Ratio Analysis of Bank Alfalah Limited

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SUBJECT: FINANCIAL ANALYSISTOPIC: RATIO ANALYSIS OF BANK ALFALAH LIMITEDPRESENTED TO:

MR.RANA ADEEL LUQMAN

PRESENTED BY:

MR. SOHAIB SULTAN (09)

MR. FARHAN ARSHAD (13)

MR. MUHAMMAD IKRAM (06)

MR. MOHSIN BILAL (40)

MR. SHAIRAZ ABBAS (27)

B.COM HONS MORNING

8TH SEMESTER

SESSION 2007-11

SUBMITTED DATE: Monday, June 14, 2011

THE ISLAMIA UNIVERSITY OF BHAWALPUR

BAHAWALNAGAR CAMPUS

DEPARTMENT OF COMMERCE


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Preface

Financial statements are the lens on a business. Financial statement analysis calibrates the lens to

bring the business into focus. Imperfections in the financial statements can dirty the lens and

distort the picture. Financial statement analysis deals with the imperfections in financial

statements to improve the focus.

Financial statements have many uses, but the predominant one is to provide information for

investing in businesses. Every day millions of shares and corporate bonds are traded in the

world's capital markets, and prices are set to value these securities. Investors want to know what

firms are worth so they can ascertain at what price to trade. They turn to financial statement

analysis to get an indication of the underlying value of firms. This book focuses on these

investors.

Underlying value is sometimes referred to as fundamental value, and the analysis of information

about fundamental value is referred to asfundamental analysis. This Report is about fundamental

analysis. Financial statement analysis is central to fundamental analysis. Indeed, in this report,

fundamental analysis is developed as a matter of appropriate financial statement analysis. As the

lens on a business, financial statements, focused with the techniques of financial statement

analysis, provide a way of interpreting the business that enables readers to understand the value it

generates for shareholders.


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ACKNOWLEDGEMENT

In the name of Allah, the most beneficent and

merciful who gave us strength and knowledge to

complete this report. This report is a part of our

courseFinancial Management. This has proved to

be a great experience. This report is a combine effort

ofMuhammad Ikram, Farhan Arshad,Mohammad

Mohsin Bilal, Sohaib Sultan Chisti, Shairaz Abbas.We

would like to express our gratitude to Mr. Rana

AdeelLuqman; who gave us this opportunity to fulfill

this report.We would also like to thank our

colleagues whoparticipated in a focus group session.

They gave us many helpful comments which helped

us a lot in preparing our report.


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Sr.no. Contents

Page

No.

1 Introduction of Bank Alfalah Limited 5

2 History of Bank Alfalah Limited 5

3 Objectives of Bank Alfalah Limited 5

4 Branches of Bank Alfalah Limited 5

5 Services of Bank 6

6 Summary of Directors Report 7

7 Two year Ratio Analysis of Bank Alfalah Limited 8

8 Income Statement 16

9 Balance Sheet 18

10 SWOT Analysis 19

11 Credit Rating of Bank Alfalah Limited 20

12 Recommendations 20


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INTRODUCTION OF BANK ALFALAH LIMITED:

Bank Alfalah Limited is a private bank in Pakistan owned by the Abu Dhabi Group .BankAlfalah was incorporated on June 21, 1992 as a public limited company under the CompaniesOrdinance 1984. Its banking operations commenced from November 1, 1992. The bank isengaged in commercial banking and related services as defined in the Banking companiesordinance, 1962.

History of bank:

Bank Alfalah Limited was launched on June 21, 1992 as a public limited company underthe Companies Ordinance 1984. The bank commenced its operations on November 1, 1992. Thebank introduced commercial banking and related services as defined in the Banking companiesordinance, 1962.

After a few years, the bank introduced its new identity of H.C.E.B after the privatizationin 1997. The management of the bank had implemented strategies and policies so the bank wouldbecome a major player in the market. With a partnership with the Abu Dhabi Group the positionof the bank became stronger which allowed the bank to invest more in revolutionary technologyto increase its range of products and services.

