Analysis Report on Bank Alfalah Ltd

8/3/2019 Analysis Report on Bank Alfalah Ltd

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FINAL PROJECT:

INTRODUCTION TO ACCOUNTING

COURSE INSTRUCTOR : Mr.MUBEEN KHALID

TITLE : ANATOMY AND ANALYSIS OF ANNUAL

FINANCIAL REPORTS OF BANK ALFALAH LIMITTED

MPA/MHA (2009-2011) 2ND SEMESTER

SUBMITTED BY :

Dr.SYED SHAMS HAIDER MHA 06

Mr.ASSAD SAKHAWAT MPA 25



ANATOMY OF THE ANNUAL REPORTS FY 2004-FY

2006 AND HFY 2007

The major nuts and bolts are as follows:

The major nuts and bolts of the financial

statements for the years mentioned above are

presented in the attached PDF files alongwith

this analysis doucement .An alalysis of thesereports is presented as follows.

ANALYSIS OF THE ANNUAL REPORTS OF BANK

ALFALAH OF FY 2004 - HFY2007

Bank: BANK ALFALAH LIMITED - Analysis of Financial Statements Financial Year 2004Financial Year 2006

OVERVIEW : Bank Alfalah Limited wasincorporated on June 21st, 1997 as a public

limited company under the Companies Ordinance1984. The bank is engaged in commercial

banking and related services as defined in theBanking Companies Ordinance, 1962. The bank iscurrently operating through 195 branches in 74

cities.

The bank got privatized in 1997. The Abu Dhabi

Group, owner of the bank, has invested in



technology to offer an extensive range of products and services, which broadly includegeneral banking, financial services, Islamicbanking, consumer banking, treasury and

international banking. Because of its superlativeperformance over the years the bank has been

assigned short-term rating of A1+ and long termrating of AA.

Bank Alfalah has expanded its branch network and deposit base. It is also making profitable

advances and increasing the range of productsand services. The bank has 195 branches of which 23 are Islamic and 5 overseas. Bank

Alfalah is the 5th largest bank of Pakistan interms of its assets which are 6% of the entire

banking sector assets.

The banking sector has expanded rapidly inPakistan along with the fast paced economic

growth. In the year 2006 banks' marketcapitalization was 1/3rd of the overall market

capitalization of KSE, indicating the large sharethat the banking sector has in the market. Thisincreased competition in the banking sector hasencouraged the Banks to come up with servicesthat could satisfy the needs of a large consumerbase. The result has been increased profitability

of all banks.

PERFORMANCE OF H1FY07 The bank'sperformance has generally improved in all

segments. Profits have increased from 0.81million in 2Q06 (EPS: 1.38) to 1.2 million in 2Q07(EPS: 1.89). Deposits increased from 184mn to

239mn, an increase of 30%. The trend of ROD hasreversed this year as it has improved from 0.44



in 2QFY06 to 0.52 2QFY07 mainly because of improved control on costs resulting in improved

profits.

Given bank's eagerness for raising longer termdeposits to match their assets maturity profiles,it is expected that the share of fixed deposits in

total deposits of the banking system wouldcontinue to further increase in days ahead.

The comparison between figures for FY07H1 andFY06H2 reveal that NPLs in H1FY'07 are now a

higher percentage of assets, while the provisioncoverage for NPLs has declined significantly.

The bank is now making greater efforts aimed atthe recovery of NPLs while a tightening of theloan policies is expected. The figures for FY07show that the bank has further improved its

liquidity position through the reduction of theADR. Advances have grown by 26.8% from 112mnto 142mn during this period. The high growth inadvances was fuelled by an even higher growth

in deposits.

The industry as a whole has also experienced anease in the liquidity position as a result of slower

growth in loans. This slowdown in lending wascaused by an increase in interest rates

accompanied by less credit capacity in themarket.

Industry figures also show that banks haveshown an increase in investment portfolios

somewhat corresponding to the decline in loans,

depicting a shift in banks' policy towards lowerrisks and returns. The half-yearly figures for



2007 show a continuing improvement in thesolvency position of the bank as a result of

further increases in capital. This conforms withan industry-wide trend of better solvency.

