The Caring Bank

Analysis of Financial Statements Bank Studied: Bank Alfalah Limited

Submitted to: Prof. Wasimullah Submitted by: Ijaz Hussain Bajwa 2065-FMS/BBA/F07

Department of Business Administration, Faculty of Management Sciences, International Islamic University, Islamabad.

Analysis of Financial Statement

Page i

The Caring Bank

Contents
Brief Introduction.................................................................................................................................... 1 PEST Analysis ........................................................................................................................................... 2 Political Environment: ......................................................................................................................... 2 Economic Indicators:........................................................................................................................... 2 Socio cultural environment: ................................................................................................................ 2 Technological Factors: ........................................................................................................................ 2 Liquidity Ratios:....................................................................................................................................... 2 Advances to Deposit Ratio .................................................................................................................. 2 Earning Asset to total Assets............................................................................................................... 3 Solvency Ratios ....................................................................................................................................... 3 Equity to Assets ................................................................................................................................... 3 Equity to Deposit................................................................................................................................. 3 Earning Assets to Deposit ................................................................................................................... 3 Credit Risk Ratios .................................................................................................................................... 4 Non-Performing Assets to Equity........................................................................................................ 4 Total Loans to Total Deposits.............................................................................................................. 4 Debt Management Ratios ....................................................................................................................... 4 Debt to total Assets............................................................................................................................. 4 Debt to Equity ..................................................................................................................................... 4 Profitability Ratios................................................................................................................................... 5 Non Interest Margin............................................................................................................................ 5 Net Interest Margin ............................................................................................................................ 5 Return on Assets ................................................................................................................................. 5 Return on Equity (ROE) by Do Pont Equation ..................................................................................... 6 Exhibit 1: Bank Alfalah Ltd and Peer group comparison ......................................................................... 7 Exhibit 2: ROE Break Down (Do Pont Equation) ..................................................................................... 8 Exhibit 3: Peer Group Working ............................................................................................................... 8 Graphs 1: Liabilities comparison on Interest base .................................................................................. 9 Graphs 2: Asset Weights comparison ................................................................................................... 10 Graphs 3: Liabilities Weights comparison ............................................................................................. 11 Graphs 4: Equity Weights comparison.................................................................................................. 12

Analysis of Financial Statement

Page ii

The Caring Bank

Brief Introduction
Banks play an important role in the economy and are considered as the backbone of an economy in every country and Pakistan is no exemption. Banks are custodian to the assets of the general masses. The banking sector plays a significant role in a contemporary world of money and economy. It influences and facilitates many different but integrated economic activities like resources mobilization, poverty elimination, production and distribution of public finance. In 2009, Pakistan economy has witnessed gradual improvement in a number of economic indicators such as lower current account deficit, including the forex reserves and declining inflation. Fiscal discipline has been difficult to maintain because of lower than expected revenue collection and uncontrolled public spending.1 Pakistan real GDP growth was 2.7% in the year 2009.2 After a peak of 25.3% in August 2008, headline inflation has been reached to 10.6% in December 2009 largely helped by high base effect and decline in commodity prices. Fiscal expansion fueled by large outlays to counter the ongoing terrorist activities augment the pressure on internal government finance, thereby diluting the effect of monetary policy. In banking sector, the fundamental outlook is changing from neutral to positive as banking sector remains to be resilient.3 The baking sector has registered a decline in 2009. The decrease can be attributed primarily to the drop in interest rates towards the end of the year. Going forward the industry spreads are expected to contract because of excepted reduction in discount rate and lowering of KIBOR. Bank Alfalah Limited was incorporated on June 21, 1997 as a Public Limited Company under the Companies Ordinance 1984 & Banking Companies Ordinance, 1962. Strengthened with the backing of the Abu Dhabi Group and driven by the strategic goals set out by its board of management, the Bank has invested in innovative technology to have an extensive range of products and services. PACRA, a premier rating agency of the country, has rated the bank AA (double A), Entity Rating for Long term and A1+ (A one plus) for the short term. These rating donate very low expectations of credit risk, strong capacity for timely payments of financial commitments in long term ad by highest capacity for timely payments in the short term respectively. Further, the unsecured subordinated debt (Term Finance Certificates) of the bank has been awarded a credit rating of AA- (double A minus).

