar to FY08 posting a decline of 1.92% but long-term advances registered an impressive increase of 11.24% in FY09 as compare to FY08.
The composition of advances was more inclined towards textile and wholesale sector followed by individuals and service industry. The amount of advances to different sectors in FY09 remained similar to last year with no major increase or decrease in any of the categories.
NIB succeeded in reducing its cost of funds by 266 bps over the year, by adding Rs 10 billion in current and savings accounts which now form 59% of the deposit base, up from 44% in 2008. At the same time, the Bank achieved a planned reduction of Rs 28 billion of expensive term deposits which it had taken at the end of 2008 and in early 2009. As a result total deposits reduced by Rs 10 billion. Total Deposits shrunk by 10% and stood at Rs 93.9 billion as compared to Rs 104.5 billion in FY09. Disaggregately fixed deposits declined by nearly 36%, while the savings account and current account (non-remunerative) increased by 24.5% and 19.2% respectively in FY09.
The bank continues to focus on generating lower cost deposits as a cornerstone of its strategy and plans to launch innovative deposit products in 2010 to generate favorable bottom line impact.
Sectoral analysis of deposits revealed that receipts of Deposits from different sector in 2009 have remained analogous to FY08 with some notable exceptions. Deposits from individual have increased to 46% of the total in FY09, which stood at 39.53% last year.
However deposits from non-profit organizations have declined from 10.57% in FY08 to 5.35% in FY09. Addition of 3.9% to deposits from oil and gas and 6.77 magnifications up from 2.28% in FY08 from Financial organization have increased the diversity of sources of deposits for the bank.
Trend for advances to deposits ratio (ADR), a key indicator of how liquid the bank's assets are; show that it has been fluctuating. Historically, bank's ADR has been impressive with the exception of last few years where regulator has made mandatory to meet a certain criteria. In 2009 advances rose by 5% which was not matched by deposits which declined by a 10%, thus setting the stage for increase in the ratio. ADR thus rose to 83% in FY09 compared to 73% in FY08.
Earning assets to Assets simply calculates that what proportion of the assets held by the bank is actually helping to generate revenue for it. The earning assets of NIB are lending to financial institutions, investments, and advances. These three assets help generate income for the bank.
Earning assets to total assets remained stagnant to the level of FY08. Although earning asset increased by 18.8% in FY09 but this was offset by 16% in total asset. Increase in assets can be explained by an increase in bank's cash balances with other banks (360%) and the increase in other assets (79%). This is not a good sign for NIB as it means that it has money tied up in assets which are more or less "idle" as they are not helping it in generating income which is the ultimate motive of any profit driven enterprise.
By improving the lending composition towards higher yielding products sold to commercial and consumer customer segments, the yield on interest earning assets improved from 2006 onwards. In FY09 there has been a slight increase in yield on earning assets ie from 0.36 in FY08 to 0.39 in FY09 but the cost of funding these earning assets has also increased. In FY09 the cost of funding these earning assets was 0.28 as compared to 0.25 in the previous year. This was due to nearly 20% increase in the interest expensed which rose to Rs 12.8 billion as the bank increased its financing by borrowings increasingly from financial institutions which surge by 164% in FY09 to Rs 62.5 billion against Rs 23.6 billion previous year.
Bank suffered heavy losses in FY07 and FY08 mainly due to the high provisioning standard set by the State Bank of Pakistan. The losses do not reflect any inherent weakness in profit generating capability of the bank rather it was due to missing FSV benefit at that time. NPLs grew tremendously in FY07 and FY08. This issue of rising NPLs could be attributed to the economic downturn, the power crisis and the subsequent industrial crisis, which has rendered many borrowers incapable to meet their financial obligations. In FY09 growth rate of NPLs pacified in comparison to previous years .It grew by only 4.33% in the FY09 and stood at Rs 23.4 billion as compare to Rs 22.4 billion last year. The provisioning against NPLs has reduced by 94% from Rs 8.83 billion in FY08 to Rs 524.5 million in FY09, as the bank adopts conservative approach to safeguard future economic viability.
The asset quality of the bank has declined 2003 onwards as the NPLs and provisions rose sharply as a percentage of the total advances and NPLs respectively. In 2009 although there had been an increase in advances but the bank was able to controls its NPLs even in a slow growing economy and a weak manufacturing sector. As stated previously 5% increase in advances followed by 4.33% increase in NPLs have made the NPLs to advances ratio to remain unchanged in FY09.
