Final Project Of Investment and Portfolio management

Topic:

Ratio Analysis Report of Meezan Bank Ltd.

Presented to:

Prof. Bilal Sarwar

Presented by:

Khulda Abbasi Ghazal Ejaz Hira Saif Ullah Tahir Mehmood Sohaib Aslam Awan

L1F11BCMH2011 L1F11MCOM2102 L1F11BCMH0013 L1F11MCOM2093 L1F11MCOM0107

Introduction Meezan Bank Limited, a publicly listed company, is the first and largest Islamic Bank in Pakistan and one of the fastest growing banks in the history of the banking sector of the Country. Having the largest branch network and product range, Meezan Bank bears the critical responsibility of leading the way forward in establishing a stable and dynamic Islamic banking system replete with dynamic and cutting-edge products and services. Meezan Bank aims to fulfill its prime objective of providing customers accessibility and convenience, within an atmosphere and culture of dedicated service and recognition of their needs. Meezan Bank has developed an extraordinary research and development capability by combining investment bankers, commercial bankers, Shariah scholars and legal experts to develop innovative, viable,and competitive value propositions that not only meet the requirements of todays complex financial world,but do so with world-class service excellence which our customers demand; all within the bounds of Shariah. Vision To establish Islamic banking as banking of first choice to facilitate implementation of an equitable economic system, providing a strong foundation for establishing a fair and just society for mankind. Mission To be the premier Islamic bank, offering a one-stop shop for innovative value-added products and services to our customers with in the bounds of Shariah, while optimizing the stakeholders value through an organizational culture based on learning, fairness, respect for individual enterprise and performance. Service Mission To develop a committed service culture which ensures the consistent delivery of our products and services within the highest quality service parameters, promoting Islamic values and ensuring recognition and a quality banking experience to our customers

Corporate Profile Meezan Bank Limited, a publicly listed company, was incorporated on January 27, 1997 and startedoperations as an investment bank in August that year. In January, 2002 in an historic initiative, Meezan Bank was granted the countrys first full-fledged commercial banking license as a dedicated Islamic Bank, by the State Bank of Pakistan.

Strategic Decision By implementing robust and aggressive strategic and tactical initiatives on the side of consumer banking, Meezan Bank aims to fulfill its prime objective of providing customers accessibility and convenience, within an atmosphere and culture of dedicated service and recognition of their needs.

Growth Meezan Bank has clearly established itself as the leading Islamic Bank in Pakistan with the largest branch networking all major cities of the country. The banking sector is showing a significant paradigm shift away from traditional means of business and is catering to an increasingly astute and demanding financial consumer who is also becoming keenly aware of Islamic Banking. During the eight years of its operation as an Islamic commercial bank (from 2002 to 2010),offering universal banking services to customers, Meezan Bank has been one of the fastest growing banks in the history of the countrys banking sector. Average growth in deposits has been 55% per annum during this period while the branch network grew from 4 to 201. The bank has established a strong and credible management team comprised of experienced professionals, that have achieved a strong balance sheet with excellent operating profitability and strong ratios, which places the Bank at the top of the industry. The Bank has been assigned a medium to long-term entity rating of AA- and a short-term entity rating of A-1. Shareholders & Shariah Board The Banks main shareholders are leading financial institutions of the Region namely, Noor Financial Investment Company,Pak-Kuwait Investment Company,and the Islamic Development Bank of Jeddah. The established position, reputation, strength and stability, of these institutions add significant value to the Bank through Board representation and appliedsynergies.The Bank has an internationally renownedShariah Supervisory Board Chaired by Justice(Retd.) Maulana Muhammad Taqi Usmani, an internationally renowned figure in the field of Shariah, particularly Islamic Finance. He holds the position of Deputy Chairman at the Islamic Fiqh Academy, Jeddah and in his long and illustrious career has also served as a Judge in the Shariat Appellate Bench, Supreme Court of Pakistan. The Board also includes Sheikh Essam M.Ishaq (Bahrain), Dr. Abdul Sattar Abu Ghuddah (Saudi Arabia) and Dr. Imran Usmani who is also the resident Shariah Advisor of the Bank.

Technology Meezan Bank has a strong technology focus. It has invested heavily in state-of-the-art software applicationsnamely Temenos T-24 and Oracle. It has also recently upgraded its hardware platform and also has a hot disaster recovery site in place to cater to any unforeseen eventualities.