1 2

Bank Alfalah Limited; annual report 2009 www.cia.com 3 www.brecorder.com

Analysis of Financial Statement

Page 1

The Caring Bank

PEST Analysis
Political Environment: The present state of the government in Pakistan is directly
affecting the policies of banks. Continuous political changes have disrupted the policies and objectives as each regime brings with it its own agenda. Organizations need time to adjust to one regime and then work with it towards economic enhancement.

Economic Indicators: Pakistans economy has witnessed the most challenging period after
posting six consecutive years of healthy economic growth. However, the strong fundamentals were compromised to prevailing global crises thats shacked the confidence of global investors and FDI flowing in the country. Soaring inflation hitting a 24% mark, huge fiscal deficits and balance of payments issues coupled with plummeting forex reserves added to the economys move to an unstable growth trajectory.

Socio cultural environment: A low saving culture has offset the huge population
advantage this is enjoyed by Pakistan. Also culture is dedicated by the religion, and in Pakistan a significant segment of the population is reluctant to accept interest for their deposits due to the negative religious implications of such an act and literacy rate of the country is very much low, thus making it harder for banks to mobilize their deposits within these regions.

Technological Factors: Banks in the developed world have been turning to heavy IT
investments, which differentiate their products, provide response times, enhance accessibility and improve customer satisfaction.

Liquidity Ratios4:
Advances to Deposit Ratio there was a slight increase in this ratio in 2008 from
the previous year. In 2008, the value was 63.78% and in 2007, it was 62.67% this about 1% fluctuation was caused by 12.54% increase in advances from 2007 and 10.08% increase in Deposit portion. As the growths were along same axis so no major fluctuation noticed. While in 2009 the value was 57.90% having a greater difference from previous year values. This fluctuation was aid by a decrease in Advances by 1.95% and on the other hand 7.99% increase in the Deposit portion. The decline in advances is noticed despite an increase in loans, cash credit and running finance business and starting the Ijara (Islamic Term: Rent or transfer of usufruct) but this was less than 0.5% of total advances. The decline was due to the 28.15% decrease in financing activities relative to previous year. The reason for this was the general economy conditions and the saturation of auto financing portion and related
4

The relevant backing of these ratio analysis is in the Exhibits & Graphs on page 7-12

Analysis of Financial Statement

Page 2

The Caring Bank

activities. The peer group value is 72.56%, which shows that bank performance is too low and need special efforts to compete with market. Another disappointing thing is that this ratio has decreasing trend. So, bank to make efforts to increase its current level of liquidity.

Earning Asset to total Assets the value of this ratio was 80.01% in 2007, 77.67%
in 2008 and 77.66% in 2009. Here again the decreasing trend is dangerous for liquidity. The reason for decline in 2008 was total assets grown with a 6.11% rate and only 3.02% increase in earning assets. So this indifferent growth caused the change of decline in ratio. In 2009 the change is very insignificant as the value was 77.66%, the reason for this very minor change was that earning assets increased by 11.46% and assets growth was similar and value was 11.49%. Therefore, ratio remained about same. The peer group value for 2009 was 87.51% that shows that earning assets of Bank Alfalah are in low percentage as compared to other bank and should be take care of, so the liquidity chances of bank to be increased.

Solvency Ratios
Equity to Assets the ratio of equity to asset was 4.19% in 2007 and 2008. In 2009,
its value was 5.08%, this increase seems good that now more parentage of assets are financed from equity. But even now it is below the peer group average of 7.78%, which represent a significant gap to be covered. The major reason for increase was increase in share capital of 68.75% in 2009 and increase in total equity of 35.33%. In 2008 this total equity increase was 6.11% and increase in assets nullified this change.

Equity to Deposit this ratio was 5.04% in 2007, 4.86% in 2008 and 5.08% in 2009.
The increase in 2009 from previous years was due to increase in Equity value and this increase was 35.33% and increase was 7.99% while in 2008 the equity increase was 6.11% & deposit increase was 10.08% which was cause of decline from 2007 value. In equity this increase was due to increased share capital and a increase of 68.75%. This ratio for peer group average was 11.34%, which shows that Bank Alfalah has greater chances of default risk as compared to UBL, Faysal and HMB.