On the 16th of May, 2005 Bank Alfalah formally took over the Bangladesh operations ofShamil Bank of Bahrain for US $17.88 million and renamed it to Bank Alfalah. This was thefirst branch of the bank outside Pakistan.

OBJECTIVES OF BANK ALFALAH:

Objectives are the ends towards which activities are aimed. In fact, these are the results to beachieved. The BAL has the following main objectives;

To create maximum economic value for shareholders through a constant relationship. To promote industrial agricultural and socio economic processes through the active

participation of private and sound public sector in the country. Create a diversified and sound portfolio for utilization of idle funds and their

investment in the existing and new venture specially in the pioneering of hightech agro based, export oriented and engineering projects to ensure maximum returns.

BRANCHES OF BANK:

The bank is currently operating through more than 362 branches domestically and aninternational presence in Afghanistan, Bangladesh and Bahrain, with the registered office atB.A.Building, I.I.Chundrigar, Karachi. Some of the main branches are located in all of the majorcities including:


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Chakwal,Hyderabad,Lahore,Kasur,Islamabad,GawaderPeshawar,Quetta,D.I.khan,Rawalpindi,Sargodha,Shekhupura,Sukkur,Sialkot,MultanMurree,AttockDistrict,Gugranwala,Pirmahal,MirpurKhas, Bahawalnagar etc.

SERVICES OF BANK:

With the mission to provide all-encompassing banking services to the customers, BankAlfalah has a uniquely defined menu of financial products. Currently it is one of the mostcomprehensive portfolios of personalized financial solutions that are custom- tailored to servethe requirements not only of conventional customers but also fulfill the needs of the corporatesector:

Home Financing Rupee Car Financing Travelers Cheque Debit card Online Banking Credit Cards ATMs Islamic Banking Corporate and Structured Financing


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SAMMARY OF DIRECTORS REPORT (BANK ALFALAH)

According to directors view performance of bank is increasing. During 2010 the banks

profit before taxation stood at Rs.1368745 million compared to Rs.1016, 316 million for theprevious year. They continue to strengthen our presence in the market place and as of yearend2010, they have a network of 386 branches.

During 2010 they focused on streamlining operational platform for creating efficiencies whileproviding maximum level of internal and external services. They say that implementation of ITplays a major role in enhance performance


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TWO YEARS RATIOS ANALYSIS OF BANK ALFALAH

LIMITED

1. Would you want to make investment as an equity investor?

No. Ratios 2009 2010 Difference

1 Equity Capital Ratio .06 .056 -.004

2 Tier 1 Leverage Ratio .044 .042 -.002

3 Risk Based Capital ratio .057 .054 -.003

4 Net Interest Margin Ratio .11 .13 .02

5 Return on Average Equity .052 .049 -.003

6 Return on Average Assets .241 .243 .002

7 Return On Earning Assets .14 .129 -.011

8 NonInterest Income to Avg Assets .0122 .0115 .0007

9 Overhead Ratio .030 .032 .02

10 Average Collection Of Interest 358(days) 332(days) 26(days)

11 Efficiency Ratio .68 .69 .01

Comments on Ratios:

Equity Capital Ratio.

Equity Capital Ratio .06 .056 .004

This ratio has decrease due to increase in assets in 2010as compare to 2009,like cash at FederalReserve Bank by 15%and advances increase by10%.this shows that bank is growing by investingin securities and lending loans. It can secure bank from big loss due to portfolios of investments.

Tier 1 Leverage Ratio.

Tier 1 Leverage Ratio .044 .042 -.002

This ratio has decrease due to increase in assets in 2010as compare to 2009,like cash at FederalReserve Bank by 15%and advances increase by10%.Higher proportion of loan indicates thatcompany is utilizing more loan than equity. Per share profit/loss may be increase due to financial

leverage.

Risk Based Capital ratio.

Risk Based Capital ratio .057 .054 -.003

This ratio has decrease due to increase in assets in 2010 as compare to 2009, like cash at FederalReserve Bank by 15% and advances increase by 10%.This shows that bank is acquiring moresecured assets due to this bank has generated realized profit on revaluation of assets which hasincreased by 1% as compared to previous year.

Net Interest Margin Ratio.

