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xpertwriter's review
Investment Sector: IPO / Secondary Offering Submitted by Xpertwriter 
, CEO At E-HostingJunction.com
at Spectrum Resumes , Inc
over 2 years ago Tags: Punjab Review banks Add Tag |
BOP Limited Review
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The Bank of Punjab was established in 1989 under the Bank of Punjab Act 1989. The bank provides commercial banking and related services in Pakistan and the Azad Jammu and Kashmir, with a special emphasis on agricultural sector. The bank, through its wholly owned subsidiary, Punjab Modaraba Services (Private) Limited, also conducts modaraba operations. Its major customer is the government and the other customers are various public sector organisations including textiles, real estate, transport, agriculture, financial institutions and individual customers.
INDUSTRY:
The year 2007 was proved to be a volatile year for the banking sector in terms of profits. Every quarter showed a different picture as shown in the graph below:
The overall profits declined by 5.6% in 2007. The fourth quarter of the banking sector did not perform well. Banking sector till the end of HY07 depicted a growth of 53.2% in profits. But in the start of 2HY07, the SBP proposed full provisioning against the non performing loans (NPLs) and withdrew the facility of forced sales value (FSV). Consequently, the banks had to make additional provisioning against their NPLs.
If quarterly performance of the banking sector in FY07 is analysed, the graph shows a mixed trend. The total profitability improved from the first quarter to second quarter but after an amendment in SBP's regulation regarding NPL and FSV, total profitability declined in the following two quarters.
The net interest income earned by the banking sector in FY07, posted a growth of 17.4% and reached at Rs 203 billion compared to Rs 173 billion in FY06. The major reason for this growth was the high level of spreads throughout the year, which remained at 7.29% on average.
Non interest income on the other hand grew significantly by 43% during the period under review.
BANK OF PUNJAB RESULTS: Analysis of financial performance (December'04-December'07):
The bank has shown a rising trend in its profits except a slight decline in 2007. The interest earned has been greater for 2007 compared to 2006. This increase has been offset by a similar increase in the interest expensed. This has been due to rising deposit rates and a higher deposit base that has caused a 14 basis point decline in the banking spread.
The deposits of the bank for this reason have grown considerably. The increase in the non-interest income was the main factor for profitability. In addition to increase in fee, commission and the brokerage income, there was also a significant increase in the income derived from foreign currency dealing. Non mark-up income grew by a massive 84% over the last year.
In spite of increased provisioning for NPLs, the bank has able to increase its profit for the year by about 17%. Moreover, the administrative expenses have also increased due to expanding branch network, better products and technological implementations. Higher profits coupled with greater asset, equity and the deposit base led to a slight levelling off of the profitability ratios.
The non-performing loans of the bank show a slowdown from their previous alarming levels. This is a favourable development, indicating that the bank has improved upon its credit policy. Moreover, the advances of the bank have increased over their previous years' levels.
These two facts may reinforce the point that the bank may be controlling its advances prudently. This credit expansion may be said to have been done in a very cautious, tactful and conservatively in order to ensure that the financing is carried out to the borrowers that fall within the boundaries set by the bank and the SBP. The bank has also tremendously increased its provisions as a measure to protect its assets.
The debt management profile shows some major shifts in the firms financing policy. As the proportion of total debt in total assets has decreased, the proportion of total equity has increased. This coincides with the bank's efforts to meet the Minimum Capital Requirements as stated by the central bank. Total deposits of the bank increased by around 39%.
Advances portfolio also grew by 32%. During the year, enhanced liquidity was used for enhancement of Advances' Portfolio and the investments in order to achieve the maximum benefit from the rising lending rate scenario and growing capital and money markets. Investment portfolio constituted second major portion of the total assets and during the period under review, total investments of the bank grew significantly by 160%.
It may be said that the bank has continued to build its investments in high yielding mutual funds, government securities in reaction to the decline in net interest income. The deposits of the bank have also seen a shift in their composition from fixed to savings deposits. In fact, this trend has been observed in the entire banking sector.
The bank's fixed deposits have been more than the savings deposits in this year. However in the banking sector, the portion of savings deposits has surpassed the portion occupied by the fixed deposits.
The increase in the deposit base signifies the effective attempts for deposit mobilisation by bank's management. The market value of the bank has maintained a healthy trend. The profitability of the bank with its current expansion process does provide many opportunities.
