Bank: ASKARI BANK LIMITED - Analysis of Financial Statements Financial Year 2004 - 2001 Q 2010

Formerly known as "Askari Commercial Bank Limited", Askari Bank Limited was incorporated on October 09, 1991 and commenced its operations in April 1992 as a public limited company.
The bank is registered on all the three stock exchanges of Pakistan. The bank has a network of 200 branches (2007: 150brances); 199 in Pakistan and Azad Jammu and Kashmir, including 18 Islamic banking branches. The bank is principally engaged in the banking business. It has a diverse customer base comprising corporate, SMEs, individual savers, households and farmers. Askari Investment Management Limited (AIM) is the wholly-owned subsidiary of Askari Bank. The bank also has an Offshore Banking Unit in Bahrain.
BANKING INDUSTRY IN FINANCIAL YEAR 2008 - 2009

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KSE Symbol                        AKBL

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Current Stock price           Rs 15.20

Profit after tax (Rs)   Rs 1.2 billion

Outstanding Shares           642743940

Market Capitalization     9904684115.4

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In the last quarter, the banking system successfully weathered a liquidity stress. The stress emerged in usual timeframe ie withdrawals on the occasion of Eid-ul-Fitr and a number of global, domestic and industry-specific factors further compounded it. Major dampening factors like global financial turmoil; economic slowdown and contractionary monetary policy were compounded by an unusual liquidity stress during October-November 2008.
The current account deficit was quite high and the real exchange rate had significantly appreciated to unsustainable levels, which ultimately put pressure on rupee/dollar exchange rate and led to capital outflows. On top of it, breakdown of capital market in Pakistan and the series of news on the financial meltdown in the advanced markets raised general public doubts about the financial strength of some Pakistani banks. By this time, due to relatively higher growth in advances, the liquidity profiles of the banks had already been burdened. In this backdrop, the usual post-Eid liquidity pressure in the interbank market led to rumour-mongering about the banks. The impact was severe in some banks especially the small banks with the constrained liquidity profile in terms of ADR.
The reduction in Cash Reserve Requirements (CRR) and Statutory Liquidity Requirements (SLR) requirements in early weeks of October 2008 to manage the liquidity stress resulted in a significant decline in cash and treasury bank balances by the end of December-08 quarter thus releasing funds for financing the growth of advances.
However, strong capacity developed by the banks and regulators over the years and the offsetting measures taken by the State Bank of Pakistan (SBP) enabled the system to avert this transitory stress from converting into a financial crisis.
Conditions in FY09 continued to be a misery for the banks, however there was a marginal increase in the shareholders return to 9%. Continued NPLs issue led to alarming checks on the asset quality of banks and reducing of gross advances for the period. The CAR (capital adequacy requirement) was up to 14.0% for the industry average as it gave a positive position of banks in the current economic condition.
INVESTMENTS
The investments, especially the government papers, which declined in both absolute rupee terms as well as a proportion of total assets during the first nine months of CY08, registered a slight increase during the last quarter. Actually, the heightened credit risk on account of deterioration in macroeconomic fundamentals and already constrained liquidity profile induced the banks to shift their preference towards risk-free Market Treasury Bills (MTBs)
The banking system is marked with a high concentration as a small number of banks hold a major share of the system's total assets and deposits. This concentration has been following an overall declining trend, as the medium sized banks gradually gained market share. However, due to unusual liquidity stress that affected mainly the small and medium sized banks, the market share of five large banks inched up to 52.4 percent (51.3 percent in September-08).
In FY09, much of the investments were geared towards government's revenue-expenditure gap. The investments (read government borrowing) increased by Rs 659 billion (68%) in 2009 (Industry review, Business Recorder, 2010).
A marginal increase of 5% is observed in 1Q10 of investment category of the bank. The major increase in this kind is of Given as Collateral, where the Investment Available-for-Sale securities grew from Rs 4,515,246 to Rs 9,669,413. The investments are more focused towards short-term securities to enhance their liquidity condition.
DEPOSITSThe deposit component, which used to witness a strong growth in last quarter, registered a slow growth of Rs 153 billion (3.8 percent) this year. Incidentally, foreign remittances, a key factor behind the recent year's strong growth in deposits, maintained the momentum and grew by 17 percent over the CY08.
The industry has been witnessing a gradual shift in deposits from savings to term deposits for quite some time. This trend emerged largely in response to SBP's policy incentives to encourage the mobilization of longer-terms deposit so as to reduce the maturity mismatches. Consequently, fixed deposits gained a significant share of savings deposits since 2004. However, SBP's policy drive to increase the CRR and SLR in last week of Jun-08 and exemption of long-term deposits also from SLR requirements during the last quarter seem to have considerably invigorated this trend (other factors like general rise in interest rates and innovative deposits scheme have also augmented depositors preference for terms deposits).
