"Industrial Analysis of Banking"
Banking Industry Analysis For the Period (Dec-08-June 09) By Umar Zia Khan 1 Banking Industrial Analysis by Umar Zia Khan Current Market Share- Deposit Wise First half of 2009 witnessed 8% growth in accumulative deposits of the banking industry. The major portion has been contributed by rising trends in home remittances. Last fiscal year alone has added US$ 8 Billion to forex reserves in shape of home remittances mainly coming from United Kingdom, United Arab Emirates & United States of America. National Bank of Pakistan dominated as market leader with 17% share in the total deposit of the industry however Bank Al-Habib Limited managed to pull highest growth rate of 18% in the first six months. Bank Al-Falah Limited 7% Market Share-Deposit Wise United Bank Limited 12% Standard Chartered National 5% Bank of Pakistan Allied Bank Limited 17% 8% Other Others 44% 18% Habib Bank Limited 16% Bank Al-Habib 4% Askari Bank Limited MCB Bank Limited 4% 9% Asset Growth Rate Resilient banking industry of Pakistan has experienced 7% average growth rate in its assets. Major leader is Bank Al-Habib scoring 300% above industrial average. Asset growth rate is little stagnant due to high ratio of non performing loans. Bank Al-Falah witnessed negative growth rate in its advances portfolio. Asset Growth Rate 25% 20% 15% 10% 5% 0% MCB Bank Habib Allied Standard United Bank Al- Askari Bank Al- National Soneri -5% Limited Bank Bank Chartered Bank Falah Bank Habib Bank of Bank Limited Limited Limited Limited Limited Pakistan Limited 2 Banking Industrial Analysis by Umar Zia Khan Financial Engine- Net Interest Margins The main component of banks financial engine, NIM has been on average 12% in first half of calendar year ’09. Standard Chartered & MCB Bank Limited scored on the higher side mainly due to strong share of low cost deposit and ideal asset mix to generate significant rate on earning assets. Bank Al-Falah has highest cost of funds among top ten banks of industry mainly due to higher composition of fixed deposits & expensive deals in savings accounts. Standard Chartered on the other hand enjoyed sound earning rate due to major portion of their lending operations in consumer side. S.N Bank Cost of Funds Advances Earning Rate Margin 1 MCB Bank Limited 4.3% 20.0% 15.7% 2 Habib Bank Limited 5.0% 16.3% 11.3% 3 Allied Bank Limited 7.2% 18.8% 11.6% 4 Standard Chartered 5.2% 21.4% 16.2% 5 United Bank Limited 6.3% 17.3% 11.0% 6 Bank Al-Falah Limited 8.6% 19.0% 10.5% 7 Askari Bank Limited 6.9% 17.0% 10.1% 8 Bank Al-Habib 7.1% 20.5% 13.4% 9 Soneri Bank Limited 10% 20.60% 10.6% Averages 6.7% 19.0% 12.3% Financial Engine Robustness Cost of Liability Aquisition to Advances Yield(NIM) 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% MCB Bank Habib Bank Allied Bank Standard United Bank Al- Askari Bank Bank Al- Soneri Limited Limited Limited Chartered Bank Falah Limited Habib Bank Limited Limited Limited 3 Banking Industrial Analysis by Umar Zia Khan Composition of Investment on Assets On average 22% of the banks balance sheets is allocated to investments. Major portion 18% is mandatory to meet SLR set by State Bank of Pakistan (SBP). Value at Risk in balance sheets is significantly on the lower side especially for banks operating in Pakistan however due to stagnant economic growth in the last year have forced banks to have 1% growth in advances. Hence, major portion of growth in deposit is diverted to investments. Analysis shows that 90% of deposit raised by banks is diverted to investments considering as most risk aversive alternate. Such diversion in longer run will associate banking industry risk with equity markets. Correlation between market capitalizations of banks with overall market are increasing. % of Investment Vs Total Assets 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% MCB Bank Habib Bank Allied Bank Standard United Bank Bank Al-Falah Askari Bank Bank Al-Habib Soneri Bank Limited Limited Limited Chartered Limited Limited Limited % of Deposit Diversion to Investment(Volume Wise)Dec to June '09 250% 200% 150% 100% 50% 0% MCB Bank Habib Allied Standard United Bank Al- Askari Bank Al- National Soneri Limited Bank Bank Chartered Bank Falah Bank Habib Bank of Bank Limited Limited Limited Limited Limited Pakistan Limited Return on Assets (ROA) Considered to be one of the solid indicators to measure financial health of company, banks in Pakistan on average are little behind from the averages prevailing in the neighboring countries especially in South Asia. Average ROA of the nine sample banks is 1.81%. 