RATIO ANALYSIS
Ratios are invaluable aids to management and others who are interested in the analysis and interpretation of financial statements. Absolute figures may be misleading unless compared, one with other. Ratios provide a means of showing the relationship between figures. Though there is no special magic in ratio analyses, many prefer to base conclusions on ratios as they find them highly useful for making judgments more easily.
Liquidity Ratios:-
Liquidity represents the ability of a bank to efficiently and economically accommodate deposits withdrawal as well as fund increase in assets. A bank has a liquidity potential when it has the ability to obtain sufficient funds in a timely manner at a reasonable cost. Liquidity is a primary factor leading to a bank’s failure whereas high liquidity helps otherwise weak institutions to remain funded during the period of difficulty.
Total Advances to Total Deposits Ratio:-
(Total Advances / Total Deposits) *100
Advances to Deposits Ratios for last five year tell us that bank management is successfully maintaining its advances ratio up to level i.e. 60-65%. There was small change observed during the period under review.
Capital Adequacy Ratio:-
Formula: Total Regulatory Capital
Total Risk Weighted Exposure
The capital Adequacy Ratio has increased from 8.16% to 9.85% from the year 2004 to 2008 which shows healthy sign but during 2008 it has decline significantly from 9.85% to 8.03% due to recession in the banking industry as a whole.
Profit before Taxation
(Profit before Tax /Gross Mark up income) * 100
The Profit before Taxation Ratio has decline from 29.43% to 5.78% from the year 2004 to 2008. The decline in the said ratio is attributed due to the healthy expansion in the branch networks during the period under review.
Gross Spread Ratio
{(Gross Markup Income-Gross Mark up Expenditure)/Gross Mark up income} * 100
The Gross spread Ration has also slightly decline from 56.69% to 34.51% from the year 2004 to 2008. During 2004, the bank has earned highest gross profit margin. Due to increase in competition within banking industry, the gross spread was reduced to gain the more market share. Further, previously the banks only focused on gross spread in markup and this was the only main income contributor in the banks income statement. But, during the period under review, the bank has also given due weightage to other income sources, like commission, fee, services charges etc. as evident from the bank income statement.
Income / Expense Ratio
Formula Total Income
Total Expenses
The income expense ratio has decline from 5.07 to 3.34 from the year 2004 to 2008. The decline in the said ratio is attributed due to the healthy expansion in the branch networks during the period under review.
Return on Average Equity (ROE) Ratio
Formula: Net Income after Tax .
Average Equity
ROE has had a fluctuating trend for the bank. It rose in the FY05 on the back of high profits for the year but declined in the subsequent year. As the general trend in the banking sector, this bank is also retaining profits and has had fresh capital inflow. One reason for this enhanced capital base is for meeting the minimum capital requirement of the SBP. The ROE of Alfalah is 21.62% which is low compared to the sector average of 25.6%. This way the bank also meets the Basel II requirements for risk exposures by keeping higher capital in hand.
The ROE ratio had remained within 20% to 30% from year 2004 to 2007 except 2008 when it was 9.17% which was quite low as compared with the previous years. This sudden decrease during 2008 was attributed due to many factors e.g. Slow economy growth, recession in all the industries, increasing of bad debts, losses in the stock exchange investment, bad law & order situation and energy crises). As a whole banks performance regarding return on equity was quite a tremendous regardless of year 2008.
Return on Average Assets (ROA) Ratio
Formula: Net Income after Tax .
Total Average Assets
.Whereas the ROA of the banking system has further improved to 1.07 in FY07 from 0.48 in FY06, Bank Alfalah's ROA had shown a significant decline in the FY06. Though still better than the industry average the ROA declined from 2.15 in FY03 to 1.07 in FY07. The total assets of the bank have grown by 19% from Rs 248.31 billion to Rs 329 billion in 2007. In FY06 Earning Assets grew by 8.8% but the resulting profitability growth has only been 3.6%. The ROA ratio also showed the same picture as the ROE. The sudden decrease during 2008 was attributed due to many factors e.g. slow economy growth, recession in all the industries, increasing of bad debts, losses in the stock exchange investment, bad law & order situation and energy crises). As a whole banks performance regarding return on assets was quite a tremendous regardless of year 2008.