Earning Assets to Deposit the values are as 96.3% in 2007, 90% in 2008 and 93%
in 2009. The increase in earning assets is less than increase deposit and also deposit are a little bigger in value term as compared to earning assets so there is a decline. The peer group average is 129%. This shows that Bank Alfalah has lower earning chances as compared to peer group.

Analysis of Financial Statement

Page 3

The Caring Bank

Credit Risk Ratios

Non-Performing Assets to Equity the ratio for 2007 was 4.78, for 2008 was 5.33
and for 2009 was 4.40. The non-performing assets are a heavy portion of its balance sheet and are about 18.57% of total asset in 2009. In 2009, this value decreased due to increase in equity, which caused the change as a result risk is reduced. The peer group average is 1.64 shows the below level performance of Bank Alfalah.

Total Loans to Total Deposits this ratio amounted 1.14 in 2007, 1.10 in 2008 and
1.13 in 2009. This reason for not changing greatly this value is that increase in total loans or debt is 6.16% in 2008 and 10.54 in 2009. While increases in deposits is 10.08% and 8% respectively and most important thing is weight of deposit in total loans as this totaled the 87.37% in 2007, 90.6% in 2008 and 88.5% in 2009. So a major change in this ratio is noticed. The peer group average is 1.34, which shows that in peer group the percentage of deposits as compared to loans is not as high as of Bank Alfalah.

Debt Management Ratios

Debt to total Assets this ratio was 95.07% in 2007, 95.12% in 2008 and 94.31% in
2009. This shows that how much of bank assets have been financed with debt. There is a slight decreasing trend in ratio. It is due the reason that growth in debt in 2008 was 6.163% and total asset increase with 6.11% so a slight increase occurred and in 2009, the decrease in 2009 was due to 11.49% increase in assets and only 10.54% increase in debt. The slight changes are because values of both the two factor dont have great difference. The peer group average is 91.5%, which shows that Bank Alfalah is more financed from debt as compared to peer group and thus more risky.

Debt to Equity in 2007 this value was 22.71, in 2008 this was 22.72 and in 2009 it
was 18.56. The reason for not change in ratios in 2007 and 2008 was due to the reason that increases in debt and equity was correlated. In 2008, growth in debt was 6.16% and in equity was 6.11%. In 2009, the increase in debt was 10.54% while equity growth was 35.33% this was the reason why ratio decreased in 2009. The peer group average is 12.08; shows that Bank Alfalah is using too much debt for financing even though an affecting change noticed in last year. So Bank Alfalah is more risky as compared to the peer group. Also usually banks are highly leveraged institutions but this ratio is near about 15, but Bank Alfalah ratio is too high. So management should pay attention towards this that a little adverse condition may harm badly.

Analysis of Financial Statement

Page 4

The Caring Bank

Profitability Ratios
Non Interest Margin value for the year 2007 was -0.86%, -1.89% in 2008 and 1.92% in 2009. Although most banks have this ratio in negative but have to compare with market how much deficit other banks are facing. The peer group average is -0.81%, which is more than half of Bank Alfalah ratio. The reason for decline in 2008 was that fee and commission decreased by 12.76% and gain on sale of securities although there was 349.98% growth in dividend income but it was not too significant. The expenses raise was due to 18.53% increase in administration expenses other values are not significant as total non-mark up expenses growth was 20.12%. In 2009 the value increased due to further decrease of 9.63% from fee and commission and non interest expense grown due to 11.39% increase in administration expense which causes a total increase of 10.49% in total non-mark up expenses. The peer group has the value of -0.81%, which shows that administration expenses of Bank Alfalah are too high.

Net Interest Margin this ratio was 3.48% in 2007, 3.86% in 2008 and 3.61% in
2009. The reason for increase in 2008 was the growth in interest earned during the year it was 20.41% and expenses were increased by 22.32% though this increase is great but in real value terms increase in interest income was greater as a result the net mark-up or interest income increased by 16.43%. While earning assets growth was only 3.02%, which helped the ratio to rise. In 2009 increase in interest earnings was 14.84% and expenses grown much greatly with 20.3% which caused the decline in ratio. Also the increases in earning assets were 11.46% much greater than previous year so in 2009 this value declined. The main reason for expenses growth was 131.1% rise in short term borrowing expenses and not up to mark, growth due to decline in 48% revenues from financial institutions and 82.34% decline o purchase and sale of securities; this is not efficient management or it may be due to general economic conditions and poor stock market.