Net Interest Margin Ratio .11 .13 .02


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The amount of interest earned as compare to previous year has increase by 21%. This indicatesthe bank is glooming and credit management working efficiently. The assets of bank are beingutilized to generate higher revenue and portion of non earning or low yielding assets is low .Bank increased the interest rate as compare to previous year.

Return on Average Equity.

Return on Average Equity .052 .049 -.003

This ratio shows the capitalization policy of bank. The current ratios show that capitalization hasincrease by 13% and return on equity decreased by 9% as compared to previous year. It indicatethat bank is engage in new projects which put impact on return on equity but in future bank mayearn from these projects.

Return on Average Assets.

Return on Average Assets .241 .243 .002

This ratio shows the relation between net operating income after taxes and total average assets,

this shows how assets ate utilizing by bank. This ratio shows return on average assets is a littlebit high as compare to previous year. So we will invest in this bank.

Return On Earning Assets.

Return On Earning Assets .14 .129 -.011

This indicates the relation between earning of bank to total assets. Higher the ratio more theefficiency of management the return on earning assets has decreased than previous year due tocapitalization of assets. The increase in profit is low as compare to increase in earning assets.

NonInterest Income to Avg Assets.

Return On Earning Assets .14 .129 -.011This ratio indicates the relation between non-interest earnings like consulting, advisory fees andbrokerage services etc. This ratio has decrease in 2010 than previous year due to decrease individends and in increase in average assets.

Overhead Ratio.

Overhead Ratio .030 .032 .02

Overhead ratio shows the relation between non-interest expenses to total average assets. There isincrease in non-interest expenses by 8.5% as compared to previous year and also increase inaverage total asset by 8%.it shows that bank in expanding its business and investing in other

companies, which has increase its overall cost. Investment in bank is beneficial.

Average Collection Of Interest.

Average Collection Of Interest 358(days) 332(days) 26(days)

Average collection days indicate the days in which bank collects interest. The collection daysdecrease in 2010 by 26 days. This ratio shows the efficiency of credit department. But on the


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other hand it shows overdue loans are increasing on which customer pay just amount of interestand get renewal of loan.

Efficiency Ratio.

Efficiency Ratio .68 .69 .01

This ratio show the relation between non-interest expenses and total income (interestincome+non-interest income).Lower the ratio higher the efficiency of management . Higher thetotal income and lower the non-interest expenses are the cause of low ratio. This ratio increasesin inflation. The non-interest expenses increase @14% and income increase by 4%.

Would we make investment in Bank Alfalah Limited.

We would like to invest in this bank because it has increased its secured assets bycapitalization of deposits and earnings of firm. Capitalization has put impact on return on equitybut it will be better in future. Profitability ratios show that the performance of management isimproving with the passage of time. Company has generated higher amount of interest and

dividend which shows that firm is being utilized its resources efficiently.

2. Would you like to extend short term loan to Bank Alfalah

Limited?


1 Loan as Percentage of Deposit .63 .60 -.032 Liquid Assets to Total Deposits 1.15 1.12 -..03










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Comments on Ratios:

Loan as Percentage of Deposit.

Loan as Percentage of Deposit .63 .60 -.03

This ratio shows the relation between loans and deposits. The loan increased @ 5% as compareto 2009 and deposits increased by 8%.It shows bank is making investment of deposits funds inmarketable securities than granting loan. So company has liquid position to pay the short termloan. That is why we will offer short term loan to bank.

Liquid Assets to Total Deposits.

Liquid Assets to Total Deposits 1.15 1.12 -..03

This ratio indicate liquid assets are sufficient to meet the current obligation. so short term loan tothis bank is not risky This ratio match the deposits with liquid assets, and this show thepercentage of liquid assets to total.



The amount of interest earned as compare to previous year has increase by 21%. This indicatesthe bank is glooming and credit management working efficiently. The assets of bank are beingutilized to generate higher revenue and portion of non earning or low yielding assets is low .Bank increased the interest rate as compare to previous year. So, lending short term loan to BankAlfalah Limited is less risky.


