Bank: National Bank of Pakistan - Analysis of Financial Statements Financial Year 2004 - 2001 H 2010

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OVERVIEW : National Bank of Pakistan is the largest commercial bank of Pakistan. The bank handles treasury transactions on behalf of the government of Pakistan as an agent to the State Bank of Pakistan. The bank has a 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 bank commenced its operations from
November 20, 1949. The bank s Karachi and Lahore offices were subsequently opened in December 1949. The nature of responsibilities of the bank is different and unique from other banks/financial institutions. The bank acts as the agent to the State Bank of Pakistan for handling provincial/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. NBP enjoys the highest rating of AAA in the industry assigned by M/s JCR-VIS Credit Rating Company Limited on a standalone basis ie without the benefit of the 75% government ownership.

BANKING INDUSTRY IN FY09

In the year 2009 the economy showed signs of stabilization. Inflation still remained a top concern although it eased to 10.7% by August as a result of monetary tightening. The current account deficit improved and the foreign exchange reserves stabilized. Problems in the energy sector played a key factor in burdening public finances. Further, terrorism remained the biggest challenge in 2009 and the negative effects of international economic meltdown also became evident in the shape of sharp rise in non-performing loans and operating costs. These factors hampered the business confidence as well as the performance of the banking sector.

In the first half of 2010 the economic indicators started showing improvement with reduction in the budgetary deficit owing to decreasing imports and increased worker s remittances. The forex reserves increased to record high levels. Despite these improvements, the inflation and shortage of infrastructure and energy remain big concerns for the economy, specially in light of the havoc caused by the floods in the past two months, which have ravaged the agricultural produce of the country and bulldozed the economy.

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Growth Rates         2004         2005        2006

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             NBP  Industry   NBP  Industry   NBP  Industry

                  avg         avg         avg

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Profits After Tax   47.58%   44.01%  105.14%  144.27%  33.93%   42.79%

Advances        36.91%   43.44%  21.76%   45.53%  17.58%   19.45%

Deposits        17.72%   21.07%  -0.46%   14.15%  8.30%   16.01%

Investments      -10.14%   -6.45%   5.11%   0.40% -10.85%   -2.06%

Net Interest Income  13.14%   9.73%  62.43%   83.08%  29.02%   38.05%

Non Interest Income  -39.19%  -20.11%  215.77%   68.66% -29.62%   5.49%

Return on Assets    30.11%   20.93%  85.42%   35.72%  24.89%   18.39%

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               2007        2008        2009

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             NBP  Industry    NBP  Industry   NBP  Industry

                  avg         avg         avg

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Profits After Tax   11.82%   4.82%  -18.78%   -4.37%  17.81%   26.07%

Advances        7.77%   14.05%  21.23%   22.89%  15.07%   4.75%

Deposits        17.94%   19.80%   5.58%   12.98%  16.25%   10.03%

Investments      50.62%   69.85%  -18.96%   -8.69%  27.41%   33.53%

Net Interest Income  11.53%   9.86%  10.20%   15.98%  3.78%   19.69%

Non Interest Income  -42.50%   16.85%  264.70%   75.05%  45.44%   21.12%

Return on Assets    -2.95%  -10.44%  -28.17%  -13.72%  5.64%   4.02%

Looking at the banking industry growth rates for the year 2009, we see that the growth rate of NBP s profit after tax is much lower than the industry average. On the other hand, the growth rate of the bank s advances is more than 200% higher than industry average, indicating that NBP possesses a large asset base. Similarly, the growth rate of NBP s deposit base is 62% higher than the industry average which shows that the Bank has very effective policies for deposit mobilization. NBP s investments, however, have an 18.3% lower growth rate than the industry average; whereas, its net interest income has a growth rate which is 81% lower than the industry average.

Alternatively, NBP s non-interest income has a growth rate 115% greater than industry average, mainly due to a significant increase in fee, commission and capital gains during 2009. The growth rate of the Bank s Return on Assets is 40.3% greater than the industry average.

FINANCIAL PERFORMANCE (FY04-1H10)

The Asset Quality ratios of the NBP show a mixed trend from 2007 onwards. Although, the growth rate of NPLs has reduced in 2009 as compared to its 2008 levels, the overall ratio of NPLs to advances has shown a steady rising trend from 2007 onwards. This growth in NPLs is an industry-wide phenomenon, owing mainly to the impact of the global financial crisis, compounded by a dampening of the repayment capacity of borrowers due to high domestic interest and inflation rates, power shortages, pressure on trade volumes and deteriorating law and order condition.

