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FINANCIAL REPORTING ANALYSIS OF BANK AL-HABIB

IN COMPARISON TO PEER GROUP

Submitted to Mr. Nouman Afghan Assistant Professor

NBS, NUST Analysis

Submitted by

Maria Iftikhar | Muhammad Ali | Muhammad Khalid Zafar | Sumbul Zehra

Third Semester

MBA 2K11

NUST Business School [NBS] National University of Science and Technology [NUST]

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Table of Contents BANKING SECTOR OF PAKISTAN ........................................................................................... 1

INTRODUCTION OF BANK AL-HABIB .................................................................................... 2

PEER GROUP & RATING ............................................................................................................ 3

Bank Al Habib ............................................................................................................................ 3

Askari Bank ................................................................................................................................ 3

NIB Bank .................................................................................................................................... 3

OBJECTIVES OF STUDY............................................................................................................. 3

METHODOLOGY ......................................................................................................................... 4

Area of Survey: ........................................................................................................................... 4

Plan of Analysis: ......................................................................................................................... 4

Type of Analysis: ........................................................................................................................ 4

Framework of Analysis: .............................................................................................................. 5

CAMELS ANALYSIS.................................................................................................................... 5

RATING OF CAMELS FRAMEWORK ....................................................................................... 5

CAPITAL ADEQUACY ................................................................................................................ 6

CAPITAL ADEQUACY RATIOS IN BANK AL-HABIB ........................................................... 6

1. Capital Ratio:.................................................................................................................... 6

2. Break-Up Value per Share: .............................................................................................. 7

ASSET QUALITY RATIOS IN BANK AL-HABIB .................................................................... 8

1. Non-Performing Loans (NPLs) to Gross Advances: ....................................................... 8

2. Provision against NPLs to Gross Advances: .................................................................... 9

3. NPLs to Equity Ratio: .................................................................................................... 10

MANAGEMENT QUALITY ....................................................................................................... 10

MANAGEMENT QUALITY RATIOS IN BANK AL-HABIB .................................................. 11

1. Admin. Expense to Profit before Tax: ........................................................................... 11

EARNING PERFORMANCE ...................................................................................................... 12

EARNING PERFORMANCE RATIOS IN BANK AL-HABIB ................................................. 12

1. Spread Ratio: .................................................................................................................. 12

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2. Net Interest Margin Ratio:.............................................................................................. 13

3. Return on Assets: ........................................................................................................... 14

4. Return on Equity: ........................................................................................................... 15

5. Non-interest Income to Total Asset Ratio: ..................................................................... 16

LIQUIDITY .................................................................................................................................. 16

LIQUIDITY RATIOS IN BANK AL-HABIB ............................................................................. 17

1. Cash and Balances with Banks to Total Assets: ............................................................ 17

2. Total Deposit and other Accounts to Total assets: ......................................................... 18

3. Investment to Total Assets: ............................................................................................ 19

4. Advances to Total Assets: .............................................................................................. 19

SENSITIVITY TO MARKET RISK ............................................................................................ 20

SENSITIVITY TO MARKET RISK IN BANK AL-HABIB ...................................................... 20

1. Credit Risk: .................................................................................................................... 20

2. Market Risk: ................................................................................................................... 21

3. Operational Risk:............................................................................................................ 21

RECOMMENDATIONS .............................................................................................................. 22

ANNEXURES

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BANKING SECTOR OF PAKISTAN

The financial sector in Pakistan comprises of Commercial Banks, Development Finance

Institutions (DFIs), Microfinance Banks (MFBs), Non-banking Finance Companies (NBFCs)

(leasing companies, Investment Banks, Discount Houses, Housing Finance Companies, Venture

Capital Companies, Mutual Funds), Modarabas, Stock Exchange and Insurance Companies.

Under the prevalent legislative structure the supervisory responsibilities in case of Banks,

Development Finance Institutions (DFIs), and Microfinance Banks (MFBs) falls within legal

ambit of State Bank of Pakistan while the rest of the financial institutions are monitored by other

authorities such as Securities and Exchange Commission and Controller of Insurance.

The banking sector in Pakistan is highly regulated. The State Bank of Pakistan (SBP) is the

Central Bank of Pakistan. It regulates the banking sector with complete autonomy, and is also

responsible for licensing, directing, supervising, controlling and inspecting banks, as well as

exercises various monetary control policy measures. The Securities and Exchange Commission

of Pakistan also monitors the operations of the listed banks related to public shareholding

matters. The banking sector in Pakistan also consists of Commercial Banks and Specialized

Banking Institutions. Commercial banks operating in Pakistan can be divided into four broad

categories, namely Nationalized Commercial Banks, Privatized Banks, Private Banks and

Foreign Banks. The Pakistani banking sector has seen several changes and trends owing to its

reform measures. Besides improved financial performance, the other trends include mergers and

acquisitions activities with local private banks, expansion of branch networks of private and

foreign banks.

