Contents

CONTENTS.................................................................................... 1

INTRODUCTION.............................................................................4

History Overview..............................................................................................4

P R O D U C T S.............................................................................5

Car Financing....................................................................................................5

Home Financing.................................................................................................5

Rupee Travelers Cheques...................................................................................6

Credits Cards.....................................................................................................6

Debit Cards.......................................................................................................6

On Line Banking.................................................................................................6

Automated Teller Machine (ATM)........................................................................6

Islamic Banking.................................................................................................6

Corporate and Structured Financing ..................................................................7

SWOT ANALYSIS...........................................................................9

PEST ANALYSIS...........................................................................12

PORTER'S 5 FORCES ANALYSIS.....................................................13

MARKET ANALYSIS......................................................................14

MARKET SHARES.........................................................................16

BOSTON CONSULTANT GROUP MATRIX (BCG) MODEL....................17

Star:..................................................................................................................................17
Cash Cow:.........................................................................................................................17
Question Mark:.................................................................................................................18
Dog:..................................................................................................................................18

STRATEGIES................................................................................ 18
ACCOUNTING ANALYSIS...............................................................19

KEY ACCOUNTING POLICIES OF BANK ALFALAH.............................20

POTENTIAL RED FLAGS AND BAL’S COUNTER MEASURES...............29

HORIZONTAL ANALYSIS...............................................................36

VERTICAL ANALYSIS....................................................................39

VALUATION ................................................................................ 41

RESIDUAL INCOME MODEL...........................................................42

FREE CASH FLOW........................................................................43

 VISION

“To be the premier organizations operating locally and internationally that

provided the complete range of financial services to all segments under one
roof.

MISSION
“To develop and deliver the most innovative products, manage customers
experience, deliver quality service that contributes to brand strength,
establishes a competitive advantage and enhances profitability, thus
providing value to the stakeholders of the bank.
INTRODUCTION

History Overview
Bank Alfalah Limited was incorporated on June 21st, 1997 as a public
limited company under the Companies Ordinance 1984. Its banking
operations commenced from November 1st, 1997. The bank is engaged in
commercial banking and related services as defined in the Banking
companies ordinance, 1962. The Bank is currently operating through
235 branches in 88 cities, with the registered office at B.A.Building,
I.I.Chundrigar, Karachi. Some of the main branches are located in all of
the major cities including: Lahore, Kasur, Islamabad, Gawadar, Peshawar,
Faisalabad, Quetta, Rawalpindi, Sukkur, Sialkot, Multan, Murree, and
Attock District etc.

Since its inception, as the new identity of H.C.E.B after the privatization
in 1997, the management of the bank has implemented strategies and
policies to carve a distinct position for the bank in the market place.
Strengthened with the banking of the Abu Dhabi Group and driven by
the strategic goals set out by its board of management, the Bank has
invested in revolutionary technology to have an extensive range of products
and services.

The portfolio concentrates on all aspects of conventional banking as

well as the financial needs of corporate sector. Dynamic and high value
product includes Car Financing, Home Financing, Rupee Travelers
Cheques, Credits Cards, Debit Cards, On line Banking, ATM and
consumer Durables. In addition to this, Islamic Banking Division is a recent
initiative, which operates as separate branch. It offers Shariah
Compliant products through a network of five branches, which will
increase to 50 by the year 2007. The bank is committed to combine all
its energies and resources to bring high value, security and satisfaction
to its customers, employees and shareholder. The Bank has invested in
revolutionary technology to have an extensive range of products and
services. This facilitates commitment to a culture of innovation and seeks
out synergies with client and service providers to ensure uninterrupted
services to it customers.

PRODUCTS
COMPREHENSIVE AND DIVERSIFIED PRODUCT PORTFOLIO
With the mission to provide all-encompassing banking services to the
customers, Bank Alfalah has a uniquely defined menu of financial products.
Currently it is one of the most comprehensive portfolios of personalized
financial solutions that are custom-tailored to serve the requirements not
only of conventional customers but also fulfill the needs of the corporate
sector:

 Car Financing
 Rupee Travelers Cheques
 Online Banking
 Credit Cards
 ATMs
 Home Financing
 Islamic Banking
 Corporate and Structured Financing

Car Financing
Car Financing is one of the major renowned products of Bank Alfalah and can
be utilized in terms of Financing of Used Vehicles, Loan against Car, Balance
Transfer Facility, Refinancing Facility (only for Alfalah Customers) and it is
characterized in terms of:
 Lowest Mark up
 Lower Insurance
 Quick Processing
 Lower Down Payment

Home Financing
Major features of Bank Alfalah Home Financing are Lowest Mark-up,
Quick Processing, Multiple Repayment Options and Free Valuation. It has
been bifurcated in terms of “Home Buyer, Home Construct, Home Improver,
and Home Balance Transfer Facility”.