Cash Dividends Ratio
The Bank Alfalah has expanded its network during the period under review. Further, the SBP has increased the equity requirement for the bank step by step. Due to the following reasons the Bank has only declared the cash dividend in 2005 and 2008.
Stock Dividend
From the above graph & table it is witnessed that bank is growing and has been earning good profits. Further, the bank management main focus was on the stock dividend instead of cash dividend only because of the SBP requirement to increase its equity and growing network.
Basic Earnings Per Share (EPS)
(Profit after Taxation / No. of Shares Outstanding) * 100
The Earning per share has reduced during the period under review. The EPS was highest during 2005. The main reason of decline of EPS is reduction in the profits due to the recession in the local and international market.
Time Deposit Ratio (Debt Equity Ratio)
Formula: Total Deposits
Total Equity
Comments
Deposit to Equity ratio has been reducing which is positive sign. BAL has show significant growth during the whole period under review. Deposits of BAL have grown with a very rapid speed, which show the bank aggressive successful strategies.
INTEREST COVERAGE RATIO
Formula: Profit Before Interest & Tax
Interest Expenses
Comments
Interest coverage ratio has showing decreasing trend which s negative sign for any organization. The reduction in Interest coverage is only due to increasing cost of funds and reduction in interest spread. The competition among the banks has increased which has reduced the spread income.
HORIZoNTAL ANALYSIS OF BALANCE SHEET
In FY08 deposits grew by 10% to an amount of Rs 300.731 billion. Mostly the growth is seen in fixed and current deposits. As mentioned before the minimum 5% floor on deposits returns added to costs of funds for the banks. Another hit on deposits was from National Savings Schemes where they offered better rates and better terms.
In FY07 Deposits increased from 239m to 273m an increase of 14%. The trend of ROD has reversed this year as it has improved from 0.55 in FY06 to 1.28 FY07 mainly because of improved control on costs resulting in improved profits. Due to banks eagerness for raising longer term deposits to match their assets maturity profiles, it is expected that the share of fixed deposits in total deposits of the banking system would continue to further increase in days ahead.
In previous year there has been a shift from advances to higher investments in FY07. This shift was in line with the overall industry trend. In FY08 an overall decrease in all the earnings ratios is seen as the profits fell drastically. This is not in line with what industry has to offer. The banks did suffer but with lesser intensity. In FY07 a positive growth of deposits has somewhat succeeded in improving the ROD of the bank which had declined in 2006.
The deposits of Bank Alfalah have shown an increase over the years largely due to increase in fixed deposits by customers. Deposits by both customers and financial institutions have seen a growth. The most prominent factor behind this was increase in the market's liquidity due to increased FDI and remittances inflow. Since 2004 there has been a growth of 131% in bank's deposits, which is an indicative of the growth that this bank has seen.
Deposits rose from a modest Rs 76.7 billion in 2003 by almost 70% to reach Rs 130 billion in 2004, after which they again rose by more than 70% to touch Rs 222 billion in 2005. Deposits continued to show strong growth, rising by more than 14% in 2007 to cross Rs 270 billion. The major upward trend in deposits throughout the industry has been the result of the heavy economic activity during recent years fuelling the demand of consumers and the private sector for credit.
The industry has also shown a trend towards increasing deposits in banks, a major cause of which is, of course, the booming economic activity, apart from higher foreign inflows in the form of worker remittances and FDI, as well as expanding branch networks, product innovation and better efforts at marketing. In fact, deposit growth in the top five banks, including Alfalah, was actually slower than that in the next five banks.
Another marked trend within the deposit structure of the bank was the greater growth shown by fixed deposits as compared to and at the cost of saving deposits. Fixed deposits increased by an absolutely stunning 100% and 300% in FY04 and FY05 respectively, and by a further 11% in FY06, thus attaining a level of almost Rs 89 billion at the end of that year, as compared to a mere Rs 11 billion at the end of FY03.