The banking sector in Pakistan has been going through a comprehensive but complex and painful

process of restructuring since 1997. It is aimed at making these institutions financially sound and

forging their links firmly with the real sector for promotion of savings, investment and growth.

Although a complete turnaround in banking sector performance is not expected till the

completion of reforms, signs of improvement are visible. The almost simultaneous nature of

various factors makes it difficult to disentangle signs of improvement and deterioration.

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Commercial banks operating in Pakistan can be divided into four categories:

1. Nationalized Commercial Banks (NCBs)

2. Privatized Banks

3. Private Banks and

4. Foreign Banks.

INTRODUCTION OF BANK AL-HABIB

Bank AL Habib was incorporated as a Public Limited Company in October 1991 and started its

operations in January 1992. It is a venture of the Habib Group, which owns 50% of the shares -

20 % shares are owned bank AL Habib was incorporated as a Public Limited Company in

October 1991 and started its operations by NIT and 30% are owned by the general public. The

bank operates in the private sector, with 30 branches in the major cities of Pakistan, and has its

principle office at Karachi.

It is a scheduled bank principally engaged in the business of commercial banking with a network

of 233 branches including a wholesale branch (in the Kingdom of Bahrain, a branch in Karachi

Export Processing Zone and four Islamic Banking branches. The Bank has invested in 66.67%

shares of AL Habib Capital Markets (Private) Limited.

The principal objective of the company is to engage in the business of equity, money market and

foreign exchange, brokerage, equity research and corporate financial advisory and consultancy

services. AL Habib Capital Markets (Private) Limited (the Company) was incorporated in

Pakistan as a (Private) Limited Company on 23 August 2005 under the Companies Ordinance,

1984 and started operations from14 December 2005.AL Habib Financial Services Limited is a

wholly owned subsidiary of the Bank. The principal objective of the company is to engage in

arranging / advising on financial products and services. AL Habib Financial Services Limited

was incorporated in Dubai on 05 March 2008. Its commercial banking services also include

acceptance and placement of funds in the interbank market; purchase and sale of foreign

currencies; trade information and research; remittances and transfer of funds; purchase and sale

of government securities; Sui gas bills collection; and MCB rupee traveler cheque services.

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PEER GROUP & RATING

The peer groups are

Askari Bank

NIB Bank

The credit ratings of all three of them are as follows.

Bank Al Habib

Pakistan Credit Rating Agency Limited (PACRA) has upgraded the Bank’s long term entity

rating to AA+ (Double A plus) from AA (Double A), while the short-term entity rating has been

maintained at A1+ (A One plus)

Askari Bank

The Bank enjoys "A-" (Single A Minus) for the medium to long term and "A2" (A two) for the

short term entity ratings by Pakistan Credit Rating Agency Limited.

NIB Bank

PACRA maintained NIB’s long term rating at AA- (Double A minus) and short term rating at

A1+ (A one plus) in June 2009, even in this difficult environment. The rating on NIB’s term

finance certificates issued in March 2008 was also maintained at A+ (A plus).

OBJECTIVES OF STUDY

In the recent years the financial system especially the banks have undergone numerous changes

in the form of reforms, regulations & norms. CAMELS framework for the performance

evaluation of banks is an addition to this. The study is conducted to analyze the pros & cons of

this model.

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To do an in-depth analysis of the CAMELS model.

To analyze Bank Al-Habib in comparison to two banks in its peer group for a period of

five years from 2007-11 in order to get the desired results by using CAMELS as a tool of

measuring performance.

METHODOLOGY

Area of Survey:

The survey was done for three banks of Pakistan’s private sector. The study environment was

Financial Institutions particularly the Banking industry. Al-Habib bank in comparison to NIB

and Askari Bank was taken into account.

Plan of Analysis:

The data analysis of the information got from the balance sheets was done and Ratios Analysis

was used as a methodology to study the relationship between two financial values. Graph and

charts were used to illustrate trends.

Type of Analysis:

The following type of Analysis are used in the project:

Macro industry level analysis – Comparison of bank Al-Habib with two other banks;

NIB Bank and Askari Bank, in its peer group to compare the ratios.

Past Performance or Historical Trend Analysis– An analysis across historical time

periods for the same firm (the last 5 years).

Graphical Trend Analysis – The use of graphs and charts for the illustration of financial

performance of the banks.

