CF Project on Askari Bank

8/9/2019 CF Project on Askari Bank

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EXECUTIVE SUMMARY

For this particular corporate finance project, we have chosen the banking sector as our segmentof analysis. Within this sector we have considered the financials of Askari Commercial Bank in

order to rate its Market share price value. Askari Bank is a listed bank on KSE. With variousfinancial tools we have evaluated the share price positioning of the bank and have marked ourinvestment in its shares as a safe or not a safe measure.

Also an overview is presented on the current financial situation of the Pakistans economy andaffects of the global crisis on our banking sector.


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PAKISTANS FINANCIAL CRISIS

Foreign reserves of country

y Wracked by political instability and hard hit by the global economic crisis, Pakistan isteetering on the brink of default.The countrys foreign reserves have dwindled to around $4.5billion, equivalent to about six weeks of imports, foreign investors have fled the country indroves and the rupee has fallen sharply

Pakistan government seeking aid

yThe government is desperately seeking an infusion of up to $10 billion to shore up thecountrys finances. It had been hoping for assistance from long-time ally China, but PresidentAsif Ali Zardari returned from Beijing last Friday without any commitment of cash. Anothertraditional ally, Saudi Arabia, has refused to provide financial concessions on oil exports toPakistan.

Pakistan seeking IMF for financial assistance

y As a final option, Pakistan may be forced to apply to the IMF for assistance. Such a step wouldcertainly come with unpalatable strings attached that would hit the poor and provoke furtherunrest.

Pakistan under Musharrafs regime

y Just two years ago, economic commentators were describing Pakistan as a success story underformer military strongman President Pervez Musharraf and speculated that it would be thenext Asian Tiger. But the situation dramatically changed afterMusharraf was compelled tocall elections. His party suffered a humiliating defeat in February and he was finally forced tostep down as president in August.The ruling coalition led by President Zardaris PakistanPeoples Party (PPP) is already confronting mass resentment over the continuing war in theborder areas and a worsening social turmoil.

Rupees devaluation

yThe political crisis has contributed to a huge exodus of foreign capital and exacerbated thecountrys economic problems. As much as $1.2 billion a month was fleeing Pakistan in thenorthern summer.The rupee has slumped by more than 30 percent against the US dollar sincethe beginning of the year and share prices have crashed by 40 percent since their all-time highin April

Impact of global crisis on Pakistans financial sector

yThe global crisis has really added fuel to the fire. The drying up of credit internationally hashit Pakistan hard with the banking system suffering a severe liquidity problem this month.Overnight call rates rose to high levels ranging from 32 to 40 percent, despite the injection of54 billion rupees into the financial system by the central bank.


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Financial standing of the country

yPakistan is heavily indebted with foreign debts standing at $44.5 billion.The PakistaniDawnreported this month that the countrys domestic and foreign borrowing rose by 100 percent inthe past three months, reaching $2.21 billioncompared to $1 billion for the same period lastyear i.e 2007. Loan repayments are contributing to the governments large budget deficit.

Economic growth situation in country

y Economic growth is slowing sharply.The IMFs World Economic Outlook report released lastweek predicted that Pakistans GDP would decline to 3.5 percent for the next fiscal yearbeginning in July 2009down from 5.8 percent for2007-2008 and an estimated 5.4 percentfor2008-2009.

Inflation rate in country

yOrdinary working people are already being affected by inflation that is running at nearly 25percent on average.The inflation figure measured by the sensitive price index (SPI) reached30 percent in the week ending October 9.


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Macro Economic factors affecting the Banking Sector

Economic environmentPakistan is the third fastest growing major economy after China and India in Asia. With theworld's sixth-largest population, Pakistan is developing a highly-skilled labour force, with

business friendly policies. Economic growth (6-7%) and foreign investment are increasing day-by-day. At purchasing power parity, Pakistan's GDP in 2007 was $475.5 billion.The WorldBank classifies Pakistan as a low-income economy.