Return on Assets the ROA in 2007 was 0.95%, 0.37% in 2008 and 0.23% in 2009.
There is a huge decrease in 2008 and 2009 in this ratio from previous year. The peer group average value is 1.17%. The reason for great decline if ratio in 2008 was due to the only 2.1% increase in net mark up after provision and non-interest income declined by 20.13% in 2008 aided by 20.12% of non interest expenses raise. Due to these main three factors a decline of 58.43% in Profit after taxation. On the other hand, asset growth was 6.11, which was reason for great low ratio. In 2009 growth in interest income was 1.34% and a good increase in noninterest income to 7.45% while non-interest expense growth of 10.49% greatly nullified the
Analysis of Financial Statement Page 5

The Caring Bank

effect so a total decrease of 43.37% in Profit before taxation and 31.06% of decline after taxation profit this relative decrease was due to deferred taxes. The raise in assets was 11.49% so relative huge increase in assets caused the ratio to depreciate. The peer group average shows that profitability of bank Alfalah is too much low so attention should be paid to change the scenario.

Return on Equity (ROE) by Do Pont Equation5 the value of ROE for Bank
Alfalah was 22.74% in 2007, 8.91% in 2008 and 4.53% in 2009. The decline in the value of ROE is too much concerning and it shows that there are some mistakes in last 2 years especially. The ROE was very good in 2007. In 2008 the decline was due to rapid decrease in Net Profit Margin and value declined from 9.83% in 2007 to 3.63% in 2008. The reasons for decline of NPM are only 2.1% increase in net mark up after provision and also non-interest income declined by 20.13% in 2008 aided by 20.12% increase in non interest expenses, so a decline of 58.43% in Profit after taxation. So, value of ROE was just 8.91% with so high equity multiplier or high risk is of real concern for management to take care of profitability and risk associated with higher equity multiplier. The other ratio of Asset Utilization is of not great concern as it is near to the average of peer group so other ratio are cause of worry. In 2009 the ROE was just 4.53% which is completely not acceptable at any term. This future decline in ROE was due to adverse affects of profitability the bank is facing, as NPM was just 2.2% in 2009. Asset Utilization was of not great worry as it was 10.47% and average of peer group has this value of 11.01% in 2009. Some good in all this worst figures is that equity multiplier value decreased in 2009 was 19.68; which was previously 23.89. That shows that riskiness of Bank Alfalah has decreased to some extent. But even than its Riskiness is much more than any of peer group member and group average was 12.75. Therefore it looks that bank is in severe crisis with high risk level along with very poor profitability ratios. United Bank Limited, Faysal Bank and Habib Metropolitan Bank Limited were taken as peer group members for benchmarking and relative analysis and there averages were used for comparison so that some comparison can be made in reality. Due to space and time limitations, we were not able to do some market surveys and meet the banking analysts. Therefore, the future prediction was not possible. In result of this working we can say that, Bank Alfalah is performing very low as compared to major market player and management should pay attention towards this and avoid the bankruptcy in these bad circumstance
5

Break Down of ROE on Exhibits 2

Analysis of Financial Statement

Page 6

The Caring Bank

Exhibit 1: Bank Alfalah Ltd and Peer group comparison

Peer Group Liquidity Ratios Advances To Deposit Ratio = Advances / Deposits Earning Assets To Assets = Earning Assets / Total Assets Solvency Ratios Equity To Assets = Equity / Assets Equity TO Deposits = Equity / Deposits Earning Assets To Deposits = Earning Assets / Deposits Cash & Govt. Securities To Total Assets = Cash & Govt. Securities / Total Assets Debt Management Ratios Debt To Assets = Debt / Total Assets Debt To Equity = Debt / Equity Capital Adequacy Ratio = Capital or Total eligible regulatory capital held / Risk Weighted Assets Profitability Ratios Net interest Margin = (Interest Income Interest Expense) / Earning Assets Non-Interest Margin = (Non-Interest Income Non Interest Expense) / Earning Assets Assets Utilization = Operating Revenue/ Total Assets Equity Multiplier = Total Assets / Total Equity ROE=(N.I/Sales)(Sales/Assets)(Assets/Equity) ROA = Net Income After Taxes / Total Assets Earnings Per Share Credit Risk Ratios Non-Performing Assets To Equity = NonPerforming Assets / Equity Non-Performing Loans to Total Assets = NonPerforming Loans / Total Assets Total Loans to Total Deposits = Total Loans / Total Deposits 72.56% 87.51% 2009 57.90% 77.66% 2008 63.78% 77.67% 2007 62.67% 80.01%