On the other hand, while savings deposits grew by almost 55% in FY04, their growth slowed to around 25% in FY05, and actually turned into a 3% decline in FY06, so that their level changed from Rs 44 billion at the end of FY03 to Rs 79 billion at the end of FY06. This is a good sign for the bank since its long term deposits have risen. The ratio of earning assets to total assets for the bank shows remarkable uniformity, suggesting careful management of and investment in interest generating assets.
Within earning assets, however, the bank shows a gradual trend of movement of capital into and away from lendings to other financial institutions. These declined from 9% of earning assets in FY03 to 0% in FY04, then increased to 13.3% in FY05, but were again reduced to 6% in FY06. This variation also caused a fluctuation in the percentage of earning assets held as advances, which increased from 58% in FY03 to 71.5% in FY04, then again declined to 58.5% in FY05, finally increasing to 68.5% in FY06.
The trend in investments has been mainly a declining one, from 39% of earning assets in FY03 to about 28% in FY04 and FY05, then again declining to 26% in FY06. Industry figures substantiate this trend to an extent, where in FY06 advances increased to 55.8% of total assets from 54.4% in FY05, while investment portfolio decreased from 21.9% of assets to 19.2% in the same period. In addition, 60% of the growth in banking assets in FY06 was accounted for by growth in advances.
The advance to deposit ratio (ADR) on the other hand has shown a decline over this period. The ADR for the industry as a whole had actually increased in 2006, as a result of an aggressive loans policy overtaking the strong growth in deposits. The bank, however, managed to maintain and actually improve its liquidity position. As has been mentioned above, deposits showed a steep upward trend, increasing by almost 70% in FY04 and FY05, and by a further 7% in FY06.
On the other hand, though advances increased by almost 80% in FY04, they showed more moderate growth rates of 34% and 26% in FY05 and FY06 respectively, showing a more moderate and cautious expansion in loans by the bank. Advances have shown a strong upward trend over both the short and long-term categories. The figures for FY07 show that the bank has further improved its liquidity position. The ADR remained flat in FY07. Advances have grown by 14.13% from 150mn to 171mn during this period. The high growth in advances was offset by an equally higher growth in deposits. The industry as a whole has also experienced an ease, in the liquidity position as a result of slower growth in loans. This slowdown in lending was caused by an increase in interest rates accompanied by less credit capacity in the market.
This is caused by the fact that while deposits have shown tremendous growth over the period under study, the bank has maintained a consistent approach with respect to its earning assets and has not expanded them to the same extent. The increase in MCR by the SBP has also led to banks increasing their capital share. The figures for FY07 show a continuing improvement in the solvency position of the bank as a result of further increases in capital. This follows an industry-wide trend of better solvency.
Horizontal Analysis Of Income Statement
The bank realized an income (profit after tax) of Rs 1.301 billion which is 63% lower than previous year (FY07: Rs 3.506 billion) translated into Rs 1.63 earnings per share (FY07: Rs 3.92). In comparison to other large banks BAFL has not been able to maintain its profitability. The interest income rose by 20% but interest expenses rose more than proportionate by 22%. The interest expenses were high as there was a minimum 5% return floor on deposits which added multiple folds to costs.
The net interest income growth was 17%, which is satisfactory, but it is diluted by massive increases in provisions against non-performing loans. The income after provisions grew by only 6% in this FY08. The Non-interest income contributed 15% lesser than previous year due to decreases in fee and commission and income from sale of securities. The bank's performance has generally improved in all segments in FY07.
Bank Alfalah Limited declared profit after tax of Rs 3.1bn with earnings per share of Rs 4.82 in FY07 as compared to profit after tax of Rs 1.7bn with earnings per share of Rs 2.71 in FY06. A significant growth of 77.6% has been registered during FY07 on the back of capital gain of Rs 1.7bn on sale of Warid Telecom (Pvt) Limited. The bank also declared a cash dividend of Rs 1.50 per share for FY07 and 23.0% bonus share.