 Financing Limit : up to Rs. 10,000,000/-

 Tenure : up to 20Years
 Equity Participation : 30% Borrower / 70% Bank
Rupee Travelers Cheques
Rupees Travelers Cheques are as good as cash and are accepted at
the major shops, travel agents, hotels business establishments and all over
the country and abroad. This service is being offered to facilitate instant fund
availability to travelers and business people who used to carry a large sum of
money with them.

Credits Cards
Bank Alfalah Visa Card is everywhere and globally accepted and
welcomed at locations displaying the VISA logo. It is accepted at nearly 30
million merchants and 870,000 ATMs in more than 150 countries around the
globe and over 10,000 establishments in Pakistan. Alfalah VISA pays for
shopping, travel, entertainment, meals and much more.

Debit Cards
Bank Alfalah Limited presents Alfalah Hilal Card, the first Visa Electron
International Debit Card which gives an unlimited access to current / savings
account with a simple swipe, at millions of retail shops and ATMs, worldwide.
The Alfalah Hill Card comes with a host of conveniences and benefits
combined with the wide reach of Visa Network enabling it to be accepted at
more than 840,000 ATMs and 13 million retail outlets around the world,
making it the most acceptable Debit Card available in Pakistan.

On Line Banking
To provide enhanced and value added products to customer bank is
constantly striving for additional facilities. Bank provide fully automated on-
line telephone banking facilities to its customers enabling them to carry out
banking transactions like balance inquiries, statement requests, product
information and exchange rate.

Automated Teller Machine (ATM)

The bank offers 24 hours self service banking facilities to it customers
on country wide basis through deployment of Automated Teller Machine. This
system allows the banking facilities such as cash withdrawals, cash deposits,
and funds transfer, balance inquiries, account statements. Electronic cash
dispensing facilities are available in major cities of Pakistan. All ATMs are
linked through a state-of-the-art Satellite Based Communication System
which offers 24 hours real time service.

Islamic Banking
A separate division is a recently initiated, which operates as separate
branch. It offers Shariah Compliant products through a network of five
branches, which will increase to 50 by the year 2007. Islamic Banking has
launched following products with the perception that these are in accordance
with the Sharia Principles.
 Alfalah Masharaka Homes
 Murabaha Finance
  Alfalah Car Ijarah

Corporate and Structured Financing

The portfolio concentrates on all aspects of conventional banking as well
as the financial needs of corporate sector including dynamic and high value
product.
 Loaning against securities
 Letter of Credit
 Letter of Guarantee
 Demand Finance
 Cash Finance
SWOT Analysis
This SWOT analysis of Bank Alfalah Limited takes into consideration
the external as well as the internal environmental structure of the bank.

Strength
Bank Alfalah is considered to be a very successful bank in the financial
circles. A bank is place where the customers can safely keep their money as
long as they want. Some of the major strengths of the bank:

• Brand Name
• Goodwill and trust
• Islamic Banking
• Car Ijarah revenues
• Least Processing Time
• On-Line banking
• Comprehensive and diversified product portfolio
• Bad debt rate is low
• Excellent credit rating
• Phenomenal Growth
• Highly Professional and trained employees
• Crucial Location Of Branches
• Bank is financially strong and has a huge deposit reserve
• Bank Alfalah has a wide network of branches at the ideal
locations, catering the financial needs of its clients.
• Foreign Trade is the focus of bank. It has become an ideal
bank for the importers and exporters.
 Weaknesses

Bank Alfalah also has some weaknesses. But their number is much less
than the strengths of the bank. Following factors need attention of the
management.
• Lack of advertisement through electronic media
• Lack of innovative marketing
• No ATM Machine
• Islamic Banking
• Skill Set of Employees is not up to mark as there is no job
rotation.
• Foreign Banks still are a little more prestigious
• Bank Alfalah Limited does not possess foreign network
• Most of the employees are overloaded with work. There is
uneven distribution of work and promotions are not very
timely
• It is slow in the introduction of new services
• Employees feel over burdened
• It has only one oversea branch although it does a lot of
foreign trade business.