The SBP vide its Circular No 10 of 2009 dated October 20, 2009 made amendments in the Prudential Regulations and allowed banks to avail the benefit of 40% of FSV of pledged stocks and mortgaged residential and commercial properties and benefit of 40% on industrial properties (land and buildings only) held as collateral against all non-performing loans. Had the benefit of the said new circulars not been availed by the Bank in the FY09, the net charge for provisions would have been higher by an amount of Rs 1,683.490 million and profit after tax would have been lower by Rs 1,094.269 million. The increase in profit as a result of taking this benefit is not available for the distribution of cash and stock dividends to shareholders.
The overall asset quality is considered acceptable in the light of the current competitive scenario. Collections are expected to come back on target in subsequent months. The bank is continuing to invest heavily in understanding, designing and delivering customer-centric business models for each of the commercial, SME and consumer segments. These unique business models will provide superior service, faster turnaround time and above all, will help it in building lasting relationships with its customers.
Taking a look at earnings ratios all of them has shown upward trend. This is apparent in the graph.
NIB Bank's Return on Assets improved from negative 4.2% in FY08 to positive 0.36% in FY09. The bank has been unable to make profit after tax since 2007. This loss can be attributed to provisions against NPLs economic downturn. The return on equity also enhanced to positive 1.70% in FY09 from negative 19.6% in FY08. Although there has been increase in equity on the back of rising share capital from 2007 onwards but profit after tax of Rs 691 million contributed to this improvement in ROE. Over the years, the ROE has not been satisfactory, as it is merely around 3% while the industry witnessed an ROE of 23%. This is not favourable for an investor.
A significant increase in investments as a share of earning assets can be seen in FY09. It grew by 77% compared to FY08. Such huge magnification in investments and mere increase of 5% in Advances for 2009 indicates cautious strategy and a shift by bank in term of its earning asset mix. Investments rendered a definite return to the banks while advances whether commercial or corporate runs the credit risk of default, which intensify further in the weak economic situations as prevalent in country.
In FY09 the solvency position of bank has improve slightly compared to FY08. The equity to asset ratio stood at 20.9% in FY09 against 21.44% in FY08. This year increase in Total Assets (16%) has largely been managed through additional liabilities (20%), mainly on the back of 164% increase in financing from financial institutions. Growth in Total Assets has not been achieved through corresponding increase in equity, which rose by 5% only. Although the growth was witnessed in share capital of the bank (42%) as compared to corresponding period, but it could not make an impressive impact on the overall equity base of the bank which more or less remains stagnant. Thus equity to asset ratio declined marginally compared to last year.
Equity to deposits ratio improved from 34.48% in FY08 to 40.92% in FY09. The reason behind this improvement is partially due to the drop witnessed in deposits of the bank, which reduced the base effect from previous high levels. Further, increase in equity in FY09 on the back of increase in share capital (42%) also lead to this rise in equity to deposit ratio.
Earning Assets to Deposits ratio shows a contrast between the bank's reliance on earning assets over deposits with respect to revenue generation. As we can observe in the graph, this ratio has enhanced from the last year. In FY09 earning asset expanded by 19% due to rising investments by bank however, deposit did not increased proportionately in comparison to the earning asset, thus we witnessed improvement in this ratio due to lower base effect. This also indicates that bank is depending less on its deposits base for the expansion of earning asset rather it has started to use the borrowing from financial institutions for this purpose which surged by 164% in FY09.
Among the market value ratios of NIB, the market to book ratio continued to decrease and stood at 0.51 in FY09 as compared to 1.00 last year. Book value per share declined from 14.4 in FY08 to 10.3 in FY09 due to growing number of outstanding shares, which increased from 2,843,727 in FY08 to 4,043,727 in FY09. This decline in BV followed by greater fall (63.5%) in average market price of the stock during 2009 owed to depressed sentiments witnessed at the local bourses due to the weak economic and dwindling political situations in country.
The P/E multiple of NIB, improved from negative 5.47 in FY08 to positive 30.86 in FY09 owed to positive EPS posted by the bank in 2009. No dividend payments are made by NIB as its pursuing a rapid growth policy and it's retaining all of its profits for its expansion programme.
FUTURE OUTLOOKThe economy, as a whole, witnessed downturn in the past few years resulting in stubborn inflation as high as 25% from fiscal and current account deficits. Subsequently, the SBP has tightened the monetary policy thus pushing up interest rates substantially. NIB plans to increase its regulatory capital by issuing Redeemable Preference Shares. NIB is supported in principle by its majority shareholder Bugis Investments, and once the capital is raised, NIB will be able to better deal with the challenges that lie ahead in such uncertain times.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for
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