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Framework of Analysis:

Ratio Analysis is the framework of Analysis used, State Bank of Pakistan has been following a

supervisory framework which involves the analysis of six indicators which reflect the financial

health of financial institutions. This framework is known as the CAMELS model. The current

study uses the same framework as an analysis indicator.

CAMELS ANALYSIS

CAMELS framework is a common method for evaluating the soundness of Financial

Institutions. The central bank has been following a supervisory framework, CAMEL, which

involves the analysis of six indicators which reflect the financial health of financial institutions.

CAMELS is a rating system for domestic and foreign banks based on the international CAMELS

model combining financial management and systems and control elements introduced for the

inspection cycle commencing. It recommended that the banks should be rated on a five point

scale (A to E) based on the lines of international CAMELS rating model. CAMELS evaluate

banks on the following six parameters:-

1. Capital Adequacy

2. Asset Quality

3. Management Soundness

4. Earnings and Profitability

5. Liquidity and

6. Sensitivity to Market Risk.

RATING OF CAMELS FRAMEWORK The five point scale (A to E) based on the lines of international CAMELS rating model is given

as under:

Symbol Interpretation

A Bank is sound in every respect

B Bank is fundamentally sound but with moderate weaknesses

C Financial, operational or compliance weaknesses that give cause for supervisory

concern.

D Serious or immoderate finance, operational and managerial weaknesses that could

impair future viability

E Critical financial weaknesses and there is high possibility of failure in future

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CAPITAL ADEQUACY

The first component, capital adequacy ultimately determines how well Financial Institutions can

manage with shocks to their balance sheets. Thus, it tracks capital adequacy ratios that take into

account the most important financial risks—foreign exchange, credit, and interest rate risks—by

assigning risk weightings to the institution's assets.

Leverage ratio can be used to measure the capital adequacy of a bank. This is the ratio of bank's

book value of core capital to the book value of its assets. The higher ratio shows the higher level

of capital adequacy. The leverage ratio falling in the first zone implies that bank is well

capitalized. Similarly, the leverage falling in the second zone shows that bank is adequately

capitalized.

CAPITAL ADEQUACY RATIOS IN BANK AL-HABIB

1. Capital Ratio:

Capital Ratio = Total shareholders’ equity / Total Assets *100

2007 2008 2009 2010 2011

Bank Al Habib 5.67% 5.62% 4.92% 4.89% 4.65%

NIB Bank 12.79% 16.21% 20.01% 4.80% 36.70%

Askari Bank 6.64% 5.84% 5.18% 4.71% 4.82%

The ratio between shareholders’ equity

and total assets expresses the

percentage of equity in total assets.

This ratio is used to measure an

entity's leverage. This is a measure of

the total debt a company takes to

acquire assets. Equity is the amount of

the company that the shareholders

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0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

2007 2008 2009 2010 2011

Askari Bank

Bank Al-Habib

NIB

own. This ratio also measures a company's solvency in the long run. Solvency is the company's

capability to meet its financial needs. The results of this analysis are used to make financial

decisions regarding further incurring of debt through increased equity. Capital Ratio of Bank Al

Habib is relatively lower throughout the 5 years and this is an indicator of high leverage ratio for

the Bank. Less of its assets are financed with equity and it also increases the risk of solvency for

the Bank. Askari Bank is also high on leverage but NIB has financed more of its Assets with

equity.

2. Break-Up Value per Share:

Break-Up Value per Share = Total shareholders’ equity/ No. of ordinary shares

2007 2008 2009 2010 2011

Bank Al Habib 21.77 20.83 20.14 20.14 20.35

NIB bank 10.26 10.20 10.30 1.95 5.82

Askari Bank 40.24 29.65 25.95 23.06 23.46

Break-up Value is net worth per

share and is an important

criterion to measure financial

soundness of a company. The

break-up value is calculated for

whole financial sector except in

case of foreign banks and

Modaraba Companies. Net

worth may also be called

shareholder equity, and it's one of

the factors you consider in evaluating a company in which you're considering an investment. To

figure your own net worth, you add the value of the assets you own, including but not limited to

cash, securities, personal property, real estate, and retirement accounts, and subtract your

liabilities, or what you owe in loans and other obligations. Net worth per share for Bank Al-

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Habib is relatively constant for the five years and shows a constant trend. It is higher than its

peer NIB bank and Askari falls almost equal to Bank-Al Habib.