Opportunities
Bank Alfalah has grown up its business with a very high pace and it has
got tremendous popularity, even with in a very short span of time. There
are many opportunities for the bank and by availing that it can stand
amongst the top foreign banks.

• Extension of International network.

• Capitalizing on IT
• Introduction of innovative products.
• Adopt E-banking
• Growth in deposits
• Growth in textile sector
• Tide down of money
• Expansion in branch network

Threats

• Political Instability
• New branches in the same location
• Islamic Competition
• Increase in Competition with other banks
• Revolving policies of state bank of Pakistan
• Terrorist image of the country
• Uncertain economic condition
• Slow product development process
• Change in govt. policies.
• Internal audit system is not encouraging.
PEST Analysis
Political Environment
• Lawyers’ movement
• Violence in Karachi
• The Lal Masjid debacle
• Militancy operation in FATA, NWFP and Swat its impact on
other parts of the country
• The return of Benazir Bhutto’s and her subsequent
assassination
• Unstable political situation affect bank’s policies
• Talibinization affected our repute in the world
• Investors hesitate investing in Pakistan
Economic Indicators
• Gross Domestic Product (GDP)
• inflation Increased
• balance of payment
• debt of the government increased
• Decrease in FDI(Foreign direct investment)
• Financial crisis made it BAL management difficult to survive
Socio cultural environment
• low saving culture
• Religious culture and people hesitate to accept interest on
deposits
• 70% rural population and very low literacy rate
Technological Factors
• Banks turning to heavy IT investments which differentiate
their products
• provide response times
• improve customer satisfaction
 • products and services are gaining faster acceptance like ATM,
Master cards, Telebanking, Internet banking and mobile
banking

Porter's 5 Forces Analysis

Threat of New Entrants
• Person can't come along and start up a bank, but there are
services, such as internet bill payment, on which
entrepreneurs can capitalize
• Threat is companies offering other financial services. e.g. an
insurance company to start offering mortgage and loan
services
Power of Suppliers
• The suppliers of capital might not pose a big threat
• the threat of suppliers luring away human capital because
larger banks are offer incentives and take away trained
employees
Power of Buyers
• The individual doesn't pose much of a threat to the banking
industry because of high switching cost of mortgage, car loan,
credit card, and mutual funds with one particular bank
• corporate clients have banks wrapped around their little
fingers
• Financial institutions can switch them by offering better
exchange rates, more services, and exposure to foreign
capital markets
Availability of Substitutes
• there are plenty of substitutes in the banking industry
• there is a non-banking financial services company that can
offer similar services like Insurance, mutual funds companies
 • n the lending side of the business, banks are seeing
competition rise from unconventional sources of capital
Competitive Rivalry
• Banks must attempt to lure clients away from competitor
banks. They do this by offering lower financing, preferred
rates and investment services
• They compete on the best and fastest services
• Larger banks would prefer to take over or merge with another
bank rather than spend the money to market and advertise

MARKET ANALYSIS
Four Price of Market
The marketing analysis of the bank focuses the promotional campaign,
the four P’s of marketing are also in vision of the bank that it uses for its
marketing (called 4 pillars) i.e., product, price, place (distribution) and
promotion. For more lucidity they shall be explained briefly here.
• Product Service Provided by Bank
• Price Commission and Bank Charges Received
• Place Placement of Services i.e. Network of its
Branches
• Promotion Promotion of Services