The country has suffered from decades of internal political disputes, low levels of foreigninvestment, and a costly, ongoing confrontation with neighboring India. However, IMF-approvedgovernment policies, bolstered by generous foreign assistance and renewed access to globalmarkets since 2001, have generated solid macroeconomic recovery over the last five years.

The government has made substantial macroeconomic reforms since 2000, most notablyprivatizing the banking sector.Poverty levels have decreased by 10% since 2001, and Islamabad

has steadily raised development spending in recent years, including a 52% real increase in the budget allocation for development in FY07, a necessary step toward reversing the broadunderdevelopment of its social sector. The fiscal deficit - the result of chronically low taxcollection and increased spending, including reconstruction costs from the October 2005earthquake - appears manageable for now. GDP growth, spurred by gains in the industrial andservice sectors, remained in the 6-8% range in 2004-06.

Inflation remains the biggest threat to the economy, jumping to more than 9% in 2005 beforeeasing to 7.9% in 2006.The central bank is pursuing tighter monetary policy - raising interestrates in 2006 - while trying to preserve growth. Foreign exchange reserves are bolstered bysteady worker remittances, but a growing current account deficit - driven by a widening trade

gap as import growth outstrips export expansion - could draw down reserves and dampen GDPgrowth in the medium term.

Inflation Rate6.7% (2007 est.)

Unemployment Rate

7.5% (2007 est.)

Major Industries

Textile and apparel, food processing, pharmaceuticals, construction materials, paper products,

fertilizer, shrimp

Major Exports

Textiles (garments, bed linen, cotton cloth & yarn), rice, leather goods, sports goods, chemicals,manufactures, carpet & rugs


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and acquisitions (M&A) are helping consolidate and, as such, develop stronger and robustbanking sector.

The Privatization Commission Ordinance laid down the legal framework for privatization andprovided for the establishment ofPrivatization Commission, which has facilitated banking sector

privatization. Weaker banks were merged with relatively bigger banks involving re-grouping of11 banks into five large banks.Of these, four banks were subsequently privatized and strategicshareholding of two large banks is now with foreign.

Moreover a special law, the Financial Institutions (Recovery of Finances)Ordinance, 2001 wasenacted with a view to facilitate speedy recovery of loans. SBP also introduced a special schemeto speed up the recovery of NPLs. Under this scheme, borrowers were allowed to settle theirobligations on the basis of Forced Sale Value vis--vis outstanding amount, whichever is lower.Borrowers were required to deposit 10% down payment at the time of signing of settlementagreement and repay remaining amount in 12 quarterly installments.The scheme encouraged alot of defaulters to come forward and settle their long outstanding liabilities.

Political Environment

Macroeconomic and political pressures have caused the KSE 100 Index to correct by 32%.Theconsumer segment of banks also remains relatively untapped and represents another avenuewhich banks will likely pursue once political and economic stability emerges. With the politicalsituation hopefully settling down over the next few months, although that may look very difficultat this stage, but there is underlying potential in the country, there are lots of possibilities forInvestment; and returns for the banking sector should be quite good and wholesome.

At this moment, a fair amount of political and economic uncertainty will continue to weigh onthe Index and a positive trigger is needed to come through in the market before we see investorconfidence begin to recover. So clearly while banking stocks are undervalued they do represent avery strong long term investment opportunity at this point.