ASSET QUALITY

Credit risk is one of the factors that affect the health of an individual Financial Institution. The

extent of the credit risk depends on the quality of assets held by an individual Financial

Institution. The quality of assets held by an FI depends on exposure to specific risks, trends in

non-performing loans, and the health and profitability of bank borrowers—especially the

corporate sector. We can use a number of measures to indicate the quality of assets held by

Financial Institutions. Suggested measures could be loan concentration by industry, region,

borrower and portfolio quality; related party policies and exposure on outstanding loan, approval

process of loan, check and balance of loans; loan loss provision ratio; portfolio in arrear; loan

loss ratio; and reserve ratio could be calculated for checking the quality of assets of a Financial

Institution.

ASSET QUALITY RATIOS IN BANK AL-HABIB

1. Non-Performing Loans (NPLs) to Gross Advances:

Non-Performing Loans (NPLs) to Gross Advances = Non-Performing Loans (NPLs) / Gross

Advances *100

2007 2008 2009 2010 2011

Bank Al Habib 0.27% 0.85% 1.19% 2.28% 2.67%

NIB Bank 14.31% 17.18% 15.75% 35.29% 40.47%

Askari Bank 6.38% 8.36% 12.01% 12.82% 14.13%

This ratio expresses the quality of loan portfolio of a bank. It shows the percentage of NPLs as

gross advances made by a bank and evaluates assets quality based on loan portfolio. A non-

performing loan (NPL) is a loan on which the borrower is not making interest payments or

repaying any principal. Local banking regulations determine the delinquency point to be

classified as non-performing. Many banking systems define NPLs as those overdue by 90 days

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0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

2007 2008 2009 2010 2011

Askari Bank

Bank Al-Habib

NIB

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

2007 2008 2009 2010 2011

Askari Bank

Bank Al-Habib

NIB

or more. Banks normally set aside

money to cover potential losses on

loans (impairment loss provisions)

and write off bad debt in their

profit and loss account. This ratio

is useful for banks and DFIs.

Overall. For Bank Al Habib this

ratio is a good indicator of its low

non-performing loans and efficient

performance.

2. Provision against NPLs to Gross Advances:

Provision against NPLs to Gross Advances = Provision against NPLs /Gross Advances *100

2007 2008 2009 2010 2011

Bank Al Habib 0.28% 1.19% 2.20% 2.56% 4.28%

NIB Bank 11.26% 17.45% 15.96% 24.17% 27.97%

Askari Bank 6.85% 7.80% 8.53% 9.29% 9.96%

The ratio between provisions

against classified loans/advances

to gross advances reflects the

quality of advances of banks and

DFIs. Bank's NPLs/advances ratio

and provision for NPLs have been

lower than the industry averages.

Lower provision on one hand may

leave the bank with greater

amount of assets for more productive uses but the bank should increase its provisions until the

declining trend in the NPLs becomes more visible. NIB Bank has kept more proportion for non-

performing loans and due to high ratio of non-performing loans, it has to block its productive

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0.00%

100.00%

200.00%

300.00%

400.00%

500.00%

2007 2008 2009 2010 2011

Askari Bank

Bank Al-Habib

NIB

assets and keep them for provision. Askari Bank has maintained a lower proportion for provision

with an increasing trend, as the number of nonperforming loans increases.

3. NPLs to Equity Ratio:

NPLs to Equity Ratio = Non-Performing Loans / Equity Ratio *100

2007 2008 2009 2010 2011

Bank Al Habib 2.70% 8.65% 16.83% 19.97% 17.92%

NIB Bank 56.65% 57.63% 37.81% 439.82% 57.02%

Askari Bank 67.09% 97.13% 134.65% 145.74% 142.56%

The ratio between NPLs to

shareholders‟ equity indicates the

exposure of the common shareholders to

NPLs. This ratio is useful for banks and

DFIs. Bank al-Habib is performing

better than its peer group in respect to

exposure of NPL’s to common equity

holders. With the increase in Non-

performing loans, equity shareholders

also get exposed to the risk of defaulted loans and the financial risk. Shareholders of NIB Bank

and Askari Bank are more exposed to this risk than Bank Al- Habib.

MANAGEMENT QUALITY

Sound management is a key to bank performance but is difficult to measure. It is primarily a

qualitative factor applicable to individual institutions. Given the qualitative nature of

management, it is difficult to judge its soundness just by looking at financial accounts of the

banks. Several indicators, however, can jointly serve as an indicator of management soundness.

Nevertheless, total expenditure to total income and operating expenses to total expenses can help

in gauging the management quality of any commercial bank. Expenses ratio, earning per

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-10

-5

0

5

10

15

2007 2008 2009 2010 2011

Bank Al Habib

NIB Bank

Askari Bank

employee, cost per loan, average loan size and cost per unit of money lent can be used as a proxy

of the management quality.