NPLs stood at Rs 69.704 billion in 1H10, 7.65% higher than Rs 64.748 billion in the corresponding period last year and are expected to continue to rise in light of the recent destruction caused by the floods all over
Pakistan and the resultant worsening economic conditions. NPLs to advances is on the rise at 15.03% in 1H10 from 14.01% in 1H09. Comparing with the other big banks of Pakistan, NBP s NPLs stand much higher than those of Allied Bank (Rs 17.269 billion; 11% higher than the corresponding period last year) and those of MCB (Rs 24.133 billion, rising 16% YoY). NPLs of HBL and UBL are also less, standing at Rs 44.407 billion and Rs 41.719 billion respectively.

This is by no means a reflection of poor performance of NBP since NBP has a considerably higher deposits base and equity as compared to the other big banks. Also, being a national bank, it is responsible for extending credit towards the sectors that are ignored by the commercial banking sector due to low profitability such as the agricultural and small business arenas.

Overall value of provisions has increased in 2009 as compared to 2008 levels. However, the ratio of total provisions to NPLs has reduced by 5.95% from 2008 to 2009. The increase in absolute value of provisions is due to both fresh accretions as well as further downgrading of the portfolio. Provisions in 1H10 amounted to Rs 56.351 billion, standing 18% higher than the provisions in the corresponding period last year hence, provisions to NPLs is higher at 0.8 as compared to 0.76 in 1H10. The big banks have similar Provisions to NPLs ratios: Allied Bank at 0.81, HBL at 0.77 and MCB at 0.76, which are in accordance with State Bank s regulations and the cautious practices of the banks in the current economic instability.

The profitability or earnings ratios of NBP declined in 2007 and 2008, before rising again in 2009. ROA increased by 5.64% over last year. ROE and ROD rose by 16.14% and 6.30%, respectively. This increase in earning ratios in attributed to a 17.8% in profit after taxation during 2009. However, this growth in profits is not reflected that well in earnings ratios because assets and equity also showed an upward trend during 2008-09.

At the end of 1H10, the bank recorded profit before tax of Rs 11.650 billion, 20% higher than the comparative period last year (Rs 9.689 billion). PAT stood at Rs 7.820 billion, 24.5% higher than in 1H09, as a result of higher NIM, lower absolute provisions and a higher non-interest income. Comparatively, the remaining big banks of
Pakistan had lower PATs, standing at Rs 3.62 billion for ABL, Rs 7.423 billion for HBL and Rs 5.2 billion for UBL with the exception of MCB, which reported profit after tax of Rs 7.942 billion, consistently higher than that of all other banks.

Earnings per share of the bank stood at Rs 5.81, lower than Rs 5.84 of the comparative period last year, with Return on Equity and Assets at 6.64% and 0.8% respectively, both higher than in 1H09. EPS of remaining big banks stand as follows: Allied - Rs 4.63, HBL - Rs 7.41, MCB - Rs 10.45 and UBL - Rs 4.25.

The liquidity ratios of NBP showed an improvement in 2009. The ratio of Earning Assets to Assets depicts a stable trend on average from 2004 to 2009. In 2009, the ratio of Earning Assets to Assets increased by 1.35% over last year. The 11.89% increase in average earning assets was greatly offset by a corresponding 11.52% increase in average assets. NBP s advance to deposits ratio increased by 6.45%, over the same period last year. In general, advance to deposits ratio of NBP shows a rising trend from 2004 to 2009, this signifies that most of funds were utilized for advances rather than any other earning asset.

During 1H10 the Earning Assets to Assets ratio of the Bank decreased from 0.75 to 0.74 as a result of decline in investments and advances. Furthermore, the advances to deposits ratio decreased to 0.61 from 0.66 during the period. The reason for the decline in this ratio is that Advances decreased while Deposits increased. Allied Bank and UBL demonstrated similar ADRs at 0.66 and 0.68 respectively. On the other hand, HBL s ADR stood at 0.62, after declining sharply since the corresponding period last year. Furthermore, MCB s ADR showed a similar position having declined from 0.71 in 1H09 to 0.58 in 1H10. This shows the continued cautious behaviour of the banks in terms of risk aversion.

In FY09 we see that Investments as a share of total earning assets fell due to changes in market conditions. This signifies that the Bank drew money from investments to Advances - a trend depicted at the overall banking industry level. One reason for this trend is a change in banks approach to NPLs treatment. Banks are now rescheduling the advances given to major customers in order to avoid NPLs. This shows optimism of banks about the future state of economy.