Socio cultural Environment

Socio cultural changes occur gradually in the society and it is not easy to predict the timing ofthese changes.The strong determinants of these changes are:

y Changes in life stylesy Pace of urbanization and its impact on societal valuesy Spread of literacyy Age distributiony Health and life expectancyy Ethical standards *

* (Adaptedfrom Srinivasan R, Strategic Management, ch.4,pg.53)


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OVERALL INDUSTRY ANALYSISThe banking system ofPakistan has shown tremendous growth and progress in past years.Oneof the driving forces behind the growth of this sector was the competition between the presentmarket players.On one side the banks were looking for cost efficiencies while on the other thefocus was on exploring more profits and new avenues of investments. With fierce competition

and banks exposure to new areas, the financial environment is getting more complex and theneed for managing various types of risks has increased.Financial Sector Development and Economic development are inter-related. No economy cangrow and improve the living standards of its population in the absence of a well functioning andefficient financial sector. Banks in Pakistan account for 95 percent of the financial sector andhence good health of banks is directly related to economic growth and development ofPakistan

Pakistans Banking Sector is resilient: Dr Akhtar

The Governor, State Bank ofPakistan, Dr Shamshad Akhtar has said that Pakistans bankingsector is quite resilient and has been and will be able to withstand different types of marketshocks and adverse macro economic conditions. This capability has been achieved through

continuous financial reform process distinctively pursued during the past few years. Thereshould not be any cause for concern about the stability of the banking system in the coming days.She pointed out that the banking system shows strong performance and holds a promisingoutlook, the investors maintained their confidence in the banking system and injected additionalcapital of around $500 million since 2006 that coupled with retained earnings improved thecapital base of the banks. The banking sector has strong capital adequacy well above theminimum requirement.The capital adequacy ratio of the system is 12.1% as ofJune 08 that iswell above the international benchmark. The nonperforming loans ratio and the ratio ofnonperforming loans to capital are also quite low and within acceptable ranges.The infection

ratio (net) in June 2008 has improved to 1.1% from 1.6 % in Dec2006, signifying that the banksset aside more reserves out of their earnings to cover the increase in non performing loans.

Accordingly, the NPL coverage and capital impairment ratios have also improved.

Pakistani banks largely focus on conventional lending and are not exposed to sub prime creditinstruments in the international market.The lending and investments of the banks are subject tothe stringent prudential regulations of SBP that prohibit the banks from clean lending andinvestment in low quality assets. Further, the banks are required to recognize the loan losses andprovide for these losses in line with the established best practices. State Bank ofPakistan throughits onsite inspection and offsite supervision wings keeps a close watch on the state of each bankas well as the banking system in entirety for any risk to the stability of the banking system.In 2007, SBP made loan provisioning requirements more stringent in order to create adequatecushions to withstand any potential credit adversity. Stress testing analysis of the system

suggests that the system is capable to withstand variety of plausible shocks in major risk factorswithout losing its solvency.

Pakistans banking system has been showing steady growth, satisfactory operating performance,strong resilience towards major risk factors, and efficiency; reflecting upon the strongfundamentals that the system has developed during financial sectors reform process. Even in theface of adverse factors arising out of macro environmental factors, the performance of the


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banking system on key financial soundness indicators continues to be reassuring. SBP Governorhas urged the banks to launch aggressive deposit mobilization efforts.

Privatization of Banking Sector

The privatization commission has been very active from last few years and various banks havebeen privatized which has lead to the growth and efficiency of the banking sector in the country.UBL was privatized in October 2002 followed by Habib Bank Limited (HBL) which wasprivatized in 2004 and then Allie Bank Limited (ABL) in 2005; where as MCB Bank Limitedwas privatized way earlier in 90s. After all the positive changes and reforms following is thepresent structure of banking industry ofPakistan.

Mergers and AcquisitionsFrom the last year or two the banking sector has witnessed various mergers and acquisitions ofbanks. For instance, Union Bank was taken over by Standard Chartered Bank in 2006 followedby takeover ofPrime Bank by ABN- Amro Bank and now by RBS. Although these mergers andacquisitions are a result of the regulations of SBP but these have really changed the structure ofthe banking industry. All the small players are weeded out of the market and few remaining will be weeded out soon, because according to SBP all the banks have had to have minimum 200branches by the end of2008

Overview in the Light of the Economic Crisis

As the international financial crisis aggravates, the World Bank has predicted a significantslowdown in Pakistani growth prospects for2009-10.The global financial crisis is hitting SouthAsia at a time when it is already reeling from adverse effects of a severe terms-of-trade shock.Pakistans economy is already facing difficulties and the global crisis will aggravate it . Indiasprospects will be hurt by a reduction in capital flows and possible slowdown in the growth of

exports.The report titled, Global Financial Crisis: Implications for South Asia, said the onsetof the global financial crisis suggested a significant slowdown in South Asias growth prospectsfor2009-10, but Pakistan was much more fragile and faced the most vulnerability in the region.