PRODUCT
The products at Alfalah include various banking services, which are its
Deposits (PLS and Non-PLS), Remittances, and ATM & VISA Cards,
Lockers etc. Bank also provides Credit Extension service.
PRICE
“The amount of money the customers pay for the product of a
company”.
BAL provides different products and services to its customers. Pricing
of products/services means the commission to be paid by the customer in
return of services provided by the bank. The commission paid for the
services mainly includes:
• Mark up/ interest
• Bank charges
• Fees and bank commission etc.
The prices for various services of Bank are given in the booklet "the
Schedule of Bank Charges". The prices at the bank are quite
competitive with those of other banks working nationally.
 PLACE
“The activities a bank undertakes to make products and
services easily available or accessible to the customers”.
Bank Alfalah’s objective has been to expand its branch network to
meet clients’ needs. Bank is well positioned and geographically poised, to
cater for increasing business demands, from its existing potential clientele.
During last year under review, BAL opened 8 new branches and presently it
has 142 branches, spread all over Pakistan covering major business
centers and cities. Bank plans to add more branches to its growing network.
PROMOTION
“All activities that a company undertakes to communicate and
promote its products”.
This is an age of competition. Numerous organizations are providing
financial services to customers. In this world of growing competition, the
only way to prosper for a bank is to adopt proper marketing and
promotional techniques.
Various promotional techniques such as advertising, personal selling
(BDO) etc. are used by bank. The promotional strategies of the Bank vary
according to the market conditions. However, the following techniques
are mostly used:
• Advertising
• Various Information / Marketing Broachers
• Personal Selling
These are some of the marketing techniques that the bank adopts in
order to capture market and attract clients.

Market Shares
As such no financial organization in Pakistan is unable to determine the
correct market share of the banking industry. Also banks do not disclose
certain confidential information to the general public and internees. Still
generally foreign banks in Pakistan contribute to about 35% to the whole
banking industry. Out of which Askari, Citi, Standard Chartered Grind
lays, Muslim Commercial, ABN-AMRO banks share the major market.

Boston Consultant Group Matrix (BCG) Model

Market share
Growth rate

High Low
High

 Car  Islamic Banking

Financing  ATM
  Debit
Home Financing Card
 Online Banking
Low

 Deposit  Rupee
 Traveler
Investment Cheque

Credit Cards

Star:
In the star, we have Car Financing Home Financing Online Banking
which show the high growth rate and high market share.

Cash Cow:
In the cash cow, we have Deposits Investments Credit Cards which
show the low growth rate and high market share.
 Question Mark:
In the Question Mark, we have Islamic Banking ATM Debit Card which
show the high growth rate and low market share.

Dog:
In the Dog, we have Rupee Travelers Cheque which shows the low
market share and low growth rate.

STRATEGIES
Bank Alfalah has formulated certain sets of strategies to enable it to
achieve its goals and objectives. These strategies are mentioned below:
• In order to achieve its goals of creating a sound base and presence of
efficient modern banking system, Bank Alfalah has started operation of
Automated Teller Machines in all the major areas like Karachi, Lahore,
Islamabad and other cities of Pakistan.
• Bank Alfalah is committed to building long-lasting relationships through
an assertion to service excellence and providing innovative products to
meet the changing needs of our valued customers. Although still in its
infancy, compared to the exalted banking standards, Bank Alfalah
backed by a strong Abu Dhabi Group and inspired by the vision of its
Board and Management, has built up a strong customer base. The
Bank provides a full range of banking services to corporate clients,
while applying leading technologies. Today the Bank is well-positioned
to provide appropriate banking services to customers.
• The main focus is building relationships and being known by the way
they do business. Management recognizes that a banking relationship
requires compatibility, communication, and cooperation and that each
customer deserves nothing less than full attention and available
resources to meet their financial objectives.
 • Core value and corporate culture is based on the belief that superior
personalized service is the most important product. Bank is in the
process of getting to know customers by name and understand their
business and personal financial needs. This one-on-one, personalized
service quality has served as Bank Alfalah's unique signature since
inception and continues to separate it from other financial institutions.
• The Bank Alfalah team comprises of some of the most highly skilled
and professional financial experts in banking industry. Managers,
lenders and trust advisors offer the unique perspective of knowing and
understanding in the local economy. The Management focuses its
attention on making informed and feasible economic decisions,
bringing better returns and more profitability for investors and
customers.
• Keeping in view the unrest among the Islamic Community on the
Interest Bearing Banking the Alfalah is in the process of target
marketing and gives its full attention to this segment of a large
population over the world.
• To acquire the reputation and status of bank which operates on
international standard, Alfalah Bank was to get the credit rating of
Pakistan Credit Rating Agency, which gave it the AA- and A1+ in the
long term and short term respectively.