During 1H10 the composition of Earning Assets shifted from Advances to Investments. Advances reduced Rs 475 billion to Rs 460 billion by end of the previous fiscal year. Meanwhile, Investments rose from Rs 217 billion to Rs 243 billion in the same period. Advances reduced from 67.91% in 1H09 to 64.80% in 1H10 whereas Investments increased from 29.79% to 31.95% YoY.

The cost of funding earning assets shows a rising trend from 2004 to 2009. In 2009 the cost of funding earning assets rose by 47.7% over last year. This can be mainly attributed to the record level interest rates at the beginning of the year, which increased the interest expense. The yield on earning assets also showed an increase by 14.35% over last year. As the cost of earning asset increased by a greater percentage than the yield on earning assets, the overall performance of NBP s earning assets decreased in 2009.

During 1H10, the Yield on Earning Assets rose from 5.85% to 6.02% (YoY), which had a greater impact on NII than did the increase in Cost of Funding Earning Assets, which rose from 2.87% to 3.15% YoY, resulting in a 21.45% increase in Net Interest Income YoY.

Net Interest Income of the big 4 banks stands as follows: Allied Bank at Rs 10.579 billion, HBL at Rs 22.018 billion, MCB at Rs 17.696 billion and UBL at Rs 16.515 billion. Compared to NBP s NII of 20.738 billion, only HBL stands ahead.

The debt management figures show that the assets of NBP have been less leveraged over time. There has been a steady decrease in the debt to equity, which declined from 16.5 in CY03 to 6.7 in CY06 and later to 6.22 in FY08. Similarly, debt to assets declined from 0.94 to 0.86 over the same period. However, there was a slight reversal of this trend during 2009, when both Debt to Equity and Debt to Assets increased by 11.6% and 1.16%, respectively. Increase in debt to assets and debt to equity ratios signify that NBP s debt management efficiency has declined over last year.

The first six months of 2010 witnessed a similar trend of Debt Management Ratios.

The solvency situation of the Bank showed marked improvement from 2004 to 2008. However, in 2009 the solvency ratios of NBP showed a mixed trend. The Equity to Assets and Equity to Deposits ratios declined by 9.03% and 8.62% in 2009, respectively. This shows that the NBP s average increase in assets and deposits during 2009 more than offset its average increase in equity during the same period. A decline in equity to deposits ratio indicates that the liabilities of the company are increasing at a greater rate than its stock of capital - such a trend if allowed to continue can have an adverse impact on the long-term solvency of NBP. On the other hand the Earning Assets to Deposits ratio of NBP increased by 1.04% in 2009. Overall, the solvency of the Bank deteriorated in 2009.

In the first half of 2010, the solvency of NBP worsened as Equity to Assets dropped to 12.07%. The reason for this was the growing base of Deposits of the bank, due to which Equity to Deposits also dropped down to 15.27%.

Deposits of the big 4 banks also rose steadily (Allied at 13% YoY, HBL at 10% YoY and MCB at 16% YoY), with the exception of UBL, which witnessed a decline in its deposits over the year (1.732%).

NBP has shown strong market performance over the years. However, in 2009 this market performance declined significantly. In particular, the Bank s price to earnings ratio fell by 64.75% and the market value to book value ratio fell by 59.3%. Moreover, the Bank s average share price per year also fell by 58.5%. This shows a decline in overall market value of NBP during 2009. A decline in P/E ratios and other market value ratios suggests decline in investor confidence and hence, growth prospects for NBP. This decline can mainly be attributed to a tight monetary policy and adverse economic and social environment of the country; rather than to any inherent factor of the Bank itself.

PE stands higher at 13.11% in 1H10 as compared to 11.99% in 1H09. Market Value to Book Value is also higher YoY at 0.88. Furthermore, share price on average is rising steadily indicating strong investor confidence in the market owing to NBP s highly profitable operations.

However, it can be expected that with the upcoming slowdown in the economy as a result of the floods, performance of the stock market is likely to decline, resulting in falling share prices and crowding out of investors.

In 2009, NBP s after-tax profit increased by 18%, from Rs 15.5 billion to Rs 18.2 billion. The said increase is owing to higher fee and commission income, tax credit and capital gains. The Bank s net interest income increased by 3.8% from the corresponding period last year, mainly due to volume growth.