Return on Average Equity .052 .049 -.003This ratio shows the capitalization policy of bank. This ratio shows that capitalization hasincrease by 13% and return on equity decreased by 9% as compared to previous year. It indicatethat bank is engage in new projects which put impact on return on equity but in future bank mayearn from these projects.



This ratio shows the relation between net operating income after taxes and total average assets,this shows how assets are utilizing by bank efficiently .This ratio shows return on average assetsis a little bit high as compare to previous year. There is no any chance of loss. So, we can lend

short term loan to bank



This indicates the relation between earning of bank to total assets. Higher the ratio more theefficiency of management the return on earning assets has decreased than previous year due tocapitalization of assets. The increase in profit is low as compare to increase in earning assets.


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Bank is moving towards growth because bank is making investments in different projects. So,there are chances of bright future that is why we do not hesitate before lending to bank.


Return On Earning Assets .14 .129 -.011This ratio indicate the relation between non-interest earnings like consulting, advisory fees and brokerageservices etc. This ratio has decreased in 2010 than previous year due to decrease in dividends and inincrease in average assets. Bank is opening new branches in different cities. The assets of bank increasing.so there are very low chances of default of bank.

Overhead Ratio.


Overhead ratio shows the relation between non-interest expenses to total average assets. There isincrease in non-interest expenses by 8.5% as compared to previous year and also increase inaverage total asset by 8%.it shows that bank in expanding its business and investing in other

companies, which has increase its overall cost. Investment in bank is beneficial. Overheadexpenses are lower as compare to inflation rate.So extending short term loan to bank is lessrisky.



Average collection days indicate the days in which bank collects the amounts of interest. Thecollection days decrease in 2010 by 26 days. This ratio shows the efficiency of creditdepartment. But on the other hand it shows overdue loans are increasing on which customer payjust amount of interest and get renewal of loan.

Efficiency Ratio.


This ratio show the relation between non-interest expenses and total income (interestincome+non-interest income).Lower the ratio higher the efficiency of management . Higher thetotal income and lower the non-interest expenses are the cause of low ratio

Would we extend short term loan to Bank Alfalah Limited?

We would like to lend loan to bank because it has sufficient liquid assets. Profitability ratiosalso show good management of bank because it has generated higher revenues rather than

previous year. Bank is increasing its assets as compare to deposits which provoke us to extendloan to Bank Alfalah Limited.


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3. Would you like to extend long term loan to Bank Alfalah Limited?


1 Long Loss Reserve to Total Loan .019 .011 -.008

2 Coverage Ratio .14 .09 -.05

3 Overdue Loans to Total Loans .12 .15 .034 90-Days Overdue Loans to T.Loans .13 .16 .03









COMMENTS ON RATIOS:

Long Loss Reserve to Total Loan.

Long Loss Reserve to Total Loan .019 .011 -.008

This ratio has decrease in 2010 as compare to 2009.Firm long loss reserve has decreased by 40%and advances increase in 2010 by 5%.It indicates good management of the firm due to adoptinggood credit policies and collecting the loan on time. we will give long term loan to bank becauselending of bank Is secure .

Coverage Ratio.

Coverage Ratio .14 .09 -.05

In 2010 companys ratio has decrease due to issuing long term loan. Long loss reserve has

decreased by 40% as compared to previous year. This ratio is lower than industry average thisshows the in-efficiency of management to maintains the reserves for long term lending. In longterm advances reserve is necessary because there is risk in long term advances.

Overdue Loans to Total Loans.

Overdue Loans to Total Loans .12 .15 .03

This ratio shows the relationship between overdue loans to total loans and overdue loan hasincreased in 2010. Overdue loan increased @26% as compared to previous year. It shows thatthere are higher chances of bad debts .It shows that collection procedure of bank is inadequate.

90-Days Overdue Loans to T.Loans.

90-Days Overdue Loans to T. Loans .13 .16 .03


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This ratio shows the relationship of 90-days overdue loan to total loan. There is increase in it by22% as compared to previous year .It shows that there may be chances of bad debts. It shows theinadequate collection procedure of bank. So giving long term loan may be risky.



The amount of interest earned as compare to previous year has increase by 21%. This indicatesthe bank is glooming and credit management working efficiently. The assets of bank are beingutilized to generate higher revenue and portion of non earning or low yielding assets is low .Bank increased the interest rate as compare to previous year.