Accounting Analysis

Accounting Convention
Management of Bank Alfalah Ltd. prepares its financial statements by
following historical cost convention of accounting. Instead of certain fixed
assets which are stated on the revalued amounts and investments
available to sale are valued at fair market value. The amounts are
stated in the Pakistani currency which is bank’s presentation and
functional currency. The figures are rounded nearest to thousand.

Key Accounting Policies of Bank Alfalah

1. Cash and Cash Equivalents

Cash and cash equivalents are comprises of the cash, balances with
treasury bank and other banks and call lendings which are made for the
sake of cash flow statements.

2. Sale and Repurchase Agreements

Bank Alfalah makes certain purchase/ (sale) investments under

agreements of resell/ repurchase investments at a certain future date at a
fixed price. The investment agreements which are purchased are not
recognized because bank has no control over them while investments
which are sold are duly recorded.
The amount paid for purchase of agreements is recorded under lending
to financial institutions and proceeds from sale of investment agreements
are recognized under borrowings.
3. Investments

Bank has classified its investments under three titles and that are:

a. Hold for trading: These investments are short term

investments which bank has kept for generating profit by the
fluctuations in price of securities and interest rate etc.

b.Held to maturity: These are the investments which have fixed

or determinable payments and bank has intention to keep them
till maturity.

c. Available for sale: These are the investments which do not fall
under the title of ‘Hold for trading’ and ‘Held for maturity’.

4. Advances

a. Loans and Advances:

Bank states Loans, advances and lease investments net of

provisions against non performing advances. Provisions of specific and
general nature for operations in Pakistan are made in accordance to
the rules and regulations which have been defined by the State
Bank of Pakistan. The advances to overseas customers are handled
under the prevailing rules of the customer’s country.
b. Finance Lease Receivables:

In lease, Bank transfers the entire risks and rewards incidental to

the owner of the assets. Bank recognizes the present value of the
lease payments under a receivable and shows them under the
title of advances to customers in the balance sheet.

5. Fixed Assets:
Fixed assets are categorized into two classes. Accounting Policies regarding these
classes have been discussed below:
a.Tangible Assets:

• Fixed assets except office premises are recorded at cost less

accumulated depreciation and accumulated impairment losses, if
any. Office premises are recorded at revalued amount less
accumulated depreciation.

• Depreciation on the fixed assets is charged on straight line method.

Depreciation is estimated while keeping the amount of residual
value of the assets (if any) in the mind.

• Maintenance cost and repair charges are charged to the income and
subsequent costs are stated as carrying value of the asset or under
separate head whichever is appropriate, if their period of benefits
extends more than one accounting period.

• Office premises are revalued by the professionals so as to eliminate

the effect immateriality from the fair value of the assets.

• Surplus from the revaluation is stated as “surplus on revaluation of

the fixed assets” and deficit is deducted from the previous value of
the surplus on revaluation of fixed assets. The value which exceeds
from the incremental depreciation charged to the assets is
transferred to the unappropriated profits.

• Gain and losses are transferred to income except those which are
related to surplus. Those are directly transferred to unappropriated
profits.

b.Intangible Assets

• Intangible assets which have finite life are stated on the balance
sheet on the cost less accumulated amortization and impairment
losses, if any.
• Amortization on the intangible assets is charged on straight line
method on a rate which is reviewed on the balance sheet in order to
eliminate the factor of immateriality.

• The other intangible assets which have infinite life are stated on the
cost less impairment losses if any.

6. Impairment

• Value of assets is reviewed if there is any sign of the impairment. If

indication of assets impairment exists then asset are revalued and
resulted impairment losses are recognized on the financial
statements.

• Impairment losses are charged to the profit and loss account except
those losses which arise from the revaluation of the assets.

• Impairment losses which arise from the revaluation of the assets

are adjusted against the value of the surplus on revaluation of the
assets.
 7. Taxation

Taxation policies have been synthesized by classifying taxation

into two categories i.e. current tax and deferred taxes.

a.Current tax

Current tax is recognized in the profit and loss account and

estimated on the taxable income by applying stated tax rate and any
adjustment of tax payable of the previous year.

b.Deferred Taxes

• Deferred taxes are stated by applying the balance sheet liability

method on the differences which are resulted on the value of
assets used for reporting purposes and the value which is
presented for the tax estimation.

