project on "the bank of punjab" 2009
TRANSCRIPT
PROJECT ON:
"The Bank of Punjab"
JUNE, 2009
International Islamic University Islamabad
ECONOMIC OVERVIEW:
In the last five years the growth in GDP reduces to 5.8% against the target of 7.2% in
fiscal year 2008. It demonstrate Pakistan economies resilience as it was achieved major
internal and external shocks including hike in oil and food prices, energy shortages, rising
interest rates, political uncertainty, deteriorating law and order situation. The foreign
investments decrease to 5.2$ billion after hitting 8.4 $ billion mark.
With the enormous economic challenges still at the forefront for which the International
monetary fund (IMF) support has been sought for stabilization, the betterment of
economic fundamentals can be forecast but with many strict strings. The recent
improvement in fiscal and current account deficit, stabilization in rupee –dollar parity,
some reduction in inflation and foreign exchange build up are some of the positive signs
that the economy is currently exhibiting.
STATUS AND NATURE OF BUSINESS:
The Bank of Punjab was formed under The Bank of Punjab Act, 1989. It was given the
status of a scheduled bank by the State Bank of Pakistan (SBP) on September 19, 1994. It
is principally engaged in commercial banking and related services with its registered head
office at Lahore. The Bank has 272 branches in Pakistan and Azad Jammu and Kashmir.
The Bank is listed on Lahore, Karachi and Islamabad Stock Exchanges. The majority
shares of the Bank are held by the Government of Punjab.
COMPETITORS:
MCB
BANK ALFALAH
HBL
National Bank Of Pakistan
PORTER FIVE FORCES MODEL
Entry barriers (high)
The Pakistani market is highly regulated by the government and also by central bank. A
lot of decision such as regularization of interest on loans and deposits as well as money
supply is controlled by the state bank of Pakistan.
Rivalry among the existing competitors (high)
When it comes to the banking sector in the country we could include in whole lot of
public as well as private banks along with NBFCs and micro finance institutes widely
spread in the country. The banking sector of the country has 56 banking institutions
which include public sector, Islamic banks, foreign banks, development financial
institution, specialized banks, and micro fiancé institutions.
Bargaining power of suppliers (medium)
The supplier of banks is people from whom the bank raises funds. So the major source
funds come from their customer (depositor), who becomes the supplier in this case.
Bargaining power of the customers (medium)
The customers and the depositors have a high bargaining power in the market. Any bank
giving the higher rate of interest would attract a large number of customers. Because
there are number of banks operating in the market which offer similar services.
Threat from substitutes (high)
There are number of substitutes in retail fiancé industry such as money lender, NBFCs,
micro finance and also the insurance companies. Banks are seeing the competition rise
from unconventional companies. Markets like Pakistan customer have high propensity
towards switching to other substitutes.
INVESTMENTS:
The investments of the Bank are classified into the following categories:
(a) Held-for-trading securities
These are investments acquired principally for the purpose of generating profit from short
term fluctuations in price or dealer’s margin.
(b) Held-to-maturity securities
These are investments with fixed or determinable payments and fixed maturity and the
Bank has positive intent and ability to hold to maturity.
(c) Available-for-sale securities
These are investments which do not fall under the trading or held to maturity categories.
According to BSD Circular No. 14, dated September 24, 2004 issued by the State Bank
of Pakistan (SBP), investments classified as held to maturity are carried at amortized
cost.
In accordance with the requirements of SBP, quoted securities are valued at market value.
The surplus / (deficit) arising on quoted securities classified as available for sale is kept
in a separate account shown in the balance sheet below equity. Unquoted securities are
valued at cost less provision for impairment, if any. On derecognizing or impairment in
quoted available-for-sale investments, the cumulative gain or loss previously reported as
surplus / (deficit) on revaluation is included in the profit and loss account for the period.
EMPLOYEE RETIREMENT AND OTHER BENEFITS
(a) Defined contribution plan — Provident Fund
The Bank operates an approved Provident Fund Scheme, covering all permanent
employees. Contributions are made monthly by the Bank and the employees at the rate of
8.33% of basic pay. Contributions by the Bank are charged to income.