Net interest income of the bank registered a growth of 53.8% to Rs 9.1bn in FY07 as compared to Rs 5.9bn in FY06 mainly on the back of interest earned on the deposits to customers. (Total deposits of the bank grew by Rs 33.6bn during FY07). In FY07, the bank sold 48.8m of its holdings in Warid Telecom (Pvt) Limited out of 316.7m to Singapore Telecommunication Limited (Singtel) at a price of US $37.67m.
Due to this, bank earned Rs 1.7bn of capital gain during FY07 that resulted in the growth of 87.3% in non-interest income. Non-interest income climbed to Rs 6.0bn in FY07 as compared to Rs 3.2bn in FY06. In terms of profits the Pakistani banking sector ranks amongst the top ten in the world. Bank Alfalah has had its share in the phenomenal profit growth of the banking sector. In FY08 we witnessed an increase in advances in contribution to earning assets.
In FY07, profits have also risen due to increase in advances, investments, and lending to financial institutions (earning assets). Only the lending to financial institutions grew by 264% in FY06. But ROD has shown a declining trend. This has been the case because the profits for Alfalah have not risen proportionally with the increase in deposits. In the year 2006 deposits grew by 7.7%. This significant increase was the result of the excessive reserve growth in the economy. But the corresponding increase in profits was a meager 3.6%. In FY03 the ROD was 2.77 that has declined to 1.28 in 2007.
The bank realized an income (profit after tax) of Rs 1.301 billion which is 63% lower than previous year (FY07: Rs 3.506 billion) translated into Rs 1.63 earnings per share (FY07: Rs 3.92). In comparison to other large banks BAFL has not been able to maintain its profitability. The interest income rose by 20% but interest expenses rose more than proportionate by 22%. The interest expenses were high as there was a minimum 5% return floor on deposits which added multiple folds to costs.
The net interest income growth was 17%, which is satisfactory, but it is diluted by massive increases in provisions against non-performing loans. The income after provisions grew by only 6% in this FY08. The Non-interest income contributed 15% lesser than previous year due to decreases in fee and commission and income from sale of securities. The bank's performance has generally improved in all segments in FY07.
Bank Alfalah Limited declared profit after tax of Rs 3.1bn with earnings per share of Rs 4.82 in FY07 as compared to profit after tax of Rs 1.7bn with earnings per share of Rs 2.71 in FY06. A significant growth of 77.6% has been registered during FY07 on the back of capital gain of Rs 1.7bn on sale of Warid Telecom (Pvt) Limited. The bank also declared a cash dividend of Rs 1.50 per share for FY07 and 23.0% bonus share.
Net interest income of the bank registered a growth of 53.8% to Rs 9.1bn in FY07 as compared to Rs 5.9bn in FY06 mainly on the back of interest earned on the deposits to customers. (Total deposits of the bank grew by Rs 33.6bn during FY07). In FY07, the bank sold 48.8m of its holdings in Warid Telecom (Pvt) Limited out of 316.7m to Singapore Telecommunication Limited (Singtel) at a price of US $37.67m.
Due to this, bank earned Rs 1.7bn of capital gain during FY07 that resulted in the growth of 87.3% in non-interest income. Non-interest income climbed to Rs 6.0bn in FY07 as compared to Rs 3.2bn in FY06. In terms of profits the Pakistani banking sector ranks amongst the top ten in the world. Bank Alfalah has had its share in the phenomenal profit growth of the banking sector. In FY08 we witnessed an increase in advances in contribution to earning assets.
Vertical Analysis Of Balance Sheet
The deposits of Bank Alfalah have shown an increase over the years largely due to increase in fixed deposits by customers. Deposits by both customers and financial institutions have seen a growth. The most prominent factor behind this was increase in the market's liquidity due to increased FDI and remittances inflow. Since 2004 there has been a growth of 131% in bank's deposits, which is an indicative of the growth that this bank has seen.