• Deferred tax asset is only recognized to the extent to which

future taxable income is expected and tax credit can be availed.

• The amount of deferred tax is reduced to the extent to which it is

not possible that tax credit can be availed.

• Bank recognizes deferred tax asset/ liability that arise from the
deficit and surplus on revaluation of the fixed assets and it is
adjusted against the related deficit/ surplus in order to
compliance with the IAS-12 Income Tax.

• Deferred tax liability which results from the temporary

differences which are associated with exchange translation
reserves of foreign branches and where the timing difference can
be controlled, is not recognized in the financial statements.

8. Employee Benefits
 a. Defined Benefit Plans

Bank manages an approved funded gratuity plan for eligible

employee whose association with bank is five or more years.
Contributions to the fund are made on actuarial recommendation
basis. Projected Unit Credit Method is used for actuarial valuation.
Actuarial gains and losses exceeding 10% of higher actuarial
liabilities or plan assets are stated over the average life of the
employees. Gratuity is payable to staff after the qualifying period
of service.

b. Defined Contribution Plan

Bank is managing an approved provident fund scheme for

permanent employees to which both employees and bank contribute
8.33% of the basic salary of the employees every month.
9. Revenue Recognition

a. Advances and Investments

Mark up income on advances, investments and profits on

Musharika and Mudaraba investments are recognized on time
proportion basis while taking into account the effective yield on
instrument. Debt securities are purchased on discount or premium
and their discount or premium is amortized to profit and loss over
the period of its maturity by using the effective yield method.

Dividend income is recognized at the time when bank’s right to

receive has been established.

b. Leasing Finance

Bank uses the financing method for the accounting of the

leasing and Ijarah financing.

10. Foreign Currency Translation

a. Functional and Presentation Currency

Bank values the items included in its financial statements in

term of Pakistani currency.

b. Transaction and Balances

Transactions in the foreign currency are translated into Pakistani

currency by using exchange rate on the date of transactions.
Gains and losses due to foreign currency translation are settled to
profit and loss statement at the end of accounting period.

c. Commitments
 Commitments are outstanding forward foreign exchange
contracts which are translated at forward rates applicable to their
respective maturities.

d.Foreign Operations

Assets and liabilities of foreign operations are translated into

Pakistani currency at prevailing exchange rate at balance
sheet date. Translation gains and losses are stated in
the equity and their disposal is made in profit and loss.

11. Dividends and Appropriation to Reserves

Dividends and appropriation to reserves are reported as liability

on the balance sheet when they are approved by the
BOD.
 12. Segment Reporting

Bank reports primarily in the segment format. Bank’s segments

are those provide products or services and are
subjected to risks and rewards directly. Bank Alfalah has
the following segments:

a. Trading and Sales

b.Retail Banking

c. Commercial Banking

d.Corporate Finance

13. Geographical Segments

a. Pakistan

b.Asia Pacific (including south Asia)

c. Middle East

14. Related Party Transactions

Parties are considered related parties when they have ability to

control and influence the decision of the other parties.
BAL is executing the related party transactions on the same
terms.

Potential Red Flags and BAL’s Counter Measures

1. Credit Risk
 Credit risk arises to due to borrower’s inability to repay the
principal as well as the amount of the interest. BAL has considered
it very seriously; it has migrated to BASE-II as per SBP
guidelines. Bank has developed procedural manual of cross check
the figures in order to cop up with the credit risk. In order to make
the risk management function more sophisticated in the future,
bank is trying to improve the risk models and credit process
infrastructure.

2. Credit Concentration Risk

Credit concentration risk arises due to concentration of exposure

of credit under various categories. In order to eliminate the
credit concentration risk, SBP has prescribed regulatory limits
of maximum exposure to single and group of borrowers. BAL’s
annual credit risk plan describes the maximum exposure to an
industry which restricts the credit concentration risk of an
industry. BAL has also developed an internal rating system that
allows the RMD to monitor the risk by giving grades (which ranges
from 1-12, grade 10-12 rating is for defaulters) to customers/
borrowers.
3. Market Risk

Market risk is the risk of losses which results due to unfavorable

fluctuations of the market prices. It arises due trading activities of
the bank’s treasury. It also includes the investments and
structural positions of the banks. BAL has cop up this risk
by calculating ‘Value at Risk’ on daily basis while using historical
data of 2 years. Also bank’s RMD (Risk Management
Department) calculate the capital charge for market risk
as well.