MANAGEMENT QUALITY RATIOS IN BANK AL-HABIB

1. Admin. Expense to Profit before Tax:

Admin. Expense to Profit before Tax = Administrative expenses /Profit/(loss) before taxation

2007 2008 2009 2010 2011

Bank Al Habib 1.04 1.20 1.12 1.09 1.30

NIB Bank -3.51 -5.85 8.30 -0.58 -1.38

Askari Bank 2.08 12.80 4.45 6.35 3.58

This ratio expresses the relationship

between administrative expenses and

profit before tax. It is useful for whole

financial sector. The Management of

the Bank Al-Habib is responsible for

establishing the Internal Control

System with the main objectives of

ensuring effectiveness and efficiency

of operations; reliability of financial

reporting; safeguarding of assets; and compliance with applicable laws and regulations. This

ratio is showing that administration expenses of Bank relatively remained in the same range and

it managed to control its expenses; in comparison with Askari Bank. Bank al-Habib is more

successful in maintaining its managerial expenses. NIB Bank has negative admin expenses to

profit ratio because of its overall loss and admin expenses is a major chunk of their expenses.

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EARNING PERFORMANCE

Earning capacity or profitability keeps up the sound health of a Financial Institution. Strong

earnings and profitability profile of banks reflects the ability to support present and future

operations. More specifically, this determines the capacity to absorb losses, finance its expansion

program, pay dividend to its shareholders and build up adequate level of capital. Being front line

of defense against erosion of capital base from losses, the need for high earnings and profitability

can hardly be overemphasized. Chronically unprofitable Financial Institution risks insolvency on

one hand and on the others, unusually high profitability can reflect excessive risk taking of an FI.

There are different indicators of profitability. Although different indicators are used to serve the

purpose, the best and most widely used indicator is return on assets (ROA). Net interest margin

is also used. Interest-spread ratio, earning-spread ratio, gross margin, operating profit margin and

net profit margin are also some commonly used profitability indicators.

In addition, interest income, net interest income, non-interest income, net non-interest income,

non-operating income, net non-operating income and net profit are also used to evaluate the

profitability of a commercial bank.

EARNING PERFORMANCE RATIOS IN BANK AL-HABIB

1. Spread Ratio:

Spread Ratio = Interest Earned/Interest Expense * 100

2007 2008 2009 2010 2011

Bank Al Habib 42.04% 45.13% 40.99% 39.35% 38.75%

NIB Bank 26.63% 26.96% 29.55% 18.27% 14.70%

Askari Bank 42.64% 42.09% 40.05% 35.85% 30.73%

Spread is the gap between interest rate a bank charges on loans and rate pays on deposits. The

amount of total interest earned divided by the total interest paid to depositors as mentioned in the

income statement. This ratio is useful for Banks and DFIs. Net interest spread is similar to net

interest margin; it expresses the nominal average difference between borrowing and lending rates

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0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

50.00%

2007 2008 2009 2010 2011

Askari bank

Bank Alhabib

NIB

of financial institutions,

without compensating for the

fact that the amount of

earning assets and borrowed

funds may be different. The

spread ratio of Bank Al-

Habib increased to 45.13% in

2008 and again decreased to

40.99%, 39.35% and 38.75%

in 2009, 2010 and 2011 respectively. The spread ratios of NIB in comparison are much lower

than both Askari and Bank Al-Habib because of the lower interest earned and the interest

expense in comparison to the other banks in its peer group. Still the ratio of NIB showed an

increasing trend throughout 2007-09 but decreased in the later period to a value of 18.27% and

14.70% respectively in 2010 and 11. The ratio for Askari Bank in the same period was 35.85%

and 30.73%; larger than NIB but less in comparison to Bank Al-Habib.

2. Net Interest Margin Ratio:

Net Interest Margin Ratio = (Total Interest Income – Total Interest Expense)/Total Assets * 100

2007 2008 2009 2010 2011

Bank Al Habib 2.96% 3.71% 3.63% 3.58% 3.68%

NIB Bank 1.13% 2.46% 2.59% 1.83% 1.35%

Askari Bank 3.54% 3.76% 3.56% 3.18% 2.93%

This ratio indicates the earning capacity through core banking business by utilizing all assets.

Banks normally borrow from savers and lend to investors. It is the ratio between the differences

of interest income and interest expense to total assets. The net interest margin shows an

increasing pattern for bank Al-Habib which is profitable for bank as management is successfully

able to control the expense as statements shows that interest earned through loans and advances

and also through investment is increasing whereas interest expense in year 2007 long term

facility for imported machinery and plant are zero whereas biggest change is that from 2007-

2011 there is a constant decrease in short-term borrowing and even borrowing from SBP.Net

interest Margin of Bank Al-Habib along with its peer group increased initially in 2008 but again

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-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

2007 2008 2009 2010 2011Askari Bank

Bank Al-Habib

NIB

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

2007 2008 2009 2010 2011

Askari Bank

Bank Al-Habib

NIB

decreased in 2009 and 2010.