High fiscal and current account deficits, rapid inflation, low reserves, a weak currency and adeclining economy have put Pakistan in a very difficult situation.The countrys ability to borrowexternally is already heavily constrained and bond spreads are very high.The global financialcrisis means that non-official foreign capital flows will be even more expensive than now .Thecontagion effects on domestic financial sector could be substantial, but stress tests suggest thatthe banking sector as a whole is likely to withstand the shocks. This is mainly due to theimproved health of the financial sector based on past reforms.

According to the report, Pakistan and India actually gained from the increase in globalcommodity demands being significant rice exporters, while other South Asian countries suffereda huge loss of income from a severe terms-of-trade shock because of a surge in globalcommodity prices.Pakistan suffered the most rapid deterioration in the current account balance,which turned from a surplus of around four per cent of the GDP in 2003 to a deficit of over eightper cent in 2008.


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Role ofOil SubsidiesFuel prices in Pakistan are heavily subsidized.Oil is bought at international market prices andsold within the country at a lower fixed price.The intention is to shield the domestic prices fromthe volatility of international oil market.

First, fuel subsidies distort the relative prices of goods and services and prices no longer servethe purpose of efficient allocation of resources.

Second, the efficacy of fuel subsidies in shielding the economy from international supply shocksis uncertain particularly if the resultant budget deficit is monetised. Further, subsidies seem to bebased on political expediency rather than economic considerations.

Finally, fuel subsidies prevent development of alternate and more efficient modes oftransportation and lighting.

First, let us consider the proposed benefits of fuel subsidies.The foremost argument made is that

subsidies provide relief to that ever-elusive common man. A fuel subsidy has two differentbenefits.There is a direct benefit since the cost of petrol, transportation, lighting and energy arekept low.Then there is an indirect effect which prevents an associated rise in prices of all othergoods due to a rise in transportation costs, power cost and input prices. At least for the directeffect, it has been shown that in many countries the benefit of the subsidy is highest for high-income groups. Incidentally, Pakistan is an outlier in this research where the share of subsidy ishighest for the lowest income groups.

The other perceived benefit of fuel subsidy is price stability.The fluctuations in international oilmarkets are supposed to be dampened by the fuel subsidy. A casual look at the data suggests thatthe policy has been successful, for example from January 1998 oil prices have increased bynearly 500 per cent while prices in Pakistan only rose by 70 per cent .On the other hand, acorrelation of 0.96 suggests that domestic prices and international oil prices move in the samedirection. Clearly, fuel subsidies have been able to absorb part of the oil shock but at what cost?

Buffering Ability of the Banking SectorPakistan appears to be on the verge of securing the emergency funding it needs to avoid default, but its banking system is suffering by association despite being in relatively good financialhealth. All four of its rated banks have already had their long-term local currency ratingsdowngraded by Moody's.

It has been reported that Pakistan needs more than $4 billion for the financial year to June 2009

to meet debt payments and other liabilities. Its foreign currency reserves stand at $4 billion andare likely to run out by the end of this month.

However, the banking system is relatively strong, with a capital adequacy ratio of 12.1% andnon-performing loan ratio of 1.1% as of June 2008. "Pakistan's banking system has over theyears nurtured itself very well," says Dr Shamshad Akhtar, governor of the State Bank ofPakistan. "As such, it is able to withstand some of the shocks that have emerged in the last few


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months, but it is also positioned quite well to withstand a few additional shocks as long as theyremain contained and we take corrective actions as we go forward."