(b) Employees compensated absences
The Bank makes annual provision in the accounts for its liabilities towards vested
compensated absences accumulated by its employees on the basis of actuarial valuation.
The most recent valuation was carried out at January 25, 2007 using the "Projected unit
credit method". The principal assumptions used in the valuation at December 31, 2006
were as follows:
- Discount rate 10%
- Expected rate of eligible salary increase in future years 9%
- Average number of leaves utilized during the year 11 days
- Average number of leaves utilized during the year in excess of
Allocated leaves (i.e. 30 days) 1 day
The amount charged during the year is Rs. 19.655 million (2005: Rs. 12.766 million)
(c) Foreign currencies
Transactions in foreign currency are translated to Rupees at the exchange rates prevailing
on the date of transaction. Forward exchange contracts and foreign bills purchased are
valued at forward rates applicable to their respective maturities. All exchange differences
are charged to income.
(d) Provisions
Provisions are recorded when the Bank has a present obligation as a result of a past event
which it is probable will result in an outflow of economic benefits and a reliable estimate
can be made of the amount of the obligation.
(e) Dividend distribution and appropriations
Dividend distributions and appropriation to reserves are recognized as a liability in the
financial statements in the period in which these are approved. Transfer to statutory
reserve and any of the mandatory appropriations as may be required by law are
recognized in the period to which they relate.
(f) Impairment
The carrying amounts of assets are reviewed at each balance sheet date for impairment
whenever events or changes in circumstances indicate that the carrying amounts of the
assets may not be recoverable. If such indication exists, and where the carrying value
exceeds the estimated recoverable amount, assets are written down to their recoverable
amount. The resulting impairment loss is taken to the profit and loss account except for
impairment loss on revalued assets, which is adjusted against the related revaluation
surplus to the extent that the impairment loss does not exceed the surplus on revaluation
of that asset.
SCHEMES:
Following are the schemes launched by The Bank of Punjab these are:
Kissan dost scheme
The Kissan dost scheme is for the facilitation of farmers to increase the agriculture
productivity.
Karobar barhao scheme
The Karobar barhao scheme is for the small investors to increase there businesses.
Lady entrepreneur financing scheme
This scheme is for ladies to start their own business.
CNG filling station financing scheme
This scheme is for the CNG filling station for the enhancement of the CNG stations.
Financing scheme for purchase of shop or office
This scheme is for the purchase of shops and offices.
INVESTMENT PORTFOLIO
The Investment portfolios of The Bank of Punjab are:
Investment by segment
2008 2007 2008 2007 Federal Government
Securities 48350734 12233381 70.23 % 51.57 %Fully paid up
ordinary shares/units 17283544 7724171 25.10 % 32.56 %Term financing
Certificate debenture 32110805 3766525 4.66 % 15.88 %Total investment
at market value 68845083 23724077 100 % 100 %
SWOTStrength
272 branches
Schemes
Diversification of investment
Foreign reserves
Weakness
Lack of communication
Lack of trust
Lack of loyal customers
Lack of conflict handlings
Oppertunities
To seek new customers
Lending
Investment
Mark up/ profit
Threats
Compatitors
Low security
Economic instability
Political instability
QUANTITATIVE
ANALYSIS
ROE 4-WAY ANALYSIS
Tax management efficiency
It is reflecting the use of security gains or losses and other tax management tool such as
buying tax – exempt bonds to minimize tax exposure. The BOP is nearly consistent on
ratio of tax around four years and efficient to control and manage that’s why net income
before tax is decreased 52.999 mil, in 2008. But in 2006 ratio fall 0.06 the BOP look
closely monitored and controlled the banks tax exposure to increase 0.84.
Expense control
The ratio of before tax income to total revenue as indicator of how many dollar of
revenue survived after operating expense are removed. A measure of operating efficiency
and expense control. This ratio is growing over the years that shows the BOP is
efficiently control expense and increased ratio 24.47 % in 2007 and then remain same in
2008.
Assets Management Efficiency
This ratio is remain consistent over three years but decreased in 2008 because net markup
after provision decreased 53.69% fee, commission and brokerage increased 38.10% but
total assets increased 39.03% because of loss or property and equipment.