For NIB, Net interest margin is

showing decreasing trend in last

few years because the interest

expenses and income changed

with the same proportion. Al-

Habib initially had a lower Net-

Interest margin in 2007 as

compared to the banks in peer

group but from 2009-11 the ratio increased for Al-Habib in comparison to both Askari Bank and

NIB Bank.

3. Return on Assets:

Return on Assets = Net profit after tax/ Total Assets * 100

2007 2008 2009 2010 2011

Bank Al Habib 1.57% 1.37% 1.14% 1.22% 1.18%

NIB bank -0.20% -4.18% 0.33% -5.90% -1.34%

Askari Bank 1.47% 0.19% 0.42% 0.29% 0.50%

This ratio expresses the

capacity of earning profit by

a bank on its total assets

employed in the business. It

is calculated as percentage

of net profit after tax to total

assets. It is useful for whole

financial sector. ROA of

Bank Al-Habib shows decreasing trend but does not mean that the bank fails to utilize its assets

in proper way because net interest margin and operating margin are increasing in whereas non

interest margin shows slight decrease in 2009, because non-interest income and non-interest

expense is decreased and overall impact on total assets and EBIT is increasing which in turn

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-150.00%

-100.00%

-50.00%

0.00%

50.00%

2007 2008 2009 2010 2011 Askari Bank

Bank Al-Habib

NIB

decreased ROA. NIB Bank initially had negative Return in asset because of negative net income

of the bank, the loss initially decreased in 2008 indicating a decrease in the ratio by other banks

in the peer group, however the bank showed a positive ROA in 2009 which again decreased with

a large decrease in net loss in 2010-11. However ROA for Bank Al-Habib had a better value in

comparison to the other banks in its peer group throughout 2007-11.

4. Return on Equity:

Return on Equity = Net profit after tax/ Total share holders’ equity *100

2007 2008 2009 2010 2011

Bank Al Habib 27.59% 24.33% 23.25% 24.88% 25.38%

NIB Bank -1.55% -25.77% 9.66% -122.99% -3.40%

Askari Bank 22.16% 3.21% 8.12% 6.20% 10.28%

This ratio expresses the

return on shareholders’

equity. ROE is a direct

measure of returns to the

shareholders. It is

calculated as a percentage

of the net profit after tax to

total shareholders’ equity.

It is also useful for whole financial sector. Return on equity of Bank Al-Habib went from 27.59%

in 2007 to 25.38% in 2011 with a decrease of -8%. In 2007-08 the return on equity of NIB was

negative indicative a negative return to shareholders however in the same period there was the

shareholders of Bank Al-Habib were having a 27.59% and Askari Bank was returning 22.16% to

its shareholders of their equity in 2007. The ratio of Bank Al-Habib declined slightly over the

period of five years. However, the decrease was negligible in comparison to the other bank in the

peer group. The decrease was due to both decreases in Net Income of the bank as well as due to

the increase in shareholders’ equity.

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0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

2007 2008 2009 2010 2011

Askari Bank

Bank Al-Habib

NIB

5. Non-interest Income to Total Asset Ratio:

Non-interest income to Total Asset Ratio = Total non-interest Income / Total Assets *100

2007 2008 2009 2010 2011

Bank Al Habib 1.51% 1.36% 0.74% 0.72% 0.68%

NIB Bank 0.34% 1.35% 0.81% 1.18% 1.28%

Askari Bank 2.51% 1.31% 1.03% 0.71% 0.88%

Ratio on incomes earned

other than mark-up e.g.

capital gains, commission,

fee to total assets etc. This

ratio expresses how much

income is earned other than

mark-up through other

functions of the bank by

employing total assets. Net

non-interest margin of bank Al-Habib shows a decreasing pattern because noninterest income is

decreasing in numerator whereas noninterest expense in denominator is increasing with higher

proportion. From 2009 to 2010 the ratio decreased by 2.7% however from 2010 to 2011 the ratio

decreased by 5.55%. The ratio in the same period increased by 8.47% for NIB and 23% for

Askari bank.