She says that Pakistan's problems are not directly related to the global financial crisis. Thecountry's current account deficit has spiralled out of control as the government continued its

policy of subsidizing oil prices. Its oil bill of almost $12 billion is equivalent to 80% of itscurrent account deficit.

Akhtar says the largest negative impacts on the country's banking system have been its highdirect and indirect exposure to falling equity markets, its heavy exposure to the textiles industry,and some banks' inappropriate risk management procedures in consumer lending.

Upsurge ofE-Banking

Electronic banking is getting popular in the country as the number and value of e-bankingtransactions showed a significant growth in fiscal year2007-08.

According to a report titled Retail Payment Systems ofPakistan (Paper-based and e-banking) prepared by the State Bank ofPakistan, a total of 124.6 million e-banking transactions worthRs13.9 trillion were recorded during the last fiscal year, showing a growth of25.4 per cent innumber and 32.3 per cent in value when compared with 2006-07.

During FY08, the volume and value of transactions through e-banking channels (Point-of-Sale(POS), Internet, call centre/IVR and mobile) reached 20 million and Rs120.1 billion, depictingan increase of 15.6 per cent in volume and 31.9 per cent in value as compared to a rise of 46 percent and 63.8 per cent respectively in the previous fiscal year.

According to the report, the quantity of active (in-use) debit/credit cards during FY08 reached6.7 million, a growth of 15.8 per cent compared to an increase of 53.7 per cent in the previousfiscal year.

Separately, the volume of credit cards decreased by 8.9 per cent as compared to a 74 per centincrease in the previous year, reaching 1.5 million. In contrast, debit cards registered a growth of24.7 per cent as compared to a rise of 45.3 per cent last year and stood at five million.

Corruption

A World Bank (WB) latest report enlists corruption as one of the core reasons that hinders thedevelopment drive in Pakistan (Lack of transparency and corruption, delays in procurement) ,which is also suffering from dearth of infrastructure in the water, irrigation, power and transportsectors. In the Executive Summary in the assessment of the Pakistan Infrastructure

Implementation Capacity (PIICA) which was carried out at the request of the GoP, jointly byWorld Bank and Planning Commission ofPakistan and report released on 8th Feb.2008, it has been confirmed that about 15 % ofPakistan Development Budget of 2007-8. is the cost ofcorruption in procurement alone. This amounts to over Rs. 150 billions.Political will, judicial independence and effective non-discriminatory accountability mechanismfor those civil/defense departments not complying with the procedures including privatization,and Public Procurement Rules 2004, as well as the public corporations and authorities, are


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urgently needed to successfully combat corruption which is defined as Misuse of Authority forpersonal gain.

List of Banks in Pakistan

Central bank

y State Bank ofPakistanNationalized scheduled banks

y First Women Bank Limitedy National Bank ofPakistan

Specialized banks

y Industrial Development Banky Punjab Provincial Cooperative Banky SME Banky Zarai Taraqiati Bank

Private scheduled banks

y Allied Bank ofPakistan, Karachiy Arif Habib Bank Limited, Karachi - (Formerly ArifHabib Rupali Bank)y Askari Bank, Rawalpindiy Atlas Bank, Karachiy Bank AL Habib, Karachiy Bank Alfalah, Karachiy BankIslami Pakistan Limited, Karachiy Crescent Commercial Bank, Karachi. 'Saudi based Samba financial group Acquired

Crescent Commercial Bank and now it is renamed as Samba Bank Ltd'y Faysal Bank, Karachi www.faysalbank.comy Habib Bank, Karachiy Habib Metropolitan Bank, Karachiy JS Banky KASB Bank, Karachiy MCB Bank Limited (formerly Muslim Commercial Bank), Islamabady Mybank Limited, Karachiy NIB Bank, Karachiy PICIC Commercial Bank, Karachi NIB Bank Limitedhas acquiredPICICGroup

including Picic CommercialBank Ltd.'y Saudi Pak Non-Commercial Bank, Karachiy Soneri Bank, Karachi