Funds management Efficiency
This ratio average is quit same over the years that BOP is manage their assets over equity
efficiently in which total assets 39.03 % and total equity 41.76% increased in 2008.
ROE is overall going very great because of efficient management of all four elements that
is the reason that ROE is preferable and attractive.
The ROE is the rate of return flowing to the bank's shareholder. It approximate the net
benefit that the stockholder have received from investing their capital in the financial
firm placing there firm at risk in the hope of earning suitable profit. The trend of return of
equity is increasing quit high because of net income is increased by 1.03 bn, 70.08% in
2006 against 2005 and 3.5 bn,86.62 % in 2008 compare to 2007. But equity that absorbs
the losses is increased 2.3bn, 53.31% in 2006 and 4.4bn, 41.76 % against their years.
ROE - 4Way Analysis Management
2004 2005 2006 2007 Efficiency
Net Income 0.85 0.79 0.84 0.84 Tax Mgt
EBT Efficiency
EBT 0.88 0.94 1.17 1.17 Exp Control
Oper Revenue Efficiency
Oper Revenue 0.03 0.03 0.03 0.01 Assets Mgt
Total Assets Efficiency
Total Assets 15.19 16.48 15.57 15.57 Funds Mgt
Total Equity Efficiency
ROE 33.25 36.89 38.56 38.56
ROA
The major portion of assets is investment and advances of financial institutions. In which
total assets increased 44.83bn, 67.60% in 2006 and 64.34bn, 39.03% in 2008 against their
years and net income is 70.08% and 86.62% in 2006 and 2008 respectively. That is the
reason ROA is move upward consistently and increased 0.05, 0.24, and 0.38 in, 2006,
2007 and 2008 respectively.
Net interest margin
The BOP markup income was increased 3.5bn, 139.73 percent in 2006 and 5.96bn,
51.47% in 2008 corresponding years and markup expense was 271% in 2006 and 85.64
% in 2008 in the result net markup was outstanding in 2006 but decreased 11.56 in 2008,
that shows BOP is paying higher interest on loans but receiving lower income in 2008
and compare with total assets BOP invested more but due to financial distress around the
world created of liquidity problem and to attract customers to paying higher interest rate
to save from liquidity risk and financial distress. These consequences net interest margin
ratio stood 1.55 % in 2008 from 3.10 % in 2006.
Non interest margin
the major increased in non interest income is dealing with foreign currencies 125.63 % in
2006 and overall increased non interest income was 21.34% ( fee, dividend and other
income) but non interest expense overall is 12.3% (Admin, write off, and other charges)
BOP is inefficient in other charges due increased 841.74 % in 2006. non interest income
overall increase 7.27% and expense is 30.64% increased which is higher than non
interest income that’s why non interest margin decreasing yearly the major reason is
highest other charges( Penalties imposed by State Bank of Pakistan, Net loss on disposal
of property and equipment and Admin expenses). But most banks has negative non
interest margin.
Net Operating Margin
Its ratio increasing in 2005 to 2007 but decreased 0.86 in 2008 from 2.95 because of total
assets increased 64340.866 mil, 39.03% and net operating decreasing 52.999 mil, 1.08 %.
That is good sign of company that control operating expenses that leads management
efficiency.
Profitability Ratios
2005 2006 2007 2008
ROE 33.25 36.89 38.56 50.76
ROA 2.19 2.24 2.48 3.31
Net Interest
Margin 2.73 3.10 2.45 1.55
Net non interest
Margin 2.59 2.83 2.95 2.09
Net Operating
Margin 2.59 2.83 2.95 2.09
EPS 33.25 36.89 38.56 50.76
Spread Earning
The spread measures the effectiveness of a financial firm's intermediation function in
borrowing and lending money and also the intensity of competition in the firm's market
area. The BOP is loosing earning spread highly and also peer group also because of
increasing competition among financial institution. The BOP management has to find
other ways to diversify services for generating income. The services is the most required
to grow earning efficiency.
Operating Efficiency
To maximize profitability and stockholder value BOP has to increase their efficiency in
their operations to reduce operating expenses and to increase productivity of their
employees by providing technological equipment and training. BOP increases their
services and productivity over the years but less efficient that peer group.