LIQUIDITY

Liquidity risk threats the solvency of Financial Institutions. In the case of commercial banks, first

type of liquidity risk arises when depositors of commercial banks seek to withdraw their money

and the second type does when commitment holders want to exercise the commitments recorded

off the balance sheet. Commercial banks have to borrow the additional funds or sell the assets at

fire sale price to pay off the deposit liabilities. They become insolvent if sale price of the assets

are not enough to meet the liability withdrawals. The second type of liquidity risk arises when

demand for unexpected loans cannot be met due to the lack of the funds. Commercial banks can

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0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

2007 2008 2009 2010 2011

Askari Bank

Bank Al-Habib

NIB

raise the funds by running down their cash assets, borrowing additional funds in the money

markets and selling off other assets at distressed price. Both liability side liquidity risk and asset

side liquidity risk affect the health of commercial banks adversely. But maintaining the high

liquidity position to minimize such risks also adversely affects the profitability of Financial

Institutions. Return on highly liquid assets is almost zero. Therefore, Financial Institutions

should strike the tradeoff between liquidity position and profitability so that they could maintain

their health sound. Commercial bank's liquidity exposure can be measured by analyzing the

sources and uses of liquidity. In this approach, total net liquidity is worked out by deducting the

total of uses of liquidity from the total of sources of liquidity. In addition, different liquidity

exposure ratios such as borrowed funds to total assets, core deposit to total assets, loans to

deposits, and commitments to lend to total assets are used to measure the liquidity position of a

commercial bank.

LIQUIDITY RATIOS IN BANK AL-HABIB

1. Cash and Balances with Banks to Total Assets:

Cash and Balances with Banks to Total Assets = Cash and Balances/Total Assets *100

2007 2008 2009 2010 2011

Bank Al Habib 10.18% 8.77% 7.61% 7% 7.72%

NIB Bank 6.63% 5.67% 6.01% 7.16% 6.11%

Askari Bank 9.25% 9.69% 10.91% 8.37% 9.42%

The ratio can be used both

internally by the company’s

analysts, and by potential and

current investors. This ratio

expresses the percentage of total

assets available in the form of

highly liquid assets. A ratio used

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0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

2007 2008 2009 2010 2011

Askari Bank

Bank Al-Habib

NIB

to compare a business’s performance among other industry members. The ratio of Bank Al-

Habib is decreasing over time because of less proportionate increase in the company liquid assets

in comparison to its total assets. There is a decrease of 13.85% in 2008 than 2007 but the ratio

again increased back in 2011. Between 2007-09 the ratio was declining for Bank Al-Habib

however increasing for Askari Bank in the same period. In 2011 Askari bank has the highest

ratio indicating the bank’s liquidity.

2. Total Deposit and other Accounts to Total assets:

Total Deposit and other Accounts to Total assets = Total Deposit and other Accounts/Total

Assets *100

2007 2008 2009 2010 2011

Bank Al Habib 81.30% 81.43% 75.77% 82.76% 78.56%

NIB Bank 66.05% 58.46% 45.13% 60.23% 55.21%

Askari Bank 78.52% 91.32% 80.96% 81.30% 84.77%

The ratio shows what percentage

of total assets comprises total

deposits and other accounts. The

higher the total deposit ratio, the

lower is the perceived liquidity

risk because contrary to purchased

funds, retail deposits are less

sensitive to a change in interest

rates or a minor deterioration in

business performance. The ratio was 81.30% in 2007 and 78.56% in 2011. This value indicates

Bank Al-Habib is lower perceived liquidity risk because the bank mobilizes savings. Savings

mobilization is becoming important, because there are simply not enough donor resources

available to cover the funding needs of the growing micro-finance sector. The ratio has a

decreasing trend initially for NIB during 2007-09 however it increased in 2010 with a value of

60.23% but still the risk of liquidity was less in comparison to the other banks in its peer group.

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0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

2007 2008 2009 2010 2011

Askari Bank

Bank Al-Habib

NIB

3. Investment to Total Assets:

Investment to Total Assets = Total investments / Total Assets *100

2007 2008 2009 2010 2011

Bank Al Habib 24.98% 27.02% 44.44% 45.47% 58.02%

NIB Bank 22.93% 19.66% 30.00% 30.51% 30.86%

Askari Bank 21.64% 17.03% 26.03% 32.44% 38.87%

The ratio between Investment

and total assets shows investment

activity with reference to its

total assets. It indicates the

portion of total assets used for

investment in various venues.

This ratio is useful for banks,

DFIs and insurance companies.

Total investments to total assets

indicate the extent of deployment of assets in investments. The higher level of investment

indicates the lack of credit off-take in the market. Bank Al-Habib has higher investments in risk

free securities as compared to NIB and Askari Bank which shows the lack of credit off-take and

further confirms the aggressive strategy of the bank in the disbursal of advances.