4. Foreign Exchange Risk

Foreign exchange risk results due to unfavorable fluctuations of

the exchange rate. BAL manages this risk by setting and
monitoring the dealer, currency and counter party limits for on
and off balance sheet financial instruments. On and off balance
sheet instruments are the contracts which are the resultant
outcome of the import and export transactions. BAL is
regulating and monitoring currency risk against prescribed
enforceable limits by SBP.
5. Interest Rate Risk

Interest rate risk arises due to fluctuations in the value of the

financial instruments due to changes in the market interest
rate. Bank is exposed to interest rate risk due to asset-liability
mismatch and maturity mismatch. In order to ensure that the BAL
is managing risk within limits, Asset and Liability Management
Committee (ALCO) is monitoring the re-pricing of assets and
liabilities on regular basis. BAL’s interest rate risk is in prescribed
limits due to re- pricing.

6. Liquidity Risk
 Liquidity risk arises due to inability of bank to meet short term
obligations. BAL’s ALCO is responsible for managing the liquidity
position and for formulation of the strategy and oversight of the
asset liability function on a regular basis. The BOD of bank has
approved a comprehensive management policy which stipulates
the early warning indicators of liquidity risk and maintenance of
various ratios. Bank is also maintaining contingency funding in
order to cop up the unforeseen liquidity risk.
 Ratio Analysis

Liquidity Ratios:
Liquidity ratios are the measure of the firm's ability to meet its
short term obligations.

Liquidity Ratio 2005 2006 2007 2008

Current Ratio 1.02 1.06 1.1 1.06
Sales to working capital 1.22 1.38 0.85 1.57
20,249,3 15,276,5 30,128,8 19,741,3
Working Capital 11 29 84 02
Interpretation:
Bank Alfalah has managed very consistent liquidity ratios. It can be
revealed by the ratios individually. Like current ratio of the bank is
managed at an average of the 1.06. Sales to working capital ratio, has
shown an inclining trend over the years except year 2007.

Leverage Ratios
Leverage ratios tell us about the capital structure of the company.

Leverage Ratios 2005 2006 2007 2008

TIE ratio 1.2 1.16 1.27 1.08
Debt to total assets 0.95 0.95 0.95 0.95
Debt to Equity 23.14 24.91 22.71 22.72
Interpretation
TIE ratio of the bank is an average is at about 1.178 throughout the last four years.
It reveals that banks operating income is 1.178 times more than its debt obligations. It is
very evident from the leverage ratios that bank is using extensive leverage for its
operations.

Profitability
Profitability ratios are the measure of the performance of the company.
Profitability Ratios 2005 2006 2007 2008
Net profit Margin 11.26% 8.31% 12.10% 4%
Operating income margin 0.74 0.69 0.59 0.54
Return on assets 1.41% 1.27% 1.01% 0.04%
Return on equity 23.20% 16.60% 22.50% 8.90%

Interpretation
Profitability ratios have revealed that the bank performance has inconsistent behavior and in
2008 it was at the worst position it ever had. The performance is badly affected in the last few
years. And it is result of the extreme wave of the terrorism and changed political scenario.

Activity Ratios
Activity ratios tell about efficiency of the bank. . These ratios are also called asset utilization
ratios. It tells us that how efficiently assets are utilized.

Activity Ratios 2005 2006 2007 2008

Total assets turnover 0.06 0.07 0.07 0.08
Sales to fixed assets 2.19 2.017 2.16 2.25
Account receivables 11.79 15.76 16.05 29.60
turnover % % % %

Interpretation
Activity ratios point out the worst efficiency of the bank. Our banks all the activity ratios are
very low, which reveals that the bank is not utilizing its assets efficiently. The company has to
improve or increase its sales, so that it can improve its asset utilization.
MARKET RATIOS:
Market measures tell the performance of the company in the market.