In terms of profits the Pakistani banking sectorranks amongst the top ten in the world. Bank Alfalah has had its share in the phenomenal

profits growth of the banking sector. Profits haverisen largely due to increases in advances,

investments and lending to financial institutions(Earning Assets).

But this positive growth of deposits has notsucceeded in improving the ROD of the bank

which has declined in 2006. Long term depositsby both customers and financial institutions haveseen a growth, leading to an increased interest

expense.

Since 2004 there has been a growth of 131% inthe bank's deposits which is an indicative of thegrowth that this bank has seen. Profits have alsorisen due to increase in advances, investmentsand lending to financial institutions (EarningAssets). The lending to financial institutions

alone grew by 264% in FY06.

But ROD has shown a declining trend becausethe profits for Alfalah have not risen

proportionally with the increase in deposits. Inthe year 2006 deposits grew by 7.7%. Thissignificant increase was the result of theexcessive reserve growth in the economy.

But the corresponding increase in profits was ameager 3.6% because of a tremendous increase



in the interest expensed amount. In FY04 theROD was 1.06 that declined to 0.76 in 2006. Butthe trend has reversed this year where the ROD

has improved from 0.44 in 2QFY06 to 0.522QFY07. This is because of improved control on

costs resulting in better profits for a small rise indeposits.

Although the ROA of the bank was better thanthe industry average, it declined from 0.74 inFY04 to 0.64 in FY06. The total assets of the

bank have grown by 11% from Rs 248.31billion toRs 275.69 billion in 2006. The bank's earning

assets have shown a significant increase but thehigh costs of funding these EA have resulted in

low profits. In FY06 EA grew by 8.8% but theresulting profitability growth has only been 3.6%.

ROE has had a fluctuating trend for the bank. Itrose in the FY05 on the back of high profits for

the year but declined in the subsequent year. Asthe general trend in the banking sector, this

bank is also retaining profits and has had freshcapital inflow.

One reason for this enhanced capital base isaimed at meeting the minimum capital

requirement of the SBP. The ROE of Alfalah is17.89% which is relatively low compared to the

sector average of 25.6%. Yield is an indicative of the profitability of the banks assets.

The bank's net interest income (NII) hasincreased by 18.2% in this year whereas the noninterest income rose by 42.1% mainly due to gain

on sale of securities. But as in the banking sectorthe NII contributes the most to income. The



increase in NII is mainly because of the highspreads that Bank Alfalah is taking advantage of

like others in the sector.

An important observation in the income of thebank is that its earning assets have been

generating increasing returns over the years. Butoverall profitability has not seen great

increments because of increasing costs of funding these earning assets.

In the year 2006 bank's markup/interest costsrose by 111% as compared to a 73% increase inits earnings. This is also indicated by a declining

interest margin which is a ratio of markup/return/interest expensed to the

markup/return/interest income. The result is thatthough the yields are high, overall profits are low

and so ROA, ROE and ROD have shown adeclining trend.

Earnings of Alfalah have been rising on the back of higher profitability over the years. As

mentioned earlier banks have been retainingtheir profits. But the overall boom in the

economy and the banking sector has made theinvestors confident about long term gains. Thus

price has been increasing for Alfalah.

The price of bank Alfalah's share has fluctuatedbetween Rs 34 and Rs 87 over the past three and

a half years. P/E has been on the rise thatindicates that investors are looking forward to

invest in the stocks of the bank in expectation of better returns in future. Though a multiple of

13.7x makes the share look overvalued, itsstrong fundamentals and in particular the



success of its subsidiary Warid telecom has keptthe investors interested in it.

MV to BV has shown a steady trend.Notwithstanding a continuing rise in the book

value, MV is almost 2.5x the BV, again indicatinginvestor's confidence generally in the bankingsector to do well on the back of high spreads.