In 2009, the deposits of the banking system increased by Rs 521 billion (14%), out of which only Rs 121 billion on net basis were deployed in advances, as virtually all the incremental supply was used to plug the government revenue-expenditure gap. The deposit base increased slightly by 3% in the first quarter of FY10. Growing remittances this FY09, is a positive sign for the bank for the increase in the deposit and other accounts. The deposits for 1Q10 augmented from Rs 205,970,227 to Rs 213,018,806.
ADVANCESDuring the quarter under review, advances witnessed a significant slowdown in sharp contrast to industry's established patterns for the last quarter. The worsening business and economic environment somewhat increased the credit risk, which compelled the banks to adopt cautious lending strategy, particularly in the consumer sector where the advances have been decreasing since start of the CY08. Some new loans have been issued of which a significant portion was disbursed to the public sector enterprises (PSEs).
CY08 however, observed a deviation in the growth pattern of advances. Slackness in the demand for bank credit during CY07 coupled with slowdown in economic activities and tightening of monetary regime, forced the banks to reposition their lending strategy and asset profile. The asset mix of the banking system gradually shifted from lending to investments during the first three quarters of CY07.
FY09 for the first nine months, banks were reluctant to lend to corporate and individuals owing to skyrocketing bad loans amid lack of demand from industries who were avoiding high financial charges. But, with some sign of economic recovery, lately, with inflation tapering off amid marginal growth in large-scale manufacturing sector, the demand for corporate credit gradually rose. However, attractive rates offered by government bonds still remain lucrative enough - wooing banks to put depositors' money in low risk papers instead of meeting the demand of private sector (Industry review, Business Recorder, 2010).
In 1Q10, investments showed a marginal increase of 5%, where available for sale securities showed a high increase as the Investments Given as Collateral increased from Rs 4,515,246 to Rs 9,669,413.
PROFITABILITYCurrently, the cumulative profit of 22 listed commercial banks has declined by 21% to Rs 50.3bn in the year 2008 as compared to Rs 63.6 billion earned in the same period in 2007, mainly due to higher provisions for non-performing loans (NPLs) and impairment loss.
The full year profits of CY08 were however lower than profits for the last couple of years but still it remained profitable. The overall profitability was neutralizing due to more than proportionate increase in operating expenses and provisioning for loan losses. In absolute terms, expenses increased by 33.4 percent to Rs 235.8 billion in CY08, which affected the overall profitability of the system. In addition to higher provisions, enhanced branch network with increased human resource base has soared the expense of the system during the last quarter under review. Moreover, the stock market crash in the second half of 2008 resulted in bank recognizing impairment loss of Rs 12 billion as against only Rs 287 million recognised in 2007.
High spreads of 7.29% in 2008 and strong advances growth of 19% supported the net interest income, while non-interest income increased by 11% on the back of surge in exchange gain as rupee remained volatile against the dollar. The annual audited results of the top five banks for the year 2008 show that their profitability on average has remained at the previous year's level. The assets distribution on the basis of ROA shows that 16 banks, holding 67.9 percent market share, have ROA of one percent and below.
The banking sector in Pakistan has remained somewhat insulated from the global financial turmoil and has maintained its profitability albeit the slower growth. The prevailing global economic downturn nevertheless has the potential to impair corporate and business profitability that may ultimately heighten the credit risk and may affect the earnings of the banking sector in the quarters ahead.
NPLs This rise in NPLs observed across all the banking groups except specialized banks, where NPLs have actually decreased. NPLs have been on the rise mainly due to poor economic performance of the economy and the FSV benefit therefore resulting in worsening of asset quality ratios.
Total provisions for NPLs surged to Rs 53 billion in 2008 as against Rs 42 billion in 2007, an astounding growth of 27% largely due to slowdown in economic growth. The composition of segment wise NPLs of the banking system shows that infection ratio of all the segments except agriculture have increased. The infection ratio of consumer finance portfolio increased in CY08 (2.3 percent over the year).
Rising inflation and contained disposable incomes coupled with increasing lending rate have reduced consumers' appetite for credit as well as their repayment capacity, resulting in increasing defaults rate in the consumer finance. Interestingly, in the wake of economic slowdown, banks seem to facilitate the businesses through rescheduling/restructuring of loans, the textile sector being the major beneficiary.
Latest banking industry numbers show an effort to keep balance sheets clear of NPLs by recognizing and providing for NPLs on criteria that are more stringent. This approach might look costly in the meantime but in the long run it'll definitely benefit banks by providing a cushion to withstand losses. In 1Q10, the non-performing advances totaled to Rs 20bn, however FSV benefit increased to 40% helped the company to reduce their charges by Rs 73,820 thousand.
FINANCIAL PERFORMANCE