4 Banking Industrial Analysis by Umar Zia Khan Return on Assets Profit Before Tax Vs As 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% MCB Bank Habib Bank Allied Bank Standard United Bank Al- Askari Bank Bank Al- Soneri Bank Limited Limited Limited Chartered Bank Falah Limited Habib Limited Limited Limited Interest Expense to Deposit Ratio One of the primary goals of financial organizations is to raise cheap deposit to stimulate lending programs. Average cost of funds for ten sample banks is 6.7% and MCB Bank Limited enjoys top position for raising the fund most cheaply. Soneri Bank Limited on the other hand pays double as interest expense to market deposit. Annual % of Interest Expense Vs Total Deposit 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% MCB Bank Habib Allied Bank Standard United Bank Al- Askari Bank Al- Soneri Limited Bank Limited Chartered Bank Falah Bank Habib Bank Limited Limited Limited Limited Limited Non Performing Loans (NPL) Like any other banking industry around the world, domestic financial institutions are also encountering NPL problem but average provisioning of nine sample banks comes out to be 0.8% whereas Standard Chartered Bank is in terrible shape as compared to industrial average mainly contributing to weak credit policy. Bank Al-Habib enjoyed very sound position in keeping provisioning as less as 0.4%. 5 Banking Industrial Analysis by Umar Zia Khan Non Performing Loans(NPL) Composition 2.0% 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% MCB Bank Habib Bank Allied Bank Standard United Bank Bank Al- Askari Bank Bank Al- Limited Limited Limited Chartered Limited Falah Limited Habib Limited Market Share- Advances Advances market share is dominated by National Bank Limited whereas Bank Al-Habib showing significant growth of 4% in the first half year of the calendar. Average growth of ten sample banks is 1% which shows reluctance of domestic banks to further extend their lending program. One of the major reasons of stagnant growth is tight monetary stance from SBP which has reduced credit demand in the economy. Market Share Advances Bank Al-Falah Limited 8% Standard United Bank Limited Chartered 16% 5% National Bank of Pakistan Allied Bank 19% Limited Other 9% 31% Habib Bank Limited Bank Al-Habib 4% Soneri Bank 20% Limited Askari Bank Limited 2% MCB Bank Limited 6% 11% 6 Banking Industrial Analysis by Umar Zia Khan Consolidated Picture Consolidated picture depict different trends in advances, deposits, asset and if closely analyzed it has hidden trends & numerous learning experiences for other banks to learn without experimenting blindly. On one hand where Bank Al-Habib showed extravagant growth in almost every indicator of financial health, Bank Al-Falah could not manage to pull any positive growth figure in the first half of calendar year. Indicative Growth Rates 25.0% 20.0% 15.0% Asset Growth Rate 10.0% Deposit Growth Rate 5.0% Advances 0.0% MCB Bank Habib Allied Bank Standard United Bank Al- Askari Bank Al- National Soneri Limited Bank Limited Chartered Bank Falah Bank Habib Bank of Bank -5.0% Limited Limited Limited Limited Pakistan Limited Deposit Growth Rate Average deposit growth rate comes to 8% whereas Bank-Al Habib manage to pull 18% growth in its deposit portfolio. Deposit Growth Rate 20.0% 15.0% 10.0% Growth Rate 5.0% 0.0% MCB Bank Habib Bank Allied Bank Standard United Bank Al- Askari Bank Bank Al- National Soneri Limited Limited Limited Chartered Bank Falah Limited Habib Bank of Bank Limited Limited Pakistan Limited -5.0% 7 Banking Industrial Analysis by Umar Zia Khan Deposit to Pre Tax Profit Position One of the analysis banks can use to determine profit ratio with an increase in their deposit portfolio is to understand and analyze deposit to pre tax profit ratio. It combines all aspects to determine final FTP of the banks deposits. Before Tax Profit Generation Vs Total Funds(Deposits) 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% MCB Bank Habib Allied Bank Standard United Bank Al- Askari Bank Al- Soneri Limited Bank Limited Chartered Bank Falah Bank Habib Bank Limited Limited Limited Limited 8 Banking Industrial Analysis by Umar Zia Khan