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y Union Bank, Karachi - StandardCharteredBank has acquiredUnion Banky United Bank, Karachiy BankOfPunjab, Lahorey Citi bank ,Islamabady Standard chartered Bank Ltd,Karachiy

Royal Bank of Scotland, Karachiy HSBC Ltd,Islamabady Dubai Islamic Bank Ltd,Rawalpindiy Meezan Bank Ltd,Karachi

Development financial institutions

y Pakistan Industrial Credit and Investment Corp Limited, Karachi 'NIB Bank LimitedAcquired PICIC Group, Including Picic Commercial Bank Limited'

y Pak Kuwait Investment Company Limited, Karachiy Pak Libya Holding Company Limited, Karachiy

Pak-Oman Investment Company Limited, Karachiy Saudi Pak Industrial and Agricultural Investment Company (Pvt) Limited, Islamabady House Building Finance Corporation, Karachiy Investment Corporation ofPakistan, Karachi

Investment banks

y Al-Towfeek Investment Bank Limitedy Asset Investment Bank Limitedy Atlas Investment Bank Limitedy Crescent Investment Bank Limitedy

Escorts Investment Bank Limitedy First International Investment Bank Limitedy Fidelity Investment Bank Limitedy Franklin Investment Bank Limitedy Islamic Investment Bank Limitedy Jahangir Siddiqui Investment Bank Limitedy Orix Investment Bank (Pakistan) Limitedy Prudential Investment Bank Limitedy Trust Investment Bank Limited


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ASKARI BANK LIMITED

COMPANY PROFILE Incorporated in Pakistan on October 09, 1991, as a Public Limited Company. Commenced operations on April 01, 1992. Listed on Karachi, Lahore & Islamabad Stock Exchange. Shared network of over 1,400 on-line ATMs covering all major cities in Pakistan.ENTITY RATINGS

- Long term: AA- Short Term: A1+

PATTERN OF SHAREHOLDINGParticulars Shares Held %_____Army Welfare Trust 94,574,143 47.18NIT 15,192,691 7.58ICP 8,535 0.00Directors & Chief Executive 6,384 0.00M Afzal Munif 627,599 0.31Executives of the Bank 22,239 0.01DFIs, NBFC etc 35,722,397 17.83Individuals 46,666,485 23.29Others 7,612,766 3.80 __

200,433,239 100.00

BUSINESS & OPERATIONS

- Corporate Banking - Investment Banking- Consumer Banking - Credit Cards- Treasury - Offshore Banking- Agriculture Financing - Islamic Banking


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CORPORATE SECTOR RETAIL BANKING

CASH, STPLACEMENTS & GOVT BO NDS ADVANCES BY SECTOR

BALANCE SHEET GROWTH PROFIT


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NPLs

ASKARI ISLAMIC BANKING

launched in 2006 6 branches in major cities Halal banking solutions areas include:

Islamic corporate banking Islamic investment banking Islamic trade finance Islamic general banking Islamic consumer banking


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SWOT ANALYSIS

Strengthsy Increasing Branch Networky Experienced & Energetic Staffy 9-5 bankingy E-Banking

Weaknessesy Conservative lending approachy Low Capital as compared to large banksy Low deposit rates

Opportunitiesy Increase networky Increase focus on consumer lendingy Position itself as highly customer-oriented Bank and then prove ity Aggressively Market itself and build brand equity

Threatsy Increase in SBP Discount Ratesy Increase In Kibor ratesy Devaluation of Currencyy Low Investments