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Category of Classification of Non Performing Advances

                                       March 31, 2010

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Domestic

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Other Assets Especially Mentioned-note 7.5.    73,664

Substandard                                 1,136,590

Doubtful                                    2,658,151

Loss                                       16,166,270

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Total                                      20,034,675

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In the year ending December 2008, the bank realized a Profit after tax of Rs 386Million which is less by 86% over last year (2007: PAT Rs 2.681 billion). Major reductions in profits are attributable to increases in non-mark-up expenses and reductions in non-mark-up income.
On a closer analysis we find that net interest earned in this year has increased by 20% but this effect is diluted as we move down the income statement. The non-mark-up income was down by 41% chiefly contributed by seizure in investments gains to half as compared to FY07. Along with these, some positive changes are seen in income from fee and commission (17% growth) and dividend income (27% growth). To match this income, non-interest expenses grew more than proportionately by 23% dominated by administration expenses. Admin expenses included salaries, which were high due to double-digit inflation adjustment in FY08.
On the balance sheet front the Net Assets grew by 6%. Earning assets (Advances, Lendings to financial institutions and investments) form the majority of assets in any bank. Over the years we see a shift in composition of these earnings assets. In the last year, FY08, the Lendings to financial institutions fell drastically which is quite apparent in the graph. Only probable reason for this change is the rising interest rates in FY08 and also that banks maintained their spread (around 7%) coupled with troubled economy where businesses were shutting down. Advances gained this year with a total growth of 28%, which is impressive considering the banking industry. On a closer look majority of the lendings were on a shorter-term basis reason being the poor economic conditions and shorter-term advances helps in risk aversion. When talking of Advances, NPLs come complimentary. The NPLs growth, 69%, this year has been highest compared to industry. This is a threat to Banks profitability and may restrain further lending.
Askari Bank was able to post an after-tax net income of Rs 1.18bn in FY09, which is 187% high from the previous year of FY08. The bank has been able to accomplish this through various ways. Its year-on-year mark-up interest income increased by 23% mounting to Rs 22bn in FY09. Following this, we observed that there was a huge increase in the particulars of provision for impairment in value of investments by 1500% as the amount augmented to Rs 76,784m in FY09 compared to Rs 5m in FY08, this was due to the charges for the year that were charged on the investments made by the bank. Second was the increase in the Gain on Sale of Investments, which increased by 291% amounting to Rs 143m in which two main particulars have to be pointed out.

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GAIN ON SALE OF INVESTMENTS - NET  (000s)        2009    2008

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Market Treasury Bills                          62,177     266