Moreover, the prudently managed trend in its advances and NPLs and increasing portion of investments has meant a better quality of its assets. The bank may be regarded in its growth phase. As evident from the graph, the market price of the bank has declined from July 2007's level, witnessing again a slight decline towards the end of the year due to political uncertainty. Due to continued political mess and the stock markets plunge, the share price is likely to be affected.
The liquidity ratios of the bank have been in tandem with pattern of the industry. In fact, during 2007, there prevailed excess liquidity in the banking sector due to the higher M2 growth. This was somewhat controlled by the tight monetary policy. However, excess liquidity still prevails in the market and if this trend continues, we may expect SBP to further tighten its monetary policy.
The increasing liquidity of the bank indicates a comfortable position in case of any contingencies that may arise. The yield on earning assets has increased but so has the cost of funding them. The deposits of the bank grew at a faster pace than its advances.
This has further pushed up the liquidity level of the bank. This trend is likely to remain. With further tightening of the monetary policy by the SBP and the excess liquidity conditions may have negatively affected the bank's performance.
The solvency profile shot from over the last year. The equity of the bank has increased and so have its earning assets, particularly due to investments. The income from these investments has contributed significantly to the earnings and show signs of supporting solvency of the bank in the coming years. The bank has not distributed any cash dividends over the past few years as it is under the expansion phase.
FUTURE OUTLOOK: Considering the political and economic situation of the country, the outlook of the banking sector for 2008 is still bleak. The profitability of the banking sector may become better in FY08 as compared to FY07 as the interest rates spread still high over 7.0%, but the growth may not be same as we have witnessed in the last few years. There has been a decline in the credit off-take growth during FY07 due to increasing number of NPLs. Banks would have to manage their credit disbursement policy prudently in order to minimise the non performing loans.
SBP has tightened the monetary policy once again, increasing the discount rate by 1.5 % to 12%. Also, the requirement to pay 5% on savings accounts is bound to increase the cost of raising funds. 1% additional increase in Cash Reserve Requirement (CRR) for less than a year's deposits, is likely to shift the pattern in favour of long term deposits. This has caused negative effects on the stock market as the prices came down significantly. The bank may be predicted to affect by this. Seeing this, the profitability of the bank may fluctuate slightly in the near future but in the long run it may increase. The bank is required to continue its efforts to prudently manage its assets and advances and NPLs so that it may increase its profitability. The share may be said to be a fair buy at this time.
INDUSTRY:
The year 2007 was proved to be a volatile year for the banking sector in terms of profits. Every quarter showed a different picture as shown in the graph below:
The overall profits declined by 5.6% in 2007. The fourth quarter of the banking sector did not perform well. Banking sector till the end of HY07 depicted a growth of 53.2% in profits. But in the start of 2HY07, the SBP proposed full provisioning against the non performing loans (NPLs) and withdrew the facility of forced sales value (FSV). Consequently, the banks had to make additional provisioning against their NPLs.
If quarterly performance of the banking sector in FY07 is analysed, the graph shows a mixed trend. The total profitability improved from the first quarter to second quarter but after an amendment in SBP's regulation regarding NPL and FSV, total profitability declined in the following two quarters.
The net interest income earned by the banking sector in FY07, posted a growth of 17.4% and reached at Rs 203 billion compared to Rs 173 billion in FY06. The major reason for this growth was the high level of spreads throughout the year, which remained at 7.29% on average.
Non interest income on the other hand grew significantly by 43% during the period under review.
BANK OF PUNJAB RESULTS: Analysis of financial performance (December'04-December'07):
The bank has shown a rising trend in its profits except a slight decline in 2007. The interest earned has been greater for 2007 compared to 2006. This increase has been offset by a similar increase in the interest expensed. This has been due to rising deposit rates and a higher deposit base that has caused a 14 basis point decline in the banking spread.
The deposits of the bank for this reason have grown considerably. The increase in the non-interest income was the main factor for profitability. In addition to increase in fee, commission and the brokerage income, there was also a significant increase in the income derived from foreign currency dealing. Non mark-up income grew by a massive 84% over the last year.