Return on Average Equity .052 .049 -.003

This ratio shows the capitalization policy of bank. This ratio shows that captilization has increaseby 13% and return on equity decreased by 9% as compared to previous year. It indicate that bank

is engage in new projects which put impact on return on equity but in future bank may earn fromthese projects.



This ratio shows the relation between net operating income after taxes and total average assets,this shows how assets are utilizing by bank efficiently .This ratio shows return on average assetsis a little bit high as compare to previous year. There is no chances of loss



This indicates the relation between earning of bank to total assets. Higher the ratio more theefficiency of management the return on earning assets has decreased than previous year due tocapitalization of assets. The increase in profit is low as compare to increase in earning assets.Bank is moving towards growth because bank is making investments in different projects. So,there are chances of bright future.



This ratio indicates the relation between non-interest earnings like consulting, advisory fees and

brokerage services etc. This ratio has decreased in 2010 than previous year due to decrease individends and in increase in average assets. Bank is opening new branches in different cities. Theassets of bank increasing .so there are very low chances of default of bank.

Overhead Ratio.



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Overhead ratio shows the relation between non-interest expenses to total average assets. There isincrease in non-interest expenses by 8.5% as compared to previous year and also increase inaverage total asset by 8%.it shows that bank in expanding its business and investing in othercompanies, which has increase its overall cost. Investment in bank is beneficial. Overhead expenses arelower as compare to inflation rate.



Average collection days indicate the days in which bank collects the amounts of interest. Thecollection days decrease in 2010 by 26 days. This ratio shows the efficiency of creditdepartment. But on the other hand it shows overdue loans are increasing on which customer payjust amount of interest and get renewal of loan.

Efficiency Ratio.


This ratio show the relation between non-interest expenses and total income (interestincome+non-interest income).Lower the ratio higher the efficiency of management . Higher thetotal income and lower the non-interest expenses are the cause of low ratio. This ratio increasesdue to increasing inflation. The non-interest expenses increase @14% and income increase by4%.

Would we extend long term loan to Bank Alfalah Limited?

We would like to extend long term loan because bank is utilizing its profit and deposits inexpansion of business like establishing new branches in different cities of the country. Thesenew branches will support bank to repay long term debt by generating profit. PACRA has given

it AA grade for granting long term loan.


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BANK ALFALAH LIMITED

INCOME STATEMENT

FOR THE YEAR ENDED DECEMBER 31, 2010.

2010 2009

(Rupees in 000)

Particulars Amount Amount

Mark up/return/interest earn 37530256 35561312

Markup/return/interest expenses 23855448 24654180

Net markup/interest income 13674808 10907132

Provisions against loans and advances 2243687 3694546Provisions for diminution in value of investments 1991192 317164

Bad debts written off directly 25504 59817

4260383 4071527

Net mark up/interest income after provision 9414425 6835605

Non markup/interest income

Fee, commission and brokerage income 1986470 1913004

Dividend income 204425 248217

Income from dealing in foreign currencies 1133544 1019732

Gain on sale of securities-net 77609 688924

Unrealized gain on revaluation of investments 3300 2849

Other income 1302813 1309527

Total non mark-up/interest income 4708161 5182253

14122586 12017858

Non mark-up/interest expenses

Administrative expenses 12578080 10923507

Provisions/(Reversal of provision) 6056 (1419)

Provisions against other assets 93040 -

Other charges 76665 79454

Total non mark-up/interest expenses 12753841 11001542

Total income before taxation 1368745 1016316


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Particulars 2010 2009

Profit before taxation: 1368745 1016316

Taxation:

Current 842232 1066301

Deferred (370883) (767346)

Prior years (71056) (179674)

400293 119281

Profit after taxation: 968452 897035

Inappropriate profit brought forward 2690728 3447767

Transferred from surplus on revaluation of fixed assets 29695 24696

Profit available for appropriation 3688875 4369198

Profit after taxation 968452 897035


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BALANCE SHEET

ALFALAH BANK LTD

FOR THE YEAR ENDED ON DECEMBER 31,2010.