Shares - Listed                                47,015   6,682

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Such high increase in sale of investments have yielded in high profits for the bank for FY09.
1Q10, seemed to be a well-performing quarter for Askari Bank. The mark-up income swelled to Rs 6bn in 1Q10 compared to Rs 5.5bn in 1Q09 and also a reduction in the provision for NPLs, which were subsidized due to FSV 40% benefit provided by the State Bank of Pakistan, thereby increasing the Net interest income to Rs 1.7bn compared to Rs 1.6bn.
One of the other key points in the profitability condition is the huge amount of unappropriated profit brought forward of Rs 886m in 1Q10 resulting in Profit After Tax of Rs 1.2bn compared to 1Q09 of Rs 626m. Thereby giving a healthy ROA of 13% and ROE of 2.1%.
The bank is also into Islamic financing so for readers' help some text is included to give an overview of the Ijara financing (Islamic lending).
What is Ijara Financing? How is it different from conventional lending?
There are several key differences. With a conventional mortgage, you borrow money to buy a house and then pay the money back over a number of years. You are charged interest on the money you borrow, which is in contravention of Sharia principles.
In Islamic Home Financing, you will identify the property that you wish to buy and the bank will purchase it on your behalf from the seller. The bank will then resell the same property back to you (inclusive of bank's profit margin) with a deferred payment plan ie you pay the bank in equal monthly installments over the agreed tenure. The bank will purchase the property from the seller. Instead of selling the property to you, the bank will lease it to you for an agreed period. At the same time, the bank undertakes to provide the property as a gift to you as long you fulfil all the terms and conditions spelt out in the lease agreement.
The distinguishing feature of this mode is that the assets remain the property of the bank. Over the term of the finance, the bank becomes the landlord and you assume the role of a tenant. During this period you make monthly payments which consist of a contribution towards the purchase price of the property (capital) and rental payments. When you have made enough 'capital' contributions to match the original purchase price, we transfer the property to you.
The scenario of the NPLs does not seem very favorable for the bank. The NPLs have consistently seen an increase, indicating that the bank is either not very efficient at collecting the outstanding loans or has a very liberal loan distribution policy. Their pace of growth has outdone the rate of increase in advances. The bank may face considerable credit risk from its loan defaulters.
In FY06, bank's advances witnessed marginal increases in consumer finances, especially Ijara financing, corporate financing while they observed a slight decline in the shares of SME and agriculture.
The assets of the bank witnessed some shift in their composition away from loans towards investments. This has also been the trend industry wide to meet the MCR requirements as directed by the State Bank of Pakistan. Though these investments offer lower returns than the loans, they are more preferable in this situation for the bank as it is struggling to collect its loans.
In FY09, the bank maintained its marginal increase of lending to financial institutions as it only increased by 3%, similarly the advances too is seen as controlled lending as it also increased by a mere 5%. The reasons tend to be the same as it were in the previous year. Low advances because of high NPLs rising from consumer banking and also from certain sectors of the economy especially the textile sector. However, on the flip side, we see a dramatic increase of 88% of investments, which amounted to Rs 135bn. The investments category is further broken down to see where are investments done.

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                                              2009         2008

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Market Treasury Bills (Government)      37,742,897   16,043,454