Bank Alfalah Ltd has shown significant growth during the period under review. If we analyze the composition of assets for CY 2008 with the pervious year, it almost shows the same trend. The major ingredient of assets is advances, which has slightly decreased to 55.21% form 57.44% during the period under review due to the strong liquidity pressure during the last quarter 2008.
The seconds largest portion of assets is investment which has also decreased from 26.91% during 2007 to 21.77%. The decrease in investment is attributed due to the high liquidity crunch rumors and also due to the stock exchange crashes during the above said period.
Bank Alfalah Limited successfully weathers the rumors of bank default during the last Quarter of 2008. Bank has successfully maintaining the Cash & Balance with Treasury and other Banks upto 14% to 15% of total assets to remain liquid during the whole period under review.
Now, by analysis the liabilities sides of balances sheet it reveals that major portion is deposits as usual to the industry. During 2008, the total deposit was 86.17% of the total liabilities & equity. Portion of deposit was highest during 2005 when it was 89.54%. The equity of the bank has been positive increasing from 3.40% to 4.88% from 2004 to 2008 respectively with 43% increase during the period under review which shows the healthy growth and good profits. Bank equity is also increased to meet the regulatory requirements. Other Liabilities has increased from 1.76% to 3.24% from 2004 to 2008 which is showing a gradual positive increase.
Vertical Analysis Of Income Statement
In FY07, profits have also risen due to increase in advances, investments, and lending to financial institutions (earning assets). Only the lending to financial institutions grew by 264% in FY06. But ROD has shown a declining trend. This has been the case because the profits for Alfalah have not risen proportionally with the increase in deposits. In the year 2006 deposits grew by 7.7%. This significant increase was the result of the excessive reserve growth in the economy. But the corresponding increase in profits was a meager 3.6%. In FY03 the ROD was 2.77 that has declined to 1.28 in 2007.
An important observation in the income of the bank is that its earning assets have been generating increasing returns over the years. But overall profitability had not seen great increments because of increasing costs of funding these earning assets. In 2006 bank's mark-up/interest costs rose by 111% as compared to a 73% increase in its earnings.
This was also indicated by a declining interest margin which is a ratio of mark-up/return/interest expensed to the markup/return/interest income. The result is that though the yields are high, overall profits are low and so ROA, ROE and ROD have shown a declining trend in 2006. However the situation improved in FY07.
Non-performing loans augmented by 121% in FY08 to an amount of Rs 8.934 billion, they impose a threat to profitability. This NPLs growth is not in line with industry wide NPLs growth. The non-performing loans (NPLs) have shown variable character during the period of analysis, first increasing from Rs 2.845 billion in FY03 to Rs 2.935 billion in FY04, then decreasing by almost two thirds of that to Rs 1.06 billion in FY05. Thus there was a drastic cut down in NPLs in this year, which was also reflected in industry figures, where NPLs decreased from Rs 211 billion in FY03 to Rs 177 billion in FY05.
This was the result of extensive measures by the industry in general and this bank in particular to improve the regulation and monitoring of loans and control defaults through more rigorous screening. The following year, however, once again showed a rapid rise of more than a hundred percent in NPLs to Rs 2.31 billion.
This rise in NPLs can be more accurately attributed to the rapid rise in interest rates during this period than to any lapse in the bank's screening procedures, as the State Bank had taken definite measures to tighten its monetary policy. At the same time there was a high level of indebtedness in both private sector and consumer markets.
There was a slowdown in the rapid decline in industry NPLs, which stood at Rs 175 billion at the end of FY06. Disaggregated industry analysis revealed that there were plenty of fresh NPLs incurred during this period. However, extensive write-offs and recoveries managed to reduce the overall level of NPLs. The bank is now making greater efforts aimed at the recovery of NPLs, and a tightening of the loan policies is expected.
Provisioning against NPLs grew phenomenally during FY07 and amounted to Rs 2.3bn over Rs 697.6m in FY06. Bank made incremental provisioning of Rs 1.0bn during the year due to the withdrawal of FSV benefit which was the major reason behind the upsurge in the provisions.