In spite of increased provisioning for NPLs, the bank has able to increase its profit for the year by about 17%. Moreover, the administrative expenses have also increased due to expanding branch network, better products and technological implementations. Higher profits coupled with greater asset, equity and the deposit base led to a slight levelling off of the profitability ratios.
The non-performing loans of the bank show a slowdown from their previous alarming levels. This is a favourable development, indicating that the bank has improved upon its credit policy. Moreover, the advances of the bank have increased over their previous years' levels.
These two facts may reinforce the point that the bank may be controlling its advances prudently. This credit expansion may be said to have been done in a very cautious, tactful and conservatively in order to ensure that the financing is carried out to the borrowers that fall within the boundaries set by the bank and the SBP. The bank has also tremendously increased its provisions as a measure to protect its assets.
The debt management profile shows some major shifts in the firms financing policy. As the proportion of total debt in total assets has decreased, the proportion of total equity has increased. This coincides with the bank's efforts to meet the Minimum Capital Requirements as stated by the central bank. Total deposits of the bank increased by around 39%.
Advances portfolio also grew by 32%. During the year, enhanced liquidity was used for enhancement of Advances' Portfolio and the investments in order to achieve the maximum benefit from the rising lending rate scenario and growing capital and money markets. Investment portfolio constituted second major portion of the total assets and during the period under review, total investments of the bank grew significantly by 160%.
It may be said that the bank has continued to build its investments in high yielding mutual funds, government securities in reaction to the decline in net interest income. The deposits of the bank have also seen a shift in their composition from fixed to savings deposits. In fact, this trend has been observed in the entire banking sector.
The bank's fixed deposits have been more than the savings deposits in this year. However in the banking sector, the portion of savings deposits has surpassed the portion occupied by the fixed deposits.
The increase in the deposit base signifies the effective attempts for deposit mobilisation by bank's management. The market value of the bank has maintained a healthy trend. The profitability of the bank with its current expansion process does provide many opportunities.
Moreover, the prudently managed trend in its advances and NPLs and increasing portion of investments has meant a better quality of its assets. The bank may be regarded in its growth phase. As evident from the graph, the market price of the bank has declined from July 2007's level, witnessing again a slight decline towards the end of the year due to political uncertainty. Due to continued political mess and the stock markets plunge, the share price is likely to be affected.
The liquidity ratios of the bank have been in tandem with pattern of the industry. In fact, during 2007, there prevailed excess liquidity in the banking sector due to the higher M2 growth. This was somewhat controlled by the tight monetary policy. However, excess liquidity still prevails in the market and if this trend continues, we may expect SBP to further tighten its monetary policy.
The increasing liquidity of the bank indicates a comfortable position in case of any contingencies that may arise. The yield on earning assets has increased but so has the cost of funding them. The deposits of the bank grew at a faster pace than its advances.
This has further pushed up the liquidity level of the bank. This trend is likely to remain. With further tightening of the monetary policy by the SBP and the excess liquidity conditions may have negatively affected the bank's performance.
The solvency profile shot from over the last year. The equity of the bank has increased and so have its earning assets, particularly due to investments. The income from these investments has contributed significantly to the earnings and show signs of supporting solvency of the bank in the coming years. The bank has not distributed any cash dividends over the past few years as it is under the expansion phase.
FUTURE OUTLOOK: Considering the political and economic situation of the country, the outlook of the banking sector for 2008 is still bleak. The profitability of the banking sector may become better in FY08 as compared to FY07 as the interest rates spread still high over 7.0%, but the growth may not be same as we have witnessed in the last few years. There has been a decline in the credit off-take growth during FY07 due to increasing number of NPLs. Banks would have to manage their credit disbursement policy prudently in order to minimise the non performing loans.
SBP has tightened the monetary policy once again, increasing the discount rate by 1.5 % to 12%. Also, the requirement to pay 5% on savings accounts is bound to increase the cost of raising funds. 1% additional increase in Cash Reserve Requirement (CRR) for less than a year's deposits, is likely to shift the pattern in favour of long term deposits. This has caused negative effects on the stock market as the prices came down significantly. The bank may be predicted to affect by this. Seeing this, the profitability of the bank may fluctuate slightly in the near future but in the long run it may increase. The bank is required to continue its efforts to prudently manage its assets and advances and NPLs so that it may increase its profitability. The share may be said to be a fair buy at this time.
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