Unlisted Term Finance Certificates      12,615,735    6,485,385

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Much can be observed that the investments are done marketable securities issued by government. This is mainly done to cover the revenue-expenditure gap of the fiscal deficit. This condition has led to government borrowing from the private sector and less from SBP. Therefore the much of investments done is basically of government securities.
The provisions to NPLs in 1Q10 are an optimistic indication for the banks as the FSV benefit is increased to 40%, thereby decreasing the provisions and affecting the Income Statement, as it was seen above. However, the NPLs still stand high and the majority of them are considered to be Loss, mounting to Rs 16bn in 1Q'10. This increase of NPLs to Advances stands at 14% in the first quarter, relatively the Advances growth is only restricted to 3%.
The liquidity of the bank has maintained a consistent upward trend, with its yield on earning assets always above the cost of funding them. It's imperative to note that cost and yield on funding earning assets run parallel which means that banks are not compromising on their spreads in years of performance regardless of dynamic economic conditions. This liquidity consistency in years until FY06 may be attributed to the excess liquidity that prevailed in the industry due to high reserve growth of the banking sector. The State Bank of Pakistan intervened in this situation by contracting the monetary policy. Also, post emergency declaration when the rupee fell, SBP intervened twice to ease the liquidity conditions in the market. SBP has prudently managed the liquidity while the bank also has certain arrangements to maintain its liquidity. It has most of its investments in treasury bills. The liquidity position may be predicted to remain similar to the above in the coming years. However, at the same time Askari needs to safeguard its liquidity against the increasing NPLs.
Askari Bank was able to maintain its liquidity condition with keeping its ratios in line with previous year FY08. The earning assets to assets remained at 81% as much of the percentage was due to the fact of a high increase of investments in the government securities. Subsequently, advances to deposits remain constant at 71%, as the bank did not increase in its advances to consumers due to high NPLs to advances in the previous year.
The bank's spread was sustained at 4% as it only decreased marginally by 1%. This was because the industry average remains to be at 5-6% for the FY09. This again helps us to understand the positivity of the bank in such recessionary condition that they are not compromising on their spread and maintaining at 4%.
Liquidity condition slightly deterred in 1Q10 as the liquidity ratios showed a decline. The earning assets to assets decreased from 81% in FY09 to 79% in 1Q10, owing to the fact, the disproportionate increase in the assets to the earning assets.
Secondly, advances to deposits too declined to 65%, showing a cause of concern for the bank as the NPLs to advances stood at 14% and in addition the reluctance shown towards advances and more prone towards investments is clearly evident through figures. The lending to financial institutions decreased by 32%, resulting in a lower asset base, along with a marginal 3% increase of Advances, mainly attributing to Lease Financing of amount Rs 10bn.
The solvency of the bank has been successfully maintained over the years. As evident, the share of equity is increasing. This may be regarded as a move against the rise in deposit rates and a decrease in the banking spread of the banking sector. This healthy trend in solvency may be predicted to continue in the future. The greater than earning assets deposits are the result of excess reserve money growth while the increase in the non-performing advances has undermined the advances performance. With the gradual shift to investments, we may expect the adverse impact of the NPLs to reduce, but this may take a long time.
The trend of maintaining healthy solvency was carried out even in FY09, as the Equity to assets was maintained at 6.1%, along with this the earning assets to deposits remained 100%. This shows the asset based is well utilized by the bank and with the new trend to shift towards low risk investment of government securities. As observed more of the deposits are concerned with long-term deposits.
1Q10 of the bank's performance is reflected in its solvency ratios where it maintained a strong position. Where the equity to assets still stood at 6% and the earning assets to deposits continue to be at 100%.
Asset quality has been improving since 2008. We saw a decrease in provisioning to NPLs in FY09, as it decreased by 7% from FY08. With the new regulation by SBP of keeping Forced Sale Value to 40%. The upcoming provisioning would be lower than the previous ones. The asset quality was also maintained as low advances were given to consumer as well as other corporate sectors, therefore the NPLs to advances also stood still at 9% in FY09. Whereas the NPLs were still the same for the period but not increasing as can be seen through previous years.
Askari Bank maintained its asset quality by constraining its advances in 1Q10 and also due to FSV benefit lower provisions were charged in this quarter, however the NPLs still remain high at Rs 20bn, showing a cause of concern.
The market value of the bank has shown a downward trend for 1Q10, as the confidence of the investors remained low due to political situation and uncertainty in the country.
In FY09, the market value rose after the nine months ending showing a late year push towards the recovery of the economy. As the investors gained confidence in the company, the results were shown as the EPS surged from Rs 0.95 to Rs 2.18 in FY09.
However the dividend payout remains very low, as low as 0.07%. The bank has maintained its reputation as one of the consistent payers of dividends. This year the bank did not give any cash dividends rather it gave stock dividend, this would help bank in two ways, first, by maintaining liquidity and second by making up for the MCR requirements.
The bank was able to maintain a healthy 11.5% contrast to minimum requirement of 10%. The required MCR can be achieved by the bank either by fresh capital injection or retention of profits. The stock dividend declared will be counted towards the required paid up capital of the Bank pending completion of the formalities for issuance of bonus shares. The bank intends to meet this requirement by way of bonus issue subsequent to balance sheet date, in this year.
FUTURE OUTLOOKThe banking industry can be seen positively as the some private credit increase is observed in the year-end of 2009 and started picking up. With key policy rate at 12.5% the SBP maintains to keep a balance and wants to increase the circulation of the money in the economy and not keeping it tied up.
On the other hand, much of the investments still lie on the government securities as the government borrowing. With uncertainty still hovering in the economy and the inflation till feb2010 still remains high at 13.8%, the key policy rate is designed neither to be tight nor to be sluggish. Therefore much can be expected in the upcoming year, as the pace for economy recovery along with increase private credit can uplift the economic cycle.
Concerns of SLR and CRR are not in consideration for most banks as healthy safety is kept to ensure no bankruptcy is involved. The only matter of concern would remain the outcome of the new monetary policy, which said to be designed in a way to boost the economy.
Askari Bank in particular remains strong in terms of their Balance Sheet as their asset base is strong and their liabilities are more of long term. Along with this the current year performance is considered extraordinary. Therefore positive expectation can be anticipated for the bank.
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].
Copyright Business Recorder, 2010