Due to increasing number of non-performing loans, car financing by the bank has declined by 42.3% in FY07. Car financing covers the major portion of total consumer financing of the bank. The total number of cars financed during FY07 was 12,058 which were of Rs 5.7bn as compared to 20,012 cars financed during FY06 equal to Rs 9.9bn.
Yield is an indicative of the profitability of the banks assets. The bank's net interest income (NII) has increased by 53.8% in 2007 whereas the non-interest income rose by 87.3% due to capital gains on sale of Warid Telecom. But as in the banking sector the NII contribute the most to income. The increase in NII is mainly because of the high spreads that Bank Alfalah is taking advantage of like others in the sector.
Organizational Analysis With Reference To Industry
Bank Alfalah Limited has showed a tremendous growth. Only with short span of ten years, Bank Alfalah secured the 5th positions in all the domestic banks working in Pakistan. The comparison of bank with the other banks operating in Bank Alfalah regarding to Total Assets Advances, Equity, Net Profit before Tax, Return on Assets etc are as under:
In Million
Source: websites of NBP, HBL, UBL, MCB, ABL, Alfalah, SCB, HMB, BALH & Meezan Bank
From above comparison of peers’ banks for last 5 years, it reveals that BANK ALFALAH has shown a fast growth. The BAL has secured overall 5th positions during 2008 amongst all commercial banks working in Pakistan. The assets of Bank Alfalah have increased from Rs.154 Billion to Rs.348 Billion, almost double within five years, while if we compare BAL with respect to total assets of Rs.348.991 Billion of other commercial banks it stands on sixth position. While NBP is holding 1st position with the total assets of Rs. 817 Billion.
Total Deposits of BAL has increased from Rs. 129.715 Billion to Rs. 300.733 Billion during the period under review. Bank Alfalah has shown as fastest growing Bank amongst commercial banks working in Pakistan. Total Equity of bank has also increased three times during 2004 to 2008 from Rs. 5.261 Billion to Rs. 17.045 Billion, which shows management commitment towards the achievement of organizational goals. Bank Alfalah has shown a tremendous growth in all the heads. The comparison with other banks on basis of data of 2008 is given as below.
Future Prospects of the Organization
The Bank fully recognizes is committed and competent workforce as the primary asset in providing value addition to its other stakeholders. Continuing with the policy to modernize human resource (HR) function in accordance with our strategic direction and to increase employee satisfaction and motivation all HR policies dealing with employee compensation and benefits were reviewed during the year for alignment with competition. Also, a comprehensive performance management system based on management by objectives was launched towards the end of 2008, aimed at an objectives evaluation of employee performance. In order to automate processing in HR function, Bank has acquired specialized human resource management software. The automation will ensure efficient recruitment, employee’s rotation, success planning career progressing and development.
BAL has entered in the consolidating phase. He has standardized policy & procedures throughout the country. Bank has also trying to develop better controls to avoid fraud and forgery.
Success is a sum of small efforts, repeated day in and day out.
RECOMMENDATIONS
Above analysis show us the real figure of the bank financials. According to these figures bank is growing up and would be the best organization in coming days of the country.
Following are some suggestions, which will enable the bank to compete with other banks more effectively & efficiently
- The employees should be signed jobs for specific period and than they should shifted to other department so that they gain knowledge of other jobs.
- Bank Alfalah Limited should properly advertise and Communicate to public about the services provided by it, so that more customers will be attracted.
- The bank’s management should give more incentives and pay scale of officers should be revised & improved.
- System and operations should be more defined and organized.
- IT draw backs should be improved.
- Administration drawbacks should be improved by the strict control of general issues.
- Audit should be held internally. Rather there should be an Audit Department in the branch to make audit on daily basis. This can become so helpful as different banks are having this department of their own.
- Lockers facilities should be provided to attract more customers.
- Expenditures must be control, which are very high.
REFERENCES
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