BOP Peer Group
2006 2007 2008 2006 2007 2008
Earning
Spread 4.72 3.78 1.85 2.4 2.1 1.96
Operating
Efficiency 38.19 42.02 96.77 34.85 55.98 126
CREDIT RISK:
It may not able to repay the principle or interest or both within period of time. The
probability that sum of the financial institution’s assets especially its loans will decline in
value and perhaps becomes worthless is known as Credit risk.
In 2006 the bank had 2.1% non performing assets as compared to 7% of the peer group
which may be due to the reason that it started its commercial banking in 2006. In 2007
0.81% of the loans were nonperforming which is least than the peer group which means
that bank’s lending department is working efficiently. Nonperforming assets compare
with equity capital it explicit the BOP is tremendous to decreasing half of nonperforming
assets against peer group it tells the bank is very well to their rules to manage their
customer s by providing proper services and facilities. Loan loss provisions are 14% less
from the peer groups which suggest that bank is down their risk that its loans will more
than the peer group.
Credit Risk BOP Peer Group
2006 2007 2008 2006 2007 2008
Non perform asset
Total loans 2.1 0.81 1.14 7.01 6.5 8.45
Non performing assets
Equity capital 7.62 10.80 17.45 15 8.23 15.25
Total loans
Total deposit 71.92 73.57 69.75 81.82 91.44 72.31
LIQUIDITY RISK:
Bankers and other financial firm managers are also concerned about the danger of not
having sufficient cash and borrowing capacity to meet customer’s withdrawal, loan
demand and other cash needs. To evaluate the liquidity risk is very important because
financial institution may be faced to borrow emergency funds at excessive cost to cover
its immediate cash needs, reducing its earning
The BOP had held portion of cash and deposit in NBP , SBP and foreign higher 16.26
against peer 10.56 but plummeted ratio of BOP against increasing ratio of peer group it
implies bank is cautious to averse from liquidity risk
Government securities to total assets ratio is less than the peer group which means that
bank is not investing as much as its peer group is but the bank should invest in these
securities rather than purchasing the funds from other institutions at high cost so that its
interest expense may reduce.
Liquidity Risk BOP Peer Group
2006 2007 2008 2006 2007 2008
Cash & depository other
inst:
Total assets 16.26 10.71 6.96 10.56 11.23 14.85
Cash, Govt securities
Total assets 7.87 8.47 6.13 12.26 15.24 19.36
CAPITAL RISK:
Capital has ability to absorb losses that absorption reduces the risk. Fluctuation of interest
result risk that indulges solvent and insolvent. Compare to total assets the BOP has
average 6.5% capital that is less chances to handle the worse situation like financial crisis
but good dealings with other institutions rescue from financial distress otherwise
investors and institutions withdraw their money.
Capital Risk BOP Peer Group
2006 2007 2008 2006 2007 2008
Equity capital
Total assets 6.07 6.42 6.52 7.09 5.24 7.5
MARKET RISK :
In market oriented economies where most of the world’s banks and other leading
financial institutions offer their service today, the market values of assets , liabilities and
net worth of banks and other financial service providers are constantly in a state of flux
creating market risk. Change in interest rates, currency prices, shifting public demands
for bank services and the services offered by non bank financial firms causes the value of
institutional assets, liabilities and equity to move up or down.
Market Risk BOP Peer Group
2006 2007 2008 2006 2007 2008
Market value
Per share 13.45 14.6 17 17.42 12.2 10.92
Earning per share
EPS 36.89 38.56 50.76 35.65 48.63 49.21
EARNING RISK:
The risk to a financial institution’s bottom line i.e. its net income after all expenses are
covered is known as earning risk. Earnings may decline unexpectedly due to factors
inside the financial firm or due to external factors, changes in economic conditions or in
laws and regulations. Earning risk can be evaluated measuring the standard deviation or
variance of after tax net income, return on equity and return on asset
Profitability Ratios
2005 2006 2007 2008
ROE 33.25 36.89 38.56 50.76
ROA 2.19 2.24 2.48 3.31
EPS 36.89 38.56 50.76 35.65
CONCLUSIONThe performance of the Bank of Punjab is growing and therefore increasing the six
branches and credit rating is AA-. Return on Assets of BOP is not attractive because of
loss of property and equipment. The bank has to manage efficiently. The bank is newly
established so it is offering high interest rates for the depositors which are resulting in
high interest expense. Its deposits have increased tremendously due to this reason and
bank has to manage withdrawals by borrowing from other financial institutions which is
another cause for the high interest expense. Another thing of concern is that bank has
operating cost which means bank has high administration cost. And due to this cost banks
net income has been affected. The bank’s investment is also increasing which means that
bank is investing the money from demand deposits to companies and mutual funds which
is causing high cost in meeting the withdrawals of deposits.