Dividend yield has been low. The share is beingtraded at a high value. But the dividend policy of the bank is such that it prefers bonuses rather

than cash dividends. Thus there has beenretention of profits by the bank as it prefers toreinvest profits rather then giving them out as

dividends.

The bank plans to use the additional capital tostrengthen itself in Pakistan and abroad. Also, itintends to use this capital to meet SBP's future

capital adequacy requirements. The future planshave kept the investors interested and resultedin keeping the MV of its share above Rs 50 since

February 2007.

Dividend cover is given by DPS/EPS. It has had anincreasing trend since EPS has been declining

more than the DPS. The bank has been inclinedtowards bonus issues resulting in an increasednumber of outstanding shares. Since the profits

not rising considerably, EPS has been on thedecline.

The non-performing loans (NPLs) havedemonstrated a variable character during the

period of analysis, first increasing from Rs 2.845billion in CY03 to Rs 2.935 billion in CY04, then



decreasing by almost two thirds of that to Rs1.06 billion in CY05.

Thus there was a drastic cut down in NPLs in thisyear, which was also reflected in industry

figures, where NPLs decreased from Rs 211billion in CY03 to Rs 177 billion in CY05. This wasthe result of extensive measures by the industryin general and this bank in particular to improve

the regulation and monitoring of loans andcontrol defaults through more rigorous

screening.

The following year, however, once again showeda rapid rise of more than a hundred percent inNPLs to Rs 2.31 billion. This rise in NPLs can bemore accurately attributed to the rapid rise ininterest rates during this period than to any

lapse in the bank's screening procedures, as theState Bank had taken definite measures to

tighten its monetary policy.

At the same time there was a high level of indebtedness in both private sector and

consumer markets. There was a slowdown in therapid decline in industry NPLs, which stood at Rs

175 billion at the end of CY06. Disaggregatedindustry analysis revealed that there were plenty

of fresh NPLs incurred during this period.However, extensive write-offs and recoveriesmanaged to reduce the overall level of NPLs.

The debt management figures show that theassets of the bank have become more leveragedduring this period. This was due to the fact that

while equity has increased, debts have increasedby a greater percentage. Equity increased by



10.58% in CY04, 41.86% in CY05, and 64.01% inCY06. However, liabilities rose by 59% in CY04and 61% in CY05, and then a relatively modest

9.5% in CY06.

Deposits rose from a modest Rs 76.7 billion in2003 by almost 70% to reach Rs 130 billion in

2004, after which they again rose by more than70% to touch Rs 222 billion in 2005.

Deposits continued to show strong growth, risingby more than 7% in 2006 to cross Rs 240 billion.The major upward trend in deposits throughoutthe industry has been the result of the heavy

economic activity during recent years fuelling thedemand of consumers and the private sector for

credit.

The industry has also shown a trend towardsincreasing deposits in banks, a major cause of

which is, of course, the booming economicactivity, apart from higher foreign inflows in theform of worker remittances and FDI, as well as

expanding branch networks, product innovationand better efforts at marketing. In fact, depositgrowth in the top five banks, including Alfalah,was actually slower than that in the next five

banks. However, Local Private Banks have shownthe highest deposit growth in the banking sector.

Both customer and institutional deposits showedsteep growth in 2004 and 2005, while in 2006,

growth in customer deposits slowed whileinstitutional deposits showed a decline. Deposit

growth had also slowed in the industry as a

whole in 2006, declining from 18.3% in CY05 to13.1% in CY06.



Another marked trend within the depositstructure of the bank was the greater growth

shown by fixed deposits as compared to and atthe cost of saving deposits. Fixed deposits

increased by an absolutely stunning 100% and300% in CY04 and CY05 respectively, and by afurther 11% in CY06, thus attaining a level of almost Rs 89 billion at the end of that year, ascompared to Rs 11 billion at the end of CY03.

On the other hand, while savings deposits grewby almost 55% in CY04, their growth slowed toaround 25% in CY05, and actually turned into a3% decline in CY06, so that their level changedfrom Rs 44 billion at the end of CY03 to Rs 79

billion at the end of CY06. This is a good sign forthe bank since its long term deposits have risenhelping it attain the exemption on the CRR (Cash

Reserve Ratio).