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FINANCIALS

Income Statement (PKR million) 2003 2004 2005 2006 2007

Total Income 5,028 6,121 10,333 14,736 19,709

Interest Income 4,074 4,487 8,781 12,597 15,143

Interest Expenditure 1,380 1,117 4,278 6,977 8,686

Fee, commission and Exchange Income 638 708 839 1,014 1,073

Other Income 317 925 713 1,125 3,492

Spread 2,694 3,370 4,503 5,620 6,458

Operating Expenses 1,438 1,845 2,594 3,283 4,802

Operating Profit 2,210 3,158 3,461 4,475 6,222

Provision-Non-Performing assets 308 315 602 1,129 3,922

Profit before taxation 1,902 2,843 2,859 3,347 2,300

Taxation 799 920 837 1,097 (381)

Profit after Taxation 1,103 1,923 2,022 2,250 2,681

Cash Flow (PKR million) 2003 2004 2005 2006 2007

Profit before taxation 1,901 2,842 2,859 3,346 2,299

Less: Dividend Income (37) (26) (51) (109) (137)

1,864 2,816 2,808 3,237 2,162

Adjustments 477 512 871 1,461 4,315

2,341 3,328 3,679 4,698 6,477

Change in Operating Assets (17,167) (23,393) (23,990) (13,944) (12,557)

Change in Operating Liabilities 14,696 20,088 33,358 18,524 15,192

Cash Flow Before Tax (130) 23 13,047 9,278 9,112

Income tax Paid (546) (476) (776) (923) (743)

Cash Flow from Operating Activities (676) (453) 12,271 8,355 8,369

Cash Flow used in Investing Activities 3,810 3,035 (8,319) (3,714) (13,526)

Cash Flow used in Financing Activities (252) 749 1,736 (225) (202)

(Decrease) / Increase in cash 2,882 3,331 5,688 4,416 (5,359)

Assumptions 5-yearAverage

2008 2009 2010 2011 2012

GDP Growth 3.5% 5.0% 5.0% 5.0% 5.0%

Growth in Deposits 24.3% 10% 10.0% 10.0% 10.0% 10.0%

Advances to Deposit Ratio 75.5% 75.0% 75.0% 75.0% 75.0% 75.0%

Deposits/Liabilities 84.7% 85.0% 85.0% 85.0% 85.0% 85.0%

Average Cost of Deposit 3.5% 5.50% 5.50% 5.00% 5.00% 5.00%

Average Spread 5.0% 6.5% 6.5% 6.5% 6.5% 6.5%

Average Lending Rate 8.5% 12.0% 12.0% 11.5% 11.5% 11.5%

Average Return on Investments 5.2% 5.2% 5.2% 5.2% 5.2% 5.2%

Advances/Assets 59.9% 59.9% 59.9% 59.9% 59.9% 59.9%

Investment/Assets 18.2% 18.2% 18.2% 18.2% 18.2% 18.2%SBP Deposits/Assets 17.4% 17.4% 17.4% 17.4% 17.4% 17.4%

Other Assets/Assets 4.6% 4.6% 4.6% 4.6% 4.6% 4.6%

Operating Expenses as % of Income 25.5% 25.5% 25.5% 25.5% 25.5% 25.5%

Provision for Non-performing loans 1.5% 3.0% 2.5% 1.5% 1.5% 1.5%


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Projected Balance Sheet (PKR million) 2008 2009 2010 2011 2012Customer Deposits 157,341 173,075 190,382 209,420 230,363

Total Liabilities 185,107 203,617 223,979 246,377 271,015

Advances 118,006 129,806 142,787 157,065 172,772

Investments 36,719 40,391 44,430 48,873 53,760

SBP Deposits 35,072 38,579 42,437 46,680 51,348Other Assets 12,263 13,489 14,838 16,322 17,954

Total Assets 202,059 222,265 244,492 268,941 295,835

Projected Income Statement (PKR million) 2008 2009 2010 2011 2012Total Income 18,843 21,662 22,986 25,285 27,813