2005 2006DIFFERENCE
%
Mark-up / return/ interest earned2,555,03
96,125,09
33,570,054 139.73
Mark-up / return/ interest expensed 719,0742,668,73
91,949,665 271.14
Net mark-up / interest income1,835,96
53,456,35
41,620,389 88.26
Provision against non-performing loan and advances
46,940 327,373 280,433 597.43
bad debts written off directly 121 3,623 3,5022894.2
147,061 330,996 283,935 603.33
Net mark-up income after provisions1,788,90
43,125,35
81,336,454 74.71
Non mark-up incomefee, commission and brokerage income 172,873 255,149 82,276 47.59Dividend income 554,218 753,669 199,451 35.99Income from dealing in foreign currencies
41,311 93,208 51,897 125.63
Gain on sale of investment / securities Other income 328,361 228,749 -99,612 -30.34
1,096,763
1,330,775
234,012 21.34
Total non mark-up income2,885,66
74,456,13
31,570,466 54.42
Non mark-up expenses
Admin expenses1,116,09
71,274,97
1158,874 14.23
Provision against off balance sheet items 364 Provision against receivable from NIT 32,046 4,744 -27,302 -85.20other charges 1,217 11,461 10,244 841.74
Total non mark-up expense1,149,72
41,291,17
6141,452 12.30
Profit before taxation1,735,94
33,164,95
71,429,014 82.32
Taxation - current 225,916 668,700 442,784 195.99 - Prior - Deffered 141,853 143,015 1,162
367,769 811,715 443,946
Profit after taxation1,368,17
42,353,24
2985,068 72.00
Unappropriated profit brought forward 101,699 143,590Transfer from surplus on revaluation of fixed assets - net of tax
3,166
101,699 146,756
Profit available for appropriation1,469,87
32,499,99
81,030,125 70.08
Basic and diluted earnings per share Rs:
5.82 10.01 4 71.99
2007 2008DIFFERENCE
%
Mark-up / return/ interest earned11,579,03
617,539,09
45,960,058 51.47
Mark-up / return/ interest expensed 7,508,79513,939,37
76,430,582 85.64
Net mark-up / interest income 4,070,241 3,599,717 -470,524 -11.56Provision against non-performing loan and advances
340,626 1,616,421 1,275,795 374.54
Provision / reversal for diminution in the value of investments
33,000 24,479 -8,521 -25.82
bad debts written off directly 100 246,869 246,769246769.0
0 373,726 1,887,769 1,514,043 405.12Net mark-up income after provisions
3,696,515 1,711,948 -1,984,567 -53.69
Non mark-up income fee, commission and brokerage income
473,212 653,512 180,300 38.10
Dividend income 1,385,875 1,804,878 419,003 30.23Income from dealing in foreign currencies
239,804 377,233 137,429 57.31
Gain on sale of investment / securities
389,063 2,039,535 1,650,472 424.22
Other income 466,435 547,635 81,200 17.41 2,954,389 5,422,793 2,468,404 83.55Total non mark-up income 6,650,904 7,134,741 483,837 7.27Non mark-up expenses Admin expenses 1,751,970 2,250,777 498,807 28.47Provision against off balance sheet items
175 292 117 66.86
other charges 38 37,950 37,912 99768.42
Total non mark-up expense 1,752,183 2,289,019 536,836 30.64Profit before taxation 4,898,721 4,845,722 -52,999 -1.08Taxation - current 880,997 169,252 -711,745 -80.79 - Deffered 83,469 250,772 167,303 200.44 964,466 400,103 -564,363 -58.52Profit after taxation 3,934,255 4,445,619 511,364 13.00Unappropriated profit brought forward