During 1Q10, the core interest revenue of the Bank increased by Rs 2.2 billion or 11.9% with increase in net interest income by Rs 585 million. Non interest markup income increased by Rs 342 million or 9.3% compared to corresponding period last year despite decline of Rs 500 million in exchange income on account of better arbitrage opportunities available last year. Further, during 1Q10 NBP s commission income increased by Rs 491 million. Capital gains of the bank were higher by Rs 530 million due to combination of settlement of 2.5% bank s holding in NIT Units and renewed focus on equity investments. However, administrative expenses of the Bank are also higher in line with inflation.

NBP s deposits grew by 16.25% over the last year, despite the rise in cost of deposits. The Bank increased its deposits to strengthen liquidity position. In this regard, NBP launched the CASA Deposit Mobilization Scheme in late 2009, aimed at mobilizing Current/Savings Accounts through incentivizing employees. The overall impact of the rise in deposits on the system s stability and liquidity outweighed the associated rise in cost.

Advances of the Bank showed a 15% growth, mainly in commodity and corporate sector on account of higher borrowings by Government from the commercial banks. Loans under commodity operations witnessed robust growth due to increase in commodity support prices by the Government. Nevertheless, the growth in advances in 2009 is less than that of last year; this is mainly due to unfavorable business environment in the country which reduced the demand for loans. In particular, SME loans registered a decline due to reduction in the repayment capacity of borrowers and in their willingness to go for fresh financing.

However, by end of 1Q10, the rising trend of deposits reversed and NBP s deposits registered a decline of Rs 12.6 billion or 1.74% from year end December 2009 mainly due to reduction in overseas deposits. On the other hand, compared to March 2009, 1Q10 showed an increase in deposits by Rs 73 billion.

FUTURE OUTLOOK

Since most of the NPLs were the result of business cycle/circumstantial defaults, with the economy picking up and reduction in interest rates, the quantum of non-performing loans is expected to decline. For the next year, NBP plans to continue with its strong focus on recovery and reduction in non-performing loans, deposit mobilization, expense management, consolidation of loans and tapping into untapped markets. Further, NBP is embarking on industry leading IT initiatives to upgrade and implement new application solutions to meet the challenges of the growing competition and enhanced business requirements. This will greatly improve operational efficiency and control, customer service and facilitate launch of new products.

With Flood Relief work taking place all over the country, the banks of
Pakistan are expected to contribute immensely in rehabilitation of the displaced and distressed Pakistanis, along with reconstruction of the basic infrastructure destroyed in the floods. Furthermore, with acres of crop yields completely annihilated, IMF loans and budget deficits, inflationary pressures and a despondent people, the economy is about to take a huge hit and banks will have to bear the brunt of it as well.

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RATIOS

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Asset Quality Ratios         2006   2007   2008   2009  1H 10  1H 09

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Growth of NPLs            7.48%  5.68%  47.35%  25.61%    -    -

NPL to Advances           11.97%  11.35%  12.58%  14.34%  15.03% 14.01%

Provisions to NPL          0.90   0.89   0.84   0.79    0.8   0.76

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Earning Ratios            2006   2007   2008   2009  1H 10  1H 09

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ROA                 2.81%  2.72%  1.96%  2.07%   0.80%  0.73%

ROE                 21.58%  19.20%  14.13%  16.41%   6.64%  5.95%

ROD                 3.53%  3.48%  2.54%  2.70%   1.01%  0.95%

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Market Value Ratios         2006   2007   2008   2009  1H 10  1H 09

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Price to Earnings          12.05  10.77  12.17   4.29   13.11  11.99

Market Value to Book Value      2.26   2.07   1.72   0.88   0.88   0.71

Average Share Price for the Year  251.63  251.46  174.76  72.60 76.16544    70

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Solvency               2006   2007   2008   2009  1H 10  1H 09

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Equity to Assets          13.01%  14.19%  13.85%  12.60%  12.07% 12.29%

Equity to Deposits         16.34%  18.13%  17.98%  16.43%  15.27% 16.03%

Earning Assets to Deposits      0.95   0.96   0.96   0.97   0.94   0.97

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Debt Management           2006   2007   2008   2009  1H 10  1H 09

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Debt to Equity            6.69   6.05   6.22   6.94   7.28   7.14

Debt to Assets            0.87   0.86   0.86   0.87   0.88   0.88

Deposit times Capital        6.12   5.52   5.56   6.09   6.55   6.24

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Liquidity              2006   2007   2008   2009  1H 10  1H 09

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Earning Assets to Assets       0.76   0.75   0.74   0.75   0.74   0.74

Advance to Deposit          0.61   0.60   0.62   0.66   0.61   0.66

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].

Courtesy: Business Recorder


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