7.78% 11.34% 129% 6.34%

5.08% 6.09% 93% 9.01%

4.19% 4.86% 90% 9.37%

4.19% 5.04% 96.3% 8.95%

91.5% 12.08 12.81%

94.31% 18.56 12.46%

95.12% 22.72 8.03%

95.07% 22.71 9.85%

4.20% -0.81% 11.01% 12.75 14.23% 1.17% 4.73

3.61% -1.92% 10.47% 19.68 4.53% 0.23% 0.71

3.86% -1.89% 10.25% 23.89 8.91% 0.37% 1.41

3.48% -0.86% 9.67% 23.89 22.74% 0.95% 3.92

1.64 3.74% 1.34

4.40 3.59% 1.13

5.33 4.28% 1.10

4.78 4.58% 1.14

Analysis of Financial Statement

Page 7

The Caring Bank

Exhibit 2: ROE Break Down (Do Pont Equation)

Years 2009 2008 2007 NPM 2.2% 3.63% 9.83% Asset Utilization 10.47% 10.25% 9.67% Equity Multiplier 19.68 23.89 23.89 Return on Equity 4.53% 8.91% 22.74%

Exhibit 3: Peer Group Working

HMB Liquidity Ratios Advances To Deposit Ratio = Advances / Deposits Earning Assets To Assets = Earning Assets / Total Assets Solvency Ratios Equity To Assets = Equity / Assets Equity To Deposits = Equity / Deposits Earning Assets To Deposits = Earning Assets / Deposits Cash & Govt. Securities To Total Assets = Cash & Govt. Securities / Total Assets Debt Management Ratios Debt To Assets = Debt / Total Assets Debt To Equity = Debt / Equity Capital Adequacy Ratio = Capital or Total eligible regulatory capital held / Risk Weighted Assets Profitability Ratios Net interest Margin = (Interest Income Interest Expense) / Earning Assets Non-Interest Margin = (Non-Interest Income Non Interest Expense) / Earning Assets Assets Utilization = Net Income / Total Assets Equity Multiplier = Total Assets / Total Equity ROE=(N.I/Sales)(Sales/Assets)(Assets/Equity) ROA = Net Income After Taxes / Total Assets Earnings Per Share Credit Risk Ratios Non-Performing Assets To Equity = NonPerforming Assets / Equity Non-Performing Loans to Total Assets = NonPerforming Loans / Total Assets Total Loans to Total Deposits = Total Loans / Total Deposits 71.94% 90.16% Faysal 73.87% 90.7% UBL 71.87% 81.66% Peer Group 72.56% 87.51%

7.96% 13.29% 150% 4.71%

6.3% 9.17% 132% 4.7%

9.09% 11.55% 104% 9.6%

7.78% 11.34% 129% 6.34%

92.09% 11.55 12.03%

92.93% 14.83 12.36%

89.49% 9.85 14.03%

91.5% 12.08 12.81%

3.15% -0.240% 10.58% 11.31 14.53% 1.28% 3.67 1.23 3.38% 1.53

3.1% -0.92% 10.93% 15.95 11.18% 0.75% 1.97 1.59 4.7% 1.36

6.34% -1.26% 11.53% 11 16.97% 1.48% 8.56 2.1 3.14% 1.13

4.20% -0.81% 11.01% 12.75 14.23% 1.17% 4.73 1.64 3.74% 1.34

Analysis of Financial Statement

Page 8

The Caring Bank

Graphs 1: Liabilities comparison on Interest base

Analysis of Financial Statement

Page 9

The Caring Bank

Graphs 2: Asset Weights comparison

Analysis of Financial Statement

Page 10

The Caring Bank

Graphs 3: Liabilities Weights comparison

Analysis of Financial Statement

Page 11

The Caring Bank

Graphs 4: Equity Weights comparison

Analysis of Financial Statement

Page 12