4. Advances to Total Assets:

Advances To Total Assets = Total advances / Total Assets *100

2007 2008 2009 2010 2011

Bank Al Habib 56.09% 56.51% 42.43% 41.67% 29.87%

NIB Bank 46.51% 44.91% 40.37% 45.32% 39.31%

Askari Bank 55.32% 62.46% 53.09% 48.54% 43.83%

This ratio expresses the relationship of advances (net) to total assets. This ratio is useful for

banks and DFIs. The ratio indicates the utilization of deposits in the core business of a bank. If

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0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

2007 2008 2009 2010 2011

Askari Bank

Bank Al-Habib

NIB

the ratio is too high, it

means that banks might not

have enough liquidity to

cover any unforeseen fund

requirements; if the ratio is

too low, banks may not be

earning as much as they

could be. Loan to deposit

ratio of Bank Al-Habib is

increasing initially in 2008 as compared to 2007 then it start decreasing gradually over time from

2008-11, it shows that bank is managing to keep more liquid assets with it in order to meet the

demands of depositors. NIB bank has initially lower ratio than bank Al-Habib and Askari during

2007-09; then the ratio started increasing so that shows NIB giving out more cash as loans than

the deposits it has. It can create liquidity problems for NIB Bank. Likewise Askari Bank has also

high ratio of Loans to deposits and with the high earnings of interest they can get into the

problem of liquidity.

SENSITIVITY TO MARKET RISK

Commercial banks are increasingly involved in diversified operations such as lending and

borrowing, transaction in foreign exchange, selling off assets pledged for securities and so on.

All these are subject to market risk like interest rate risk, foreign exchange rate risk, and financial

asset and commodity price risk. The health of a Financial Institution more sensitive to market

risk is more hazardous than that of less sensitive. Foreign exchange risk, interest rate risk, equity

price risk, and commodity price risk are the indicators of sensitivity to market risk.

SENSITIVITY TO MARKET RISK IN BANK AL-HABIB

1. Credit Risk: Pakistan Credit Rating Agency Limited (PACRA) has maintained the Bank's long term and short

term entity ratings at AA+ (Double A plus) and A1+ (A One plus), respectively. The ratings of

unsecured, subordinated TFCs have also been maintained at AA (Double A). These ratings

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denote a very low expectation of credit risk emanating from a very strong capacity for timely

payment of financial commitments.

Credit risk is managed through the credit policies approved by the Board; a well-defined credit

approval mechanism; use of internal risk ratings; prescribed documentation requirements; post-

disbursement administration, review, and monitoring of credit facilities; and continuous

assessment of credit worthiness of counterparties. The Bank has also established a mechanism

for independent, post-disbursement review of large credit risk exposures. Decisions regarding the

credit portfolio are taken mainly by the Central Credit Committee. Credit Risk Management

Committee of the Board provides overall guidance in managing the Bank's credit risk.

2. Market Risk: Market risk is managed through the market risk policy approved by the Board; approval of

counterparty limits and dealer limits; specific senior management approval for each investment;

and regular review and monitoring of the investment portfolio by the Bank's Asset Liability

Management Committee (ALCO). In addition, the liquidity risk policy provides guidance in

managing the liquidity position of the Bank, which is monitored on daily basis by the Treasury

and the Middle Office. Risk Management Committee of the Board provides overall guidance in

managing the Bank's market and liquidity risks.

3. Operational Risk: Operational risk is managed through the audit policy and the operational risk policy approved by

the Board, along with the policy on prevention of frauds and forgeries; operational manuals and

procedures issued from time to time; a system of internal controls and dual authorization for

important transactions and safe-keeping; a Business Continuity Plan, including a Disaster

Recovery Plan for I. T.; and regular audit of the branches. Audit Committee of the Board

provides overall guidance in managing the Bank's operational risk.

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RECOMMENDATIONS

1. Bank Al-Habib has high capital ratio and it is highly recommended to reduce the leverage

otherwise it has to face high liquidity risks in case of any uncertainty.

2. Bank has kept lower provisions for non-performing loans and that can also be a threat if

more loans default and bank will not be available with liquid cash to compensate the loss.

3. Spread shows the major earnings of any Bank and reduction in this ratio should be

monitored effectively s it is cutting down the profits for Bank. Any way can be adopted

for instance; giving attractive investment opportunities and giving out favorable loans.

They also need to keep check on the interest rates they are charging on deposits and

loans.

4. Bank is not utilizing its assets in effective way. They are unable to generate maximum

return out of their assets comprising of advances and loans.

5. Liquidity is reducing over the period of 5 years and to manage cushion for uncertainties,

Bank has to arrange enough liquid for that.

6. Bank is inviting more and more deposits and they are increasing with proportion to total

assets. It shows that bank can face more liquidity risk in future. To reduce this risk, Bank

has to provide better investment opportunities and provide more loans to the customers.

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ANNEXURES: WORKSHEETS