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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA1
Trends in Pakistani Banking Sector
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA2
Sector transformation lower systemic risk
In the past 8 years, Pakistan’s banking sector has undergone
transformation from a loss generating, state dominated, under-
capitalized, poor asset quality and inefficient sector to a predominated
privately owned, highly profitable, fast growing, leaner, well capitalized
and cleaner balance sheet holding sector.
However, the sector is NOT insulated from weakening in the real
economy.
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA3
Aggregate Post-tax Profits
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
PKR Billion
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA4
Return on Equity (ROE)
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA5
Return on Assets (ROA)
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA6
0.0%
4.0%
8.0%
12.0%
16.0%
20.0%
24.0%
28.0%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Banking Deposit Growth
CAGR: 12.6% pa
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA7
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Advances (Loans) Growth
CAGR: 15.3% pa
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA8
Higher interest rates higher spreads
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Lending-Deposit Rate Spread T-bill Yield
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA9
Net NPLs as % of Net Loans
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA10
Analyzing a Bank – Concepts & Application
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA11
Quantitative Analysis
FINANCIAL SOUNDNESS
Profitability
Solvency
GROWTH and FUNDING MIX
Deposits
Borrowings
Loans
Investments
RISK ASSESSMENT
Credit Risk
Market Risk
Liquidity Risk
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA12
Risk Assessment
CREDIT RISK
Concentration in fewer sectors.
How much of banks’ lending is to pro-cyclical sectors.
LIQUIDITY RISK
GAP Analysis: Difference between a bank’s liabilities and assets as both
mature over time.
MARKET RISK
Exposure to equities, derivatives and bonds.
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA13
Non-Quantitative Factors
Ownership
Market Positioning & Strategy
Product Mix & Delivery Channels
Human Resource Quality
Internal Control Systems
IT Platform (Core Banking Solution, ATM Network, On-line networks,
Internet banking, etc. )
Investor Relations
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA14
Profit & Loss Statement
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA15
Balance Sheet
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA16
Return on Assets (ROA)
-1.4%
0.3%0.1%
1.8%2.0%
1.4%1.2%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
2002
2003
2004
2005
2006
2007
2008
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA17
Return on Equity (ROE)
-10.3%
6.1%
26.0%28.6%
21.7%19.7%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
2002
2003
2004
2005
2006
2007
2008
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA18
Revenue Analysis
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA19
Net Interest Margin (NIM)
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA20
Non-Interest Income
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA21
Balance Sheet Growth - Liabilities
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA22
Balance Sheet Growth - Assets
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA23
Loan Book
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA24
Efficiency Ratio
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA25
Building a financial model
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA26
Key Assumptions – Macro/Sector
Translate economic/sector analysis in forecasts for:
M2 growth
Interest rates
Deposit growth
Advances growth
Sources of economic forecasts
Multilaterals: IMF/WB/ADB
State Bank of Pakistan
Consensus forecasts maintained by data services such as Reuters,
Bloomberg, etc.
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA27
Key Assumptions – Bank Specific
Balance Sheet – Develop forecasts for:
Deposit Growth
Deposit Mix
Borrowing
Advances Growth
Non-Performing Loans (NPLs)
Investment Portfolio Mix
Cash/FI lending
Net Interest Margin (NIM) – Forecast based on:
Interest Yield = f (interest rates, portfolio mix)
Cost of Funds = f (interest rates, deposit/borrowing mix)
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA28
Key Assumptions – Bank Specific
Non-Interest Income
Fee income = f (trade, guarantees, advisory, etc)
FX income = f (exchange rate, trade, remittances)
Dividend/Capital Gains = f (equity portfolio)
NPL provisioning
NPL charge = f (credit risk)
Administrative Cost
Taxation Rate (35%)
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA29
Allied Bank – Key Assumptions
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA30
Allied Bank – P&L Statement
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Security Analysis (Fall 2009) Asif Ali Qureshi, CFA31
Allied Bank – Balance Sheet