2010 2009

Particulars Amount(000) Amount(000)

Cash and balances with treasury banks 41197841 35056012

Balances with other banks 16179255 22722639

Lendings to financial institutions 6497556 14947435

Investment 113425861 99159957

Advances-net 207152546 188042438

Fixed assets 14204555 14492194

Deferred tax assets - -

Other assets 12826225 14649380

Total assets 411483839 38907005

Liabilities

Bills payable 4521533 3766144

Borrowings 13700124 20653921

Deposits and other accounts 354015311 324759752

Sub-ordinated loans 7567192 757018

Liabilities against assets subject to finance lease - -

Deferred tax liabilities 115919 17985

Other liabilities 9258216 1000678

Total Liabilities 389178295 366936635

Net Assets 22305544 22133420

Presented by:

Share capital 13491563 13491563

Reserves 3819133 3587969

Unappropriated profit 2415860 2690728

Totals 19726556 19770260

Surplus on revaluation of assets-net of tax 2578988 2363160

22305544 22133420


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SWOT ANALYSIS OF BANK ALFALAH CO.LTD

What is SWOT analysis?

SWOT stands for strengths, weaknesses, opportunities and threats. If change in external market

is favorable for us that is opportunity for us, if external change is not favorable for organizationthat is threat for us. If our firm has competencies to prevail the change in external market that is

strength and if our firm has not competencies to prevail the change in market that is weakness.

This SWOT analysis of Bank Alfalah Limited takes into consideration the external as well as

the internal environmental structure of the bank.

Strength:

Bank Alfalah is considered to be a very successful bank in the financial circles. A bank is

place where the customers can safely keep their money as long as they want. Bank is financiallystrong and has a huge deposit reserve. Bank Alfalah has a wide network of branches at the ideallocations, catering the financial needs of its clients. Foreign Trade is the focus of bank. It hasbecome an ideal bank for the importers and exporters. It has Highly Professional and trainedemployees. The bank also has Crucial Location Of Branches.

Weaknesses:

Bank Alfalah also has some weaknesses. Their number is much less than the strengths ofthe bank. There is Lack of advertisement through electronic media. There is also Lack ofinnovative marketing. Skill Set of Employees is not up to mark as there is no job rotation. BankAlfalah Limited does not possess foreign network. Most of the employees are overloaded with

work. There is uneven distribution of work and promotions are not very timely. It has only oneoversea branch although it does a lot of foreign trade business.

Opportunities.

Bank Alfalah has grown up its business with a very high pace and it has got tremendouspopularity, even with in a very short span of time. The Bank has extended its Internationalnetwork. The Bank is going to capitalize its capital on information technology. It is alsointroducing innovative products. Bank is also going to establish new branches in different cities.

Threats.

If there is change in external environment and organization do not have strengths toprevail the change. That is threat for that organization.

There are following threats for Bank Alfalah Limited.

Political instability is main threat for whole the industries in Pakistan. Competition inbanking sector is also a threat for Bank Alfalah Limeted. The change in government


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policies is also a threat for Bank Alfalah Limited . Islamic interruption is also a threat forcommercial banking.

CRADIT RATING OF BANK ALFALAH LIMITED

PACRA has rated the bank AA (double A), Entity Rating for long term and A1+ (A oneplus) for the short term. These ratings denote a very low expectation of credit risk, strongcapacity for timely payment of financial commitments in the long term and by highest capacityfor timely repayment in the short term, respectively. The ratings of first and second and thirdunsecured listed and subordinated TFC issues of PKR 650 million, PKR 1,250 million andRs.1,325 million have been maintained at AA- (Double A minus).

Recommendations

The financial position, liquidity and profitability of Bank Alfalah Limited are satisfactory. Itneeds to be more improved. It should expand its business online in multi countries. It shouldtake the maximum debt so that financial leverage could be possible and resulting increase returnon equity.

It should assure the existing equity investor if it needs further capital in future then it will notdilute the ownership of existing share holders. Finally, it has to maintain strong relation with thecustomers and other stakeholders.


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Ratio Analysis of Bank Alfalah Limited

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