Interest Income 15,849 18,369 19,364 21,301 23,431

Interest Expenditure 10,181 11,199 11,199 12,319 13,551

Fee, commission and Exchange Income 1,180 1,298 1,428 1,571 1,728

Other Income 1,813 1,994 2,194 2,413 2,654

Spread 5,668 7,170 8,165 8,982 9,880

Operating Expenses 4,704 5,408 5,738 6,312 6,943Operating Profit 3,958 5,055 6,049 6,654 7,319

Provision-Non-Performing assets 3,023 2,950 1,947 2,142 2,356

Profit before taxation 934 2,105 4,102 4,512 4,963

Taxation 308 695 1,354 1,489 1,638

Profit after Taxation 626 1,410 2,748 3,023 3,325

No of shares 406 406 406 406 406EPS 1.54 3.47 6.77 7.45 8.19

Weighted Average Cost of Capital

Cost of Debt 5.20% (based on cost of deposits for2007)

Return on Equity (through Dividend Growth Model)

Do Rs. 1.50 (Cash Dividend for2007) Growth Rate (G) 10% (Assumed in projections) Current Share Price (Po) Rs.28.0 Dividend Yield 5.4% Required Rate of Return (R) (Do/ Po) + G = 5.4% +10.0%=15.4%Return on Equity (through CAPM)

Risk Free Rate (Rf) 15.5% (3 month KIBOR) Market Return (ERm) 22.0% (Average KSE for3 years) BETAACBL 1.2 (Assumed for Askari) Expected Return (ERACBL) RF+(ERM-RF)*BETAACBL= 15.5%+(22.0%-15.5%)*

1.2=23.3%

Average Cost ofEquity (RROE) (RDDM + RCAPM)/2 = (15.4%+23.3%)/2 = 19.3%


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Capital Structure

Total Debt PKR 169.09 million (Deposits as of2007) Total Equity No. of Shares * Current Market Value per Share

406 million * Rs.28.0 = PKR 11,368 million

Total Capitalization Debt PKR 169,906 million (93.7%)Equity PKR 11,368 million ( 6.3%)Total PKR 181,274 million

Weighted Average Cost of Capital

WACC =%Equity * RROE + %Debt*Cost of Debt*(1-Tax Rate)=6.3% * 19.3% + 93.7%* 5.2% * (1-33%)=4.5%

Dividend Policy

y Dividend has traditionally been paid as a combination of cash and bonus shares.y Cash Dividend has been an average 13.5% of Net Income.y Bonus issues have been an average of22.7% of Net Incomey Total Average Payout 36.2%Net Present Value & IRR

Projected Income Statement (PKR million) 2008 2009 2010 2011 2012

Profit after Taxation 626 1,410 2,748 3,023 3,325

No of shares 406 406 406 406 406

EPS 1.54 3.47 6.77 7.45 8.19

Payout 0.56 1.26 2.45 2.70 2.97

Share Price in 2012 (P/E = 5) 41.00

Cash Flows 0.56 1.26 2.45 2.70 43.97

NPV @ 19.3% is equal to PKR22.3 per share

IRRat the current market price of PKR 28.0 per share is 13.6%

Paybackthrough dividend does not take place in the 1st 5 years however given the projectedearnings form year 5 onwards it takes place in the 12

th or 13th year

Profitability Index = 22.3/28.0 = 0.79

WACC Sensitivity

1 2 3 4 5 6 7 8 9 10 11 1

Equity 6.3% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100

Debt 93.7% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0

WACC 4.5% 3.5% 5.1% 6.7% 8.2% 9.8% 11.4% 13.0% 14.6% 16.2% 17.7% 19.3%


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CONCLUSIONS & RECOMMENDATIONS

NPV : Rs. 22.3 per shareIt is below the market price of Rs. 28.0 per share

IRR: 13.6%Below the Required Rate of Return of 19.3% for Equity

PI: 0.79Below 1.0

Given the current market price of Rs.28.0 per share both NPV and IRR as well as PI indicatethat the share is not a good investment

CF Project on Askari Bank

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Transcript of CF Project on Askari Bank