History "We must work our destiny in our own way and present to the works an economic system based on true Islamic concept of equality of manhood and social justice"-Quaid-e-Azam Mohammed Ali Jinnah At Opening Ceremony of The State Bank of Pakistan on July 1, 1948-1947The inception of Pakistan as the first Islamic Republic created in the name of Islam. 1980 CII presents report on the elimination of Interest genuinely considered to be the first majorcomprehensive work in the world undertaken on Islamic banking and finance. 1985 Commercial banks transformed their nomenclature stating all Rupee Saving Accounts asinterestfree. However, foreign currency deposits in Pakistan and foreign loans continued asbefore. 1991 Procedure adopted by banks in 1985 was declared un-Islamic by the Federal Shariat Court(FSC). The Government and some banks/DFIs made appeals to the Shariat Appellate Bench(SAB) of the Supreme Court of Pakistan. 1997 Al-Meezan Investment Bank is established with a mandate to pursue Islamic Banking. Mr. IrfanSiddiqui appointed as first and founding Chief Executive Officer. 1999 The Shariat Appellate Bench of the Supreme Court of Pakistan rejects the appeals and directs all laws on interest banking to cease. The government sets up a high level commission, taskforces and committees to institute and promote Islamic banking on parallel basis with conventional system.

2001 The Shariah Supervisory Board is established at Al-Meezan Investment Bank led by Justice (Retd.) Muhammad Taqi Usmani as chairman. State Bank of Pakistan sets criteria for establishment of Islamic commercial banks in private sector and subsidiaries and stand-alone branches by existing commercial banks to conduct Islamic banking in the country. 2002 Meezan Bank acquires the Pakistan operations of Societe Generale and concurrently AlMeezan Investment Bank converts itself into a full fledged Islamic commercial bank. The first Islamic banking license is issued to the Bank and it is renamed Meezan Bank. President General Pervez Musharraf inaugurates the new Islamic Commercial Bank at a formal ceremony in Karachi. 2003 Meezan Bank establishes itself as the pioneer of Islamic Banking in Pakistan and quicklyestablishes branches in all major cities of the country. A wide range of products are developed and launched consolidating the Banks position as the premier Islamic Bank of the country Al Meezan Investment Management Limited (AMIM), the asset management arm of Meezan Bank, introduces Meezan Islamic Fund (MIF), the countrys first open-end Islamic Mutual Fund. 2004 The State Bank establishes a dedicated Islamic Banking Department (IBD) by merging the Islamic Economics Division of the Research Department with the Islamic Banking Division of the Banking Policy Department. A Shariah Board has been appointed to regulate and approve guidelines for the emerging Islamic Banking industry. The Government of Pakistan awards the mandate for debut of international Sukuk (Bond) offering for USD 500 million. The offering is a success and establishes a benchmark for Pakistan. Meezan Bank acts as the Shariah Structuring Advisor for this historic transaction.

2006 A number of new dedicated Islamic Banks, namely Bank Islami and Dubai Islamic Bank, commence operations in Pakistan. Meezan continues its leadership position in the industry by more than doubling it branch network to a total of 62 branches in 21 cities, clearly establishing itself as the largest Islamic Bank of the country. Meezan Bank, becomes the first Islamic bank to introduce 8 am to 8 pm banking at selected branches in Karachi

2007 Meezan Bank's branch network reached the milestone number of 100 branches (including subbranches) in 31 cities nationwide. CarIjarah portfolio reached Rs. 4.1 billion and the EasyHome portfolio stood at Rs. 3.1 billion. The Bank introduced Istisna' financing to caterto the working capital needs of customers. Meezan Bank was awarded 'Best Islamic Bank in Pakistan' by Islamic Finance News of RED money Group, Malaysia. Deposit base of the Bank grew to over Rs. 54 billion and the Bank earned profit after tax of Rs. 963 million. Trade Finance business reached Rs. 70 billion. 2008 Meezan Bank introduced Tijarah financing to allow customers to raise funds for financing of stocks of finished goods. Meezan Bank was awarded 'Best Islamic Bank in Pakistan' by Islamic Finance News of RED money Group, Malaysia and 'Best Islamic Financial Institution in Pakistan by Global Finance Magazine, New York. Branch network grew to 166 branches (including sub-branches) in 40 cities nationwide. Deposit base grew to Rs. 70 billion and the total financing portfolio amounted to Rs. 39 billion. 2009 2009 was a watershed year for Meezan Bank. The branch network reached 201 branches(including sub-branches) in 54 cities nationwide; deposit base crossed Rs. 100 billion;profit/return earned on financing and investment activities exceeded Rs. 10 billion and the Bank handled more than Rs. 100 billion of import/export business. Being a socially responsible bank, Meezan Bank launched Meezan Labbaik, a Hajj and Umrah product - the primary objective being the desire to facilitate Muslims in performing their holy duty. Meezan VisaDebit Card was also launched during the year which is accepted at over 30 million outlets worldwide and allows customers to withdraw fund million ATMs worldwide and can also be used for shopping, dining, traveling, fuel and cash needs. Meezan Bank was awarded 'Best Islamic Bank in Pakistan' by Islamic Finance News of RED money Group, Malaysia; 'Best Islamic Financial Institution in Pakistan' by Global Finance Magazine, New York; 'Best Islamic Bank in Pakistan' for 2009 by ASIA MONEY Magazine, Hong Kong and 'Islamic Bank of the Year' for 2009 by CFA Association of Pakistan. Corporate assets, including corporate Sukuk stood at over Rs. 40 billion. Corporate highlights of 2009 includedTijarah financing with PSO, Istisna financing with PARCO and Murabaha financing with Punjab Food Department. The Bank started implementing its new core banking application - T-24. T-24 is a core banking software which includes banking best practices based on Temenos'implementations in over 600 financial institutions and 120 countries across Retail, Corporate,Private Wealth, Islamic and Micro finance and Community Banking sectors.