Market Ratios 2005 2006 2007 2008

DPS 0 0 0 1.21
EPS 2.56 3.525 4.815 1.627
P/E ratio 3.21 2.83 2.07 6.14
Dividend payout ratio 0 0 0 0.74
Dividend yield 0 0 0 0.121
Book value per share 2.43 2.11 2.11 1.82
Interpretation:
If we see the DPS we can say that company is not announcing dividends
consistently. Earning per share has increased from 2005 to 2007 but in 2008 it is quite low.
Market performance of the bank is not quite promising. Book value is showing a continuous
trend of declining. Bank has to work over its portfolio and has to diversify it.
Horizontal Analysis

Interpretation
 Historical analysis has been done by using the historical data. In this estimation is
done by dividing the present amount of the item with amount of the item in prior years.
 Horizontal Analysis
Bank Alfalah Limited
Income Statement
Horizontal Analysis
(2005- (2006- (2007-
Description 06) 07) 08)
20.41
Net Sales 73.04% 21.67% %
-
13.13
Other Income 43.61% 87.26% %
14.05
Total Revenues 68.48% 30.33% %
111.42 22.32
Cost of Goods Sold % 9.11% %
239.91 49.09
Provisions 84.18% % %
110.06 25.67
Total Direct Expenses % 19.24% %
Selling, General & 28.15
Administrative 36.23% 40.06% %
-
60.43
Operating Income 0.10% 76.76% %
Interest Expenses 0.00% 0.00% 0.00%
Foreign Exchange (Loss) Gain 0.00% 0.00% 0.00%
Associated Company (Loss)
Gain 0.00% 0.00% 0.00%
Other Non operating (Loss)
Gain 0.00% 0.00% 0.00%
-
64.89
Income Tax Expense -6.73% 74.95% %
Reserve Charges 0.00% 0.00% 0.00%
-
Income Before Extra Ordinary 58.43
Items 3.56% 77.58% %
119.32 71.86
Provisions Brought forward % 49.62% %
Revaluation of assets 4.84% -5.71% 0.00%
 Minority Interests 0.00% 0.00% 0.00%
Net Income 42.07% 62.64% 3.34%

Vertical Analysis
Vertical Analysis
Bank Alfalah Limited
Income Statement
Vertical Analysis

Description 2005 2006 2007 2008

100.00 100.00 100.00 100.00
Net Sales % % % %
Other Income 18.33% 15.22% 23.42% 16.90%
118.33 115.22 123.42 116.90
Total Revenues % % % %
- - - -
Cost of Goods Sold 58.83% 71.88% 64.46% 65.49%
-
Provisions -3.10% -3.30% -9.22% 11.41%
- - - -
Total Direct Expenses 61.93% 75.18% 73.68% 76.90%
- - - -
Selling, General & Administrative 35.47% 27.93% 32.15% 34.22%
Operating Income 20.93% 12.11% 17.59% 5.78%

Interest Expenses 0.00% 0.00% 0.00% 0.00%

Foreign Exchange (Loss) Gain 0.00% 0.00% 0.00% 0.00%
Associated Company (Loss) Gain 0.00% 0.00% 0.00% 0.00%
Other Non operating (Loss) Gain 0.00% 0.00% 0.00% 0.00%
Income Tax Expense -7.03% -3.79% -5.45% -1.59%
Reserve Charges 0.00% 0.00% 0.00% 0.00%
Income Before Extra Ordinary
Items 13.90% 8.32% 12.14% 4.19%

Provisions Brought forward 7.02% 8.90% 10.95% 15.63%

Revaluation of assets 0.20% 0.12% 0.10% 0.08%
Minority Interests 0.00% 0.00% 0.00% 0.00%
Net Income 21.13% 17.34% 23.18% 19.90%
Valuation
Projected statements
Residual Income Model
Free Cash Flow

free cash flow model

Description 2005 2006 2007 2008
cash flow from operating 34,877,8 7,852,3 39,645,3 2,499,60
activities 85 62 25 6
less dividend 360,000 0 0 975,000
1,799,19 3,542,3 1,074,31
less capital expenditure 5 12 969,185 4
32,718,6 4,310,0 38,676,1
Free cash flow 90 50 40 450,292

FV = pv(1+i)^n
450292=32718690(1+g)
^3
450292/32718690=(1+g
)^3
g =
-0.76
WACC= w1ke+w2kd(1-
tax)
3.7955