Bank: NATIONAL BANK OF PAKISTAN - Analysis of Financial Statements Financial Year 2004 - Financial Year 2009
National Bank of Pakistan is the largest commercial bank of Pakistan. The bank handles treasury transactions for 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 the 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 the 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. Its 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 an 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.
OVERVIEW OF BANKING INDUSTRY
In the year 2009, the economy showed signs of stabilisation. Inflation still remained 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 stabilised. Problems in the energy sector played a key factor in burdening public finances. Further, terrorist attacks 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.
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 mobilisation.
NBP's investments, however, have an 18.3% lower growth rate than the industry average, while its net interest income growth rate 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 FINANCIAL YEAR 2004 - FINANCIAL YEAR 2009
The Asset Quality ratios of 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.
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.
The profitability or earnings ratios declined in 2007 and 2008, before rising again in 2009. ROA increased by 5.64% over the last year. ROE and ROD rose by 16.14% and 6.30%, respectively. This increase in earning ratios is attributed to a 17.8% in profit after tax during 2009. However, this growth in profits is not reflected well in earnings ratios, because assets and equity also showed an upward trend during 2008-09.
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.
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 bank's 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.
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 the 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.
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.
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.
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.
NBP's deposits grew by 16.25% over 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 unfavourable 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.
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. NBP remains committed to the interest of all stakeholders including its employees, owners, regulators and the Pakistani nation. To that effect, the bank has implemented the new 'Core Banking Package' in order to enhance work efficiency by completely automating its functions. The bank has also initiated five new capacity building projects.
: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder
: 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].
Copyright Business Recorder, 2010