2010 Meezan Bank developed a number of new deposit products to cater to the unique needs of different market segments. Among the products launched during this year were Meezan Business Plus, a Mudaraba-based account that offers an array of free services for businesses, Meezan Euro Savings Account and Meezan Pound Savings Account. Meezan Bank's Car Ijarahcompleted its 9th year and stood at Rs. 4.2 billion with over 8,000 active vehicles. Meezan Bank stood among the top three auto-finance providers in the countries .

Ratio analysis
2009

Market Value Ratio:

Market Value per Share= Price of stock x No. of shares outstanding Market Value per share = Rs. 15.74 Price Earnings Ratio = Market price per equity share / Earnings per share Price Earning Ratio 9.20 Earnings per share=Net income available to shareholders/No. of shares outstanding Earning per Share= Rs. 1.71 Interpretation of Market Value Ratios This shows that Rs 1.71 dividend is declared per share having market value of Rs 15.74 and price per share is 9.20 times greater than the earning per share. These ratios explain how much the investor is willing to pay for the shares.

Profitability Ratios:
Net Profit Before Tax to Total Income=net Profit Before Tax/Total Income Net Profit Before Tax to Total Income 14.8% Profit Margin=net Profit After Tax/Total Revenues Profit Margin= 8.76%

Interpretation of Profitability Ratios The Profit Margin of a Meezan Bank determines that its ability to withstand competition and adverse conditions like rising costs, falling prices or declining sales in the future is very low. This ratio measures that the percentage of profits earned per rupee of revenue generated is 8.76%

Deposit Ratio:
Expense to Income=Total expense/ Total Income Expense to Income= 72.15% Financing to Deposit Ratio=Financing/Deposit Financing to Deposit Ratio= 44.04% Interpretation of Deposit Ratios This shows that the bank is not so much efficient in managing its funds. The customers trust on the bank and has increased the amount of deposits in but the bank, on the other hand, is not equally efficient. However the bank has also realized the situation and started utilizing the funds in other investments and lending to other financial institutions. This move of the bank is endeavoring to balance the situation which was created by under utilization of the funds collected from the customers. Efficiency Ratio: Return on Assets=profit after taxation/total assets Return on Average Assets = 0.98% Return on equity= profit after taxation/total shareholder equity Return on Average Equity = 13.29% Interpretation of ROE and ROA Meezan Banks is generating 13.29% on every rupee invested by shareholders and 0.98% on every rupee invested on its assets.Meezan banks ability to squeeze profits from shareholders' money appears rather impressive. The greater difference in ROE and ROA is due to the liabilities of Meezan Bank.

2010

Liquidity Ratios:
1- Current Ratio=Current Asset/Current Liabilities Current Ratio=69.69% 2-Quick Ratio=Current Asset-Inventories Current /Liabilities Quick Ratio= 47.35%

Interpretation of Liquidity Ratios These ratios are representing liquidity of Meezan Bank. They also show that Meezan Bank is not keeping its funds idle but have sufficient liquidity to proceed in future

Efficiency Ratios:
3-Return on equity= profit after taxation/total shareholder equity Return on Equity=15.35% 4-Return on Assets=profit after taxation/total assets Return on Assets=1.06% Interpretation of ROE and ROA Meezan Banks is generating 15.35% on every rupee invested by shareholders and 1.06% on every rupee invested on its assets.Meezan banks ability to squeeze profits from shareholders' money appears rather impressive. The greater difference in ROE and ROA is due to the liabilities of Meezan Bank.

