National Bank of Pakistan

Credit Ratings of National Bank of Pakistan (2003-04)

The above data confirms the financial superiority, unmatched managerial skills, strategic vision, comprehensive marketing policies, and above all immaculate leadership of Ali Raza the President of NBP in the whole domestic banking industry of the country. It has been achieved with giant and joint team effort of all the workers from top to bottom under the unparallel supervision of the President of the bank who has made NBP a role model to all the domestic banks of the country and rest of the region.

 

Main Financial Data of National Bank of Pakistan (Rs. in Million)

The above table reflects NBP’s overall financial strength, greater availability of credit facilities and investment opportunities in the domestic banking industry of the country.  Indeed National Bank of Pakistan is customer’s friendly and industrial’s facilitator.

Major Loans Sanctioned By National Bank of Pakistan in 2003-04

It is evident from the above table that National Bank of Pakistan is facilitating the process of industrialization in the country.

Comparative Analysis of profitability of NBP ((Rs. in Million)

The above table shows that NBP’s profit and income is on the increase from 1999 to 2003. Due to better administrative control and financial discipline in the affairs of NBP, the administrative expenses have been reduced.

National Bank of Pakistan is achieving high standards of customer services and ratios of profitability.  Many scientific management techniques are being used to enhance the productivity and good will of the bank in the eyes of common people. National Bank of Pakistan is also introducing corporate culture, risk management tactics, total quality management traditions, and above all concept of good governance in each and every department of National Bank of Pakistan.

Comparative Analysis of Domestic Banking Industry of Pakistan (Rs. million)

Gross Assets of Different Domestic Banks of the Country (Rs. in Million)

Total Equity of Different Domestic Banks (Rs. Million)

It is great opportunity for NBP to monopolize the huge potential market of common consumers in the country and to increase the profitability of the bank. It will enhance the overall economic activity, industrial productivity in the country and reduce slackness in the consumer market. Insurance& Pension Funds, Sales Finance, Mortgages, and Affinity Loans are very common in many ASEAN countries and National Bank of Pakistan can be benefited from the successful experiences of other countries in order to grab the local markets.  

KASB securities recommend banks as key winners in the upcoming budget due to corporate tax savings as quoted:

“Reduction in tax rates of banking companies by 300bps to 38% is a net positive for the banking sector. Sustainable economic growth and higher trade volumes also bode well for the banking sector.”

Cost of Capital

National Bank of Pakistan has following operations:

• Engaged in providing commercial banking and related services in Pakistan and overseas
• Handles treasury transactions for the Government of Pakistan as an agent to the State Bank of Pakistan.
• Provides services as trustee to National Investment Trust (NIT)
• Introduced “Foreign Exchange Company” in order to facilitate the general masses, regularize the inflows of foreign money and control the undesirable blackmailing of private foreign exchange companies in the country.

National Bank should have a single cost of capital because majority of its revenue comes from commercial banking. Its other operations constitute a very small percentage in revenues. According to an estimate only 2-3 percent of NBP’s total revenue comes from other operations.

Cost of Equity

Using CAPM for calculating cost of equity:

Rf = 9.25% (3-months T-bills)

Rm = 15.25 %

Beta = 0.8 (company specific)

(Values taken from Mr. Farhan Mahmood, GM Analyst, Jahangir Siddique & Co. Karachi)

Re = Rf + Beta (Rm - Rf)

Re = 14.05 %

Cost of Debt

Cost of debt was calculated by dividing the long term debt by average debt balance.

Rd = long term debt / avg debt balance (in Rupees 000s)        

Rd = 30.48%

Determining WACC

Tax rate = 42.5% (average), Debt to Equity Ratio = 0.31,

Weighted average cost of capital can be calculated by:

WACC = Debt x Rd x (1- Tc) +   Equity x Re

             Debt + Equity          Debt + Equity

WACC = 15.1%

Forecast Assumptions

In year 2005, there was a radical increase in revenues and profits because of the measures taken by Mr. Ali Raza. His tasks included structural reforms and changes in administration system.

“The bank has been restructured with the objective of empowering people, reducing decision making layers and creating a business focus. In other words, trying to transform a public services institution into a commercial one.”

This resulted in an efficient and strong foundation for future operations. When a system goes through a major change, the results change immensely. However, same growth ad development is not expected in future because the bank will follow the new system in future and there will be no major change. Instead the revenues will grow in a bit stagnant manner. Our forecast assumptions are based on the above mentioned facts.

 

Forecast Future Cash Flows

Terminal Value (Yr9) = CF in (Yr10)/Terminal Capitalization Rate

Terminal Capitalization Rate = R = R (t) = r – g

Where g = growth in cash flows, r = required rate of return or discount rate       

Here g = 9.7%

We have calculated the value of “g” by our own analysis of past cash flows and the analysis of the banking industry.    

Present Value of Cash Flows

By using WACC (15.1%) to discount all the cash flows to the most recent times, we got the total value of the company:

Value of enterprise = Rs. 165,746,855 (000s)

Estimated Price Per Share

By subtracting the outstanding debt from the value of firm and then dividing it with the number of shares outstanding we calculated the price per share. ( all values are in 000s)

        Enterprise value = 165,746,855

Less:        Outstanding debt =   33,731,297

Equals:         Value of equity =   132,015,558

Divide:     No. of shares =         590,893

Equals: Equity value/share                 223

Cross Check

From our analysis:

Share value = 223

From market:

Share value = 220.05 (on 5th June 2006)

Sensitivity Analysis

Difference in share price = 223-220.05 = 2.95

Since there is a difference in share price so according to the sensitivity analysis:

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