The ratio of earning assets to total assets for thebank shows remarkable uniformity, suggesting

careful management of and investment ininterest generating assets. Within earning

assets, however, the bank shows a gradual trendof movement of capital into and away from

lendings to other financial institutions.

The lending to other financial institutionsdeclined from 9% of earning assets in CY03 to 0%

in CY04, then increased to 13.3% in CY05, butwas again reduced to 6% in CY06.

This variation also caused a fluctuation in the

percentage of earning assets held as advances,which increased from 58% in CY03 to 71.5% in



CY04, then again declined to 58.5% in CY05,finally increasing to 68.5% in CY06.

The trend in investments has been mainly adeclining one, from 39% of earning assets in

CY03 to about 28% in CY04 and CY05, then againdeclining to 26% in CY06. Industry figures

substantiate this trend to an extent, where inCY06 advances increased to 55.8% of total assetsfrom 54.4% in CY05, while investment portfoliodecreased from 21.9% of assets to 19.2% in the

same period.

In addition, 60% of the growth in banking assetsin CY06 was accounted for by growth in

advances. The advance to deposit ratio (ADR) onthe other hand has shown a decline over this

period. The ADR for the industry as a whole hadactually increased in 2006, as a result of an

aggressive loans policy overtaking the stronggrowth in deposits.

The bank, however, managed to maintain andactually improve its liquidity position. As has

been mentioned above, deposits showed a steepupward trend, increasing by almost 70% in CY04and CY05, and by a further 7% in CY06. On theother hand, although advances increased by

almost 80% in CY04, they showed more moderategrowth rates of 34% and 26% in CY05 and CY06respectively, presenting a more moderate and

cautious expansion in loans by the bank.Advances have shown a strong upward trendover both the short and long-term categories.

The solvency situation for the industry as awhole has shown marked improvement in recent



years, caused by increasing profitability andfresh inflows of capital. The figures for the bank

show that there was a decline in the solvencyposition in 2005 as a result of high growth indeposits. As a result, from financing 4% of

assets in CY04, equity financed around 3% of equity in CY05.

This situation, however, has improved in 2006because of increases in equity, which once againfinanced almost 4% of assets. However, earningassets in comparison to deposits declined fromaround 1.03 in CY04 to 0.97 in CY05 and 0.96 in

CY06.

This is caused by the fact that while depositshave shown tremendous growth over the period

under study, the bank has maintained aconsistent approach with respect to its earningassets and has not expanded them to the sameextent. The increase in MCR by the SBP has also

led to banks increasing their capital share.



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Financial Ratio

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2004 2005 2006

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Earnings Ratios

ROA 0.86 0.84 0.67

ROE 21.80 26.75 17.89

ROD 1.06 0.97 0.76

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Asset Quality Ratios

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NPL (Billions) 2.94 1.06 2.31

NPL to Advances 4.3% 1.0%

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Market V alue Ratios

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Price to earning 10.50 12.43 13

Market to Book 2.57 2.27 2.4

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Debt Management

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Debt to equity 24.33 30.68 25

Debt to assets 0.96 0.97 0.9

Deposit times capital 20.60 27.67 2

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Liquidity

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Earning assets to assets 0.83 0.81

Advance to deposit 0.67 0.59

Yield on earning asset 5.26% 7.19%

Cost of funding earning 2.28% 4.23%

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Solvency

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Equity to assets 3.95% 3.16%Equity to deposits 4.85% 3.61%

Earning assets to deposits 1.04 0.97

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Other financials

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2004 2005 2006 20

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Cost of funds 2.10% 3.89% 6.40

Intermediation Costs 2.31% 2.33% 2Net Prof it Margin 0.94% 0.92% 0.7

Interes t Margin 0.57 0.41 0.28

Net Interest Margin 1.93 1.97 2.32

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Analysis Report on Bank Alfalah Ltd

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