Profitability Ratios:
5-Net Profit Before Tax to Total Income=net Profit Before Tax/Total Income Net Profit Before Tax to Total income=14.40% 6-Profit Margin=net Profit After Tax/Total Revenues Profit Margin=11.17%

Interpretation of Profitability Ratios The Profit Margin of a Meezan Bank determines that its ability to withstand competition and adverse conditions like rising costs, falling prices or declining sales in the future is very low. This ratio measures that the percentage of profits earned per rupee of revenue generated is 11.17%

Deposit Ratio

6-Financing to Deposit Ratio=Financing/Deposit Financing to Deposit Ratio=41.35% 7-Investment to Deposit Ratio=investmant/Deposit Investment to Deposit Ratio=41.94%

Interpretation of Deposit Ratios This shows that the bank is not so much efficient in managing its funds. The customers trust on the bank and has increased the amount of deposits in but the bank, on the other hand, is not equally efficient. However the bank has also realized the situation and started utilizing the funds in other investments and lending to other financial institutions. This move of the bank is endeavoring to balance the situation which was created by under utilization of the funds collected from the customers.

Market value ratios:

8- Market Value per share=Rs 16.90 9- Earning per Share=net income/Common shares outstanding Earnings per share=Rs 2.36 10-Price earning Ratio=price per share/ earning per share Price Earning Ratio=7.16 times Interpretation of Market Value Ratios This shows that Rs 2.36 dividend is declared per share having market value of Rs 16.90 and price per share is 7.16 times greater than the earning per share. These ratios explain how much the investor is willing to pay for the shares.

Stock performance (FY10) Stock returns volatility of weekly continuously-compounded returns shows that the standard deviation of MEBLs stock returns is 2.88%. The future stock returns are expected to vary with a standard deviation of 2.88%, indicating very low projected volatility of stock returns. This shows that Meezan Bank enjoys high investor confidence, which leads to a consistent share price. Meezan Bank has successfully positioned itself as the premier Islamic bank. Beta analysis generates the beta of MEBL stock to be 0.28 against a (KSE-100 index) market beta of 1.00, as given by the slope of the trend line. This shows that MEBL stock is much less risky compared to the market, and experiences very low price fluctuations. However, this also implies low possibility of short-term returns on the stock. A low degree of scatter is observed on the plot, showing that investor confidence in MEBL is steady and consistent.

RECENT PERFORMANCE (FY10) ===================================================================== =============== Rupees in 000s FY09 FY10 % Change ===================================================================== =============== Income Statement Profit/ return earned on financings, investments and placements 10,102,060 12,290,549 21.66 Return on deposits and other dues expensed 4,969,916 6,606,474 32.93 Net spread income 5,132,144 5,684,075 10.75 Provisioning Provision against non-performing loans and advances net 1,430,536 1,330,057 -7.02 Provision / (reversal) for diminution in value of investments net 88,640 46,862 -47.13 Provision against off balance sheet obligations 37,682 100.00 Provision against amountsdue from financial institutions 81,875 100.00 Net spread after provisioning 3,612,968 4,187,599 15.90 Other incomeFee, commission and brokerage income 529,260 615,752 16.34 Dividend Income 189,973 321,898 69.44

Income from dealing in foreign currencies 752,904 1,381,044 83.43 Gain on Sale of Investments 76,160 97,155 27.57 Other Income 49,507 59,181 19.54 Total other income 1,597,804 2,475,030 54.90 Total net spread after provisioning/other income 5,210,772 6,662,629 27.86 Other expenses Administrative expenses 3,530,161 4,460,804 26.36 Other Provisions / write-offs/ (reversals) 60,859 18,306 -130.08 Other Charges 1,747 56,559 3137.49 Total other expenses 3,471,049 4,535,669 30.67 Profit before taxation 1,739,723 2,126,960 22.26 Taxation 714,372 477,372 -33.18 Profit after taxation 1,595,465 1,649,588 3.39 Basic earnings per share 1.71 2.36 38.01 -