169,817 3,219,246 3,049,429 1795.71
Transfer from surplus on revaluation of fixed assets - net of tax
6,174 5,866 -308 -4.99
175,991 3,225,112 3,049,121 1732.54Profit available for appropriation 4,110,246 7,670,731 3,560,485 86.62Basic and diluted EPS Rs: 9.01 10.51 2 16.65
ASSETS 2005 2006DIFFERENCE
%
cash and balances with treasury banks
5,579,566 8,787,387 3,207,821 57.49
balances with other banks 2,118,242 9,367,595 7,249,353 342.23Landings to financial institution 1,019,488 7,593,681 6,574,193 644.85
Investment16,197,50
518,026,181 1,828,676 11.29
Financing/Advances39,438,92
363,623,705 24,184,782 61.32
Performing Non-performing 829,803 516,185 -313,618 -37.79Operating fixed assets 689,486 1,715,061 1,025,575 148.74Deferred tax assets- net Other assets 1,277,201 2,040,568 763,367 59.77
Total Assets66,320,41
1111,154,17
844,833,767 67.60
LIABILITIES Bills payable 267,113 478,001 210,888 78.95borrowings from financial institutions
2,831,605 6,791,007 3,959,402 139.83
Deposit and other accounts54,724,31
188,465,051 33,740,740 61.66
Sub-ordinated loans liabilities against assets subject to finance lease
81,795 55,403 -26,392 -32.27
deferred tax liabilities- net 8,964 220,177 211,2132356.2
4
other liabilities 567,540 1,474,425 906,885 159.79
Total Liabilities58,481,32
897,484,064 39,002,736 66.69
NET ASSETS PRESENTED BY Share capital 1,506,230 2,349,719 843,489 56.00Reserves 2,770,645 4,257,337 1,486,692 53.66unappropriated profit 143,590 169,817 26,227 18.27Share Holder capital 4,420,465 6,776,873 2,356,408 53.31Minority interest Surplus on revaluation of assets- net deferred tax
3,418,618 6,893,241 3,474,623 101.64
7,839,083 13,670,114 5,831,031 74.38
ASSETS 2007 2008DIFFERENCE
%
cash and balances with treasury banks
14,054,859 14,210,302 155,443 1.11
balances with other banks 3,722,089 1,927,662 -1,794,427 -48.21Lendings to financial instituation
11,846,823 2,450,000 -9,396,823 -79.32
Investment 28,233,211 73,461,695 45,228,484 160.20
Financing/Advances101,319,95
4133,893,58
532,573,631 32.15
Performing Non-performing 1,150,766 2,636,418 1,485,652 129.10Operating fixed assets 2,068,744 3,252,759 1,184,015 57.23Deffered tax assets- net
Other assets 3,609,457 5,778,19 -3031638-
524.67
Total Assets166,005,90
3231,832,42
165,826,518 39.65
LIABILITIES Bills payable 856,448 937,647 81,199 9.48borrowings from financial institutions
6,989,424 17,842,915 10,853,491 155.28
Deposit and other accounts137,727,60
6191,968,90
954,241,303 39.38
liabilities against assetssubject to finance lease
40,988 40,321 -667 -1.63
deffered tax liabilities- net 298,616 2,205,530 1,906,914 638.58other liabilities 2,816,341 2,983,079 166,738 5.92
Total Liabilities148,729,42
3215,978,40
167,248,978 45.22
NET ASSETS 17,276,480 15,854,020 -1,422,460 -8.23PRESENTED BY Share capital 2,902,490 4,230,379 1,327,889 45.75Reserves 4,537,232 7,427,232 2,890,000 63.70unappropriated profit 3,219,246 3,452,842 233,596 7.26Share Holder capital 10,658,968 15,110,453 4,451,485 41.76Surplus on revaluation of assets- net deffered tax
5,466,746 3,885,341 -1,581,405 -28.93
16,125,714 18,995,794 2,870,080 17.80