Trends in Pakistani Banking Sector
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Transcript of Trends in Pakistani Banking Sector
Security Analysis (Fall 2009) Asif Ali Qureshi, CFA1
Trends in Pakistani Banking Sector
Security Analysis (Fall 2009) Asif Ali Qureshi, CFA2
Sector transformation lower systemic risk
In the past 8 years, Pakistan’s banking sector has undergone
transformation from a loss generating, state dominated, under-
capitalized, poor asset quality and inefficient sector to a predominated
privately owned, highly profitable, fast growing, leaner, well capitalized
and cleaner balance sheet holding sector.
However, the sector is NOT insulated from weakening in the real
economy.
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Aggregate Post-tax Profits
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
PKR Billion
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Return on Equity (ROE)
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
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Return on Assets (ROA)
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
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0.0%
4.0%
8.0%
12.0%
16.0%
20.0%
24.0%
28.0%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Banking Deposit Growth
CAGR: 12.6% pa
Security Analysis (Fall 2009) Asif Ali Qureshi, CFA7
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Advances (Loans) Growth
CAGR: 15.3% pa
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Higher interest rates higher spreads
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Lending-Deposit Rate Spread T-bill Yield
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Net NPLs as % of Net Loans
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
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Analyzing a Bank – Concepts & Application
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Quantitative Analysis
FINANCIAL SOUNDNESS
Profitability
Solvency
GROWTH and FUNDING MIX
Deposits
Borrowings
Loans
Investments
RISK ASSESSMENT
Credit Risk
Market Risk
Liquidity Risk
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Risk Assessment
CREDIT RISK
Concentration in fewer sectors.
How much of banks’ lending is to pro-cyclical sectors.
LIQUIDITY RISK
GAP Analysis: Difference between a bank’s liabilities and assets as both
mature over time.
MARKET RISK
Exposure to equities, derivatives and bonds.
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Non-Quantitative Factors
Ownership
Market Positioning & Strategy
Product Mix & Delivery Channels
Human Resource Quality
Internal Control Systems
IT Platform (Core Banking Solution, ATM Network, On-line networks,
Internet banking, etc. )
Investor Relations
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Profit & Loss Statement
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Balance Sheet
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Return on Assets (ROA)
-1.4%
0.3%0.1%
1.8%2.0%
1.4%1.2%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
2002
2003
2004
2005
2006
2007
2008
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Return on Equity (ROE)
-10.3%
6.1%
26.0%28.6%
21.7%19.7%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
2002
2003
2004
2005
2006
2007
2008
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Revenue Analysis
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Net Interest Margin (NIM)
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Non-Interest Income
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Balance Sheet Growth - Liabilities
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Balance Sheet Growth - Assets
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Loan Book
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Efficiency Ratio
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Building a financial model
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Key Assumptions – Macro/Sector
Translate economic/sector analysis in forecasts for:
M2 growth
Interest rates
Deposit growth
Advances growth
Sources of economic forecasts
Multilaterals: IMF/WB/ADB
State Bank of Pakistan
Consensus forecasts maintained by data services such as Reuters,
Bloomberg, etc.
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Key Assumptions – Bank Specific
Balance Sheet – Develop forecasts for:
Deposit Growth
Deposit Mix
Borrowing
Advances Growth
Non-Performing Loans (NPLs)
Investment Portfolio Mix
Cash/FI lending
Net Interest Margin (NIM) – Forecast based on:
Interest Yield = f (interest rates, portfolio mix)
Cost of Funds = f (interest rates, deposit/borrowing mix)
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Key Assumptions – Bank Specific
Non-Interest Income
Fee income = f (trade, guarantees, advisory, etc)
FX income = f (exchange rate, trade, remittances)
Dividend/Capital Gains = f (equity portfolio)
NPL provisioning
NPL charge = f (credit risk)
Administrative Cost
Taxation Rate (35%)
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Allied Bank – Key Assumptions
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Allied Bank – P&L Statement
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Allied Bank – Balance Sheet