In line with the favourable investment environment, profit earned on financings, investments and placements increased by 21.66% from Rs. 10.10 billion in FY09 to Rs. 12.29 billion in FY10. However, the return expensed on deposits increased by a greater 32.93%, from Rs. 4.97 billion in FY09 to Rs. 6.61 billion in FY10. This led to a net 1075% increase in net spread income, from Rs. 5.13 billion in FY09 to Rs. 5.68 billion in FY10. As a result of the decrease in financing activities coupled with the FSV benefit which enabled banks to recognise a higher Forced Sale Value of NPLs, the provisioning against NPLs decreased by 7.02% over FY09-FY10. This led to 15.90% increase in net spread after provisioning from Rs. 3.61 billion in FY09 to Rs. 4.19 billion in FY10. A 16.34% increase in fee, commission and brokerage income, 69.44% increase in dividend income and 83.43% increase in income in dealing in foreign currencies caused the total other income to increase by 54.90% from Rs. 1.60 billion in FY09 to Rs. 2.48 billion in FY10. The total spread/other income thus increased by 27.86% from Rs. 5.21 billion in FY09 to Rs. 6.66 billion in FY10. However, an increase of 30.67% in other expenses, mainly on account of the 26.36% increase in administrative expenses due to the expanding number of branches, led to a net 22.26% increase in profit before taxation, from Rs. 1.74 billion in FY09 to Rs. 2.13 billion in FY10. Net taxation decreased by 33.18%, leading to a 3.39% increase in profit after taxation from Rs. 1.60 billion in FY09 to 1.65 billion in FY10. The earnings per share, however, increased by 38.01% from Rs. 1.71 per share in FY09 to Rs. 2.36 per share in FY10. FUTURE OUTLOOK The Islamic financial assets are expected to cross $1 trillion by 2010 in other words 12% of domestic banking industry share by 2012. The Islamic Banking industry continues to grow in Pakistan and six-full fledged Islamic Banks are now in operation. It is interesting to note that the conventional banks are increasingly realizing the huge potential market backed by the untapped and steadily growing appetite for Islamic banking products; hence the drive for entering this market is based on business considerations in addition to religious considerations. As the level of awareness and understanding of Islamic Banking remains very low, this might pose as a threat to the credibility to the full-fledged Islamic Banks like Meezan. For this reason, there is a need for all banks to act in concert and help build awareness of Islamic Banking throughout the country. Islamic banks should come forward to serve the nation by providing the less privileged with the opportunity to meet their needs in the Shariah Compliant manner. The Bank, which has firmly established its leadership position in the Islamic Banking industry, should focus more on the development and offering of the financing products of social welfare such as education and micro finance.

Going forward, Meezan Bank is cognizant of State Bank of Pakistan s (SBP) initiative to introduce e-bond automated trading for GOP securities, which includes Ijarah Sukuks through Bloomberg. Being a primary dealer for GOP Ijarah Sukuks, Meezan Bank will try to not only introduce this platform within itself, but also create a viable secondary market for these Sukuks. Meezan Bank continues to facilitate other Islamic banks and Islamic banking branches in their quest to deploy or solicit excess liquidity through various Islamic modes. Treasury is in constant liaison with the Bank s Product Development and Shariah Compliance (PDSC) department to devise new treasury products with the vision to create an Islamic interbank money market. The bank will strive to build a high quality financing portfolio and increase ADR to a level between 55% and 60% so as to increase shareholder return. Meezan Bank is committed to its Vision of establishing Islamic banking as banking of first choice. The priority is to ensure that Islamic banking products and services are available across the length and breadth of Pakistan; this will be achieved by: 1. Growing the branch network: The Bank intends to renew its aggressive branch growth strategy and add 53 new branches during the year. This will take the total branch network of the Bank to 275 giving it excellent network capability critical for the effective market penetration of a commercial bank. 2. Deepen the existing and add new Alternate Delivery Channels: 50 new ATMs will be added to the existing network of 169 ATMs. Plans are underway to up-grade the Banks 24 hour Call Centre and additional functionality including out-bound campaign-management will be added. A major new initiative will be launch of the Banks mobile banking platform. The intention is to substantially increase customer outreach and also support the financial inclusion programme of the SBP. 3. Improve systems and controls: Significant focus is being given to improvement of systems and controls in the Bank. As a part of this initiative, an internal control unit has already been set-up. In addition, substantial investment is being made in new software applications including state of the art KYC and AML software, among others. 4. Improve training and development: As the Bank expands, sourcing and retaining the right quality of human resource is an increasingly significant challenge. Accordingly, the Bank will build on its existing training and development infrastructure, balancing Shariah-based training and branch banking training.

Disclaimer
As per the charter of this report, it is mandatory on all the members to ensure all the components of this report that were recommended by the instructor. The prime responsibility for ensuring all the analysis of the Banks operation thus lies with the members. Based on the extensive reviews of sample cases for each analysis and related interpretation, made in this regard, in our opinion, the affairs and activities performed in this report with the guidelines and directions given by the instructor are related to the requirements. The analysis conducted is of FY 2009-10.

May Allah bless us with the best Tawfeeq to accomplish His cherished tasks, make us successful in this world and in the Hereafter, and forgive our mistakes. (Aameen)