Banking Final Report

Financial Statements Analysis

SUBMITTED TO: MISS SUMMAIRA SAJAAD SUBMITTED BY: ZARA SIKANDER KINZA RAZZAK NIMRA ASHFAQ HAMZA MANSOOR LUQMAN RAEES SANA RASHID KHAN Wednesday, November 21, 2012

SECTION F, BBA IV, LAHORE SCHOOL OF ECONOMICS

Contents
Contents..................................................................................................................... 2 BALANCE SHEET ANALYSIS.........................................................................................2 ASSETS SECTION..................................................................................................... 2 LIABILITIES SECTION................................................................................................4 EQUITY SECTION......................................................................................................4 INCOME STATEMENT ANALYSIS..................................................................................4 PROFIT LOSS AFTER TAX (NET INCOME): ................................................................6 FINANCIAL RATIO ANALYSIS........................................................................................6 PROFITABILTY AND EFFICIENCY RATIOS:.................................................................9 EXPENSE CONTROL MEASURES:............................................................................11 CREDIT RISK.......................................................................................................... 11 MARKET RISK.........................................................................................................11 LIQUIDITY RISK......................................................................................................12 SOLVENCY & CAPITAL ADEQUACY:........................................................................12 DUPONT ANALYSIS................................................................................................ 12

BALANCE SHEET ANALYSIS

ASSETS SECTION
ADVANCES: The first major use of sources for BOP is Advances; the net increase in advances from 2010 to 2011 is Rs 0.0631 b and in percentage terms the increase is 5.22%. The major reason of increase in advances is the decrease in NPL from 7.0739 b in 2010 to 7.0364 b in 2011. In percentage terms NPL has decreased 4.845%. The Provision for loan loss charged to the I/S has significantly decreased from 0.559m in 2010 to (0.0316b) in 2011. The reason for this

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is that the State Bank of Pakistan has amended prudential regulations for provising against NPLs and had this change not been made this specific PLL would have been higher and consequently loss before tax would have been higher and advances lower by 1.096m. Looking at the infection ratio which is NPL/ Gross loans, it has decreased from 51.5 % in 2010 to 47.9 % in 2011, this is a positive indicator for BOP as it is recovering most of its advances given out also gross loans have increased which is another reason why infection ratio has decreased. When considering sectoral specific risk we have identified that the major sector to which the advances are being given out is textile and ginning. The percentage given to this sector is 28035 % of total gross loans, however analyzing the NPL/ Gross loans for this sector we see that 67.38% of funds are not being recovered from this sector. The next sector that proves to be most risky is trading and commerce for which 70.656 % of funds lended out are not being recovered. Bop should increase its advances given to sectors that are risk free such as federal and provincial governments where the credit risk is 0. INVESTMENTS: The second major use of funds for BOP is investments. There is a significant change or increase in investments from 2010 to 2011 by 64.11% or by Rs 0.361b. When investigating the annexed note 10.2 we find that BOP has significantly increased investments in Federal Government securities. The investment in market treasury bills has raised from 0.3549 b in 2010 to 0.7354 b in 2011 furthermore Pakistan investment bonds have raised from 0.046 b in 2010 to 0.105 b in 2011. Thus our investments at cost have accumulately raised from 0.5986 b in 2010 to 0.9670 b in 2011. Further noting provisions in investments have decreased from (0.186m) in 2010 to (0.405m) in 2011. So thus there has been an increase in net investments as noted above. The investment in government securities compared to other types has risen from 71.22% in 2010 to 86.99% in 2011. This has helped to minimize the credit risk for BOP as this is default free investment. The ratio of government securities to total assets has risen from 17.52% in 2010 to 29.94% in 2011, this signifies lower liquidity risk and credit risk. CASH AND BALANCE WITH TREASURY BANKS: It is the third major use of funds for BOP. It has increased over the fiscal year 2011 by 2.628m.Looking at the breakdown in a next note no7; the local currency current account with SBP has increased significantly over the year 2011. This increase is under the requirements of cash reserve requirements set by SBP.

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LENDING TO FINANCIAL INSTITUTIONS: It is the fourth major use of funds for BOP and it has increased by a nominal percentage by 1.885% and in monetary terms by Rs 0.137m. The increase is registered due to significant increase in certificate investments from 0.143m in 2010 to 1.38m in 2011. These carry profits at the rate ranging from 12.4 to 15 % and will mature in 27 Jan 2012.

LIABILITIES SECTION

DEPOSITS: The first major source of funds for BOP is deposits and other accounts. This has risen by 140276% in the year 2011 and as a percentage of total liabilities this figure has decreased from 92.3% in 2010 to 88.03% in 2011. Fixed deposits in customer segments have increased from 0.96b in 2010 to 1.07b in 2011. This has caused the overall increase in deposits and other accounts. BORROWINGS: The second major source of fund for BOP is borrowings, now this has risen significantly as a percentage of total sources of funds from 5.11% in 2010 to 9.24% in 2011. Overall in monetary terms borrowings have increased from 0.115b in 2010 to 0.249b in 2011. The major reason for an increase in borrowings is the increase in re purchase agreement borrowings from 5.08m in 2010 to 0.188b in 2011. These are secured against market treasury bills and Pakistan investment bonds and will mature by 16 Jan 2012.

EQUITY SECTION
SHARE CAPITAL: Share capital is constant at 5.287m in both the years. As at close of the year, paid-up capital, reserves (net of losses) and advance subscription money of the Bank stood at Rs.10.1 billion, as against the minimum regulatory capital requirement of Rs. 8.0 billion. The Capital Adequacy Ratio (CAR) remained at a level of 7.12% against the prescribed level of 10%.

INCOME STATEMENT ANALYSIS

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INTEREST EARNED: This has increased from 0.18b in 2010 to 0.206b in 2011. This
increase is due to the increase in interest earned from investments in available for sale securities which increase significantly from 0.549b in 2010 to 0.820b in 2011 further more held for trading securities increased by 1.67m over the fiscal year 2011.

INTEREST EXPENSE: It has also increased from 0.188b in 2010 to 0.210b in 2011.
The reason for interest expense to increase is due to is the significant increase in the deposits which has caused interest expense on deposits to increase from 0.16b in 2010 to 0.18b in 2011.

NET INTEREST INCOME: This is recorded as a loss in both years however the loss
has decreased over the year from (0.58m) in 2010 to (0.391m) in 2011. This is because of the increase in interest earned which is more than the increase in the interest expense.

PLL: The Provision for loan loss charged to the I/S has significantly decreased from 0.559m in
2010 to (0.0316b) in 2011. The reason for this is that the State Bank of Pakistan has amended prudential regulations for provising against NPLs and had this change not been made this specific PLL would have been higher and consequently loss before tax would have been higher and advances lower by 1.096m.

NET INTEREST INCOME AFTER PLL: It was a loss in 2010 of (3.91m) and has
now become positive in 2011 at the figure 2.196m. This is due to the significant decrease in PLL.

NON INTEREST INCOME: It has risen from 1.88m in 2010 to 1.98m in 2011. The
reason for this is the increase size of the bank which has caused services offered to also increase in turn affecting fee commission and brokerage income positively increasing from 0.526m in 2010 to 0.724m in 2011. Furthermore gain on sale and redemption on security has also increased from 0.29m in 2010 to 0.33m in 2011, it is due to the gain on sale of the federal government security which has registered an income of 0.042m in 2011.

NON INTEREST EXPENSE: Admin expenses have increased from 0.343m in 2010
to 0.395m in 2011. The increase in admin expenses is again due to increase in size of the bank.

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In the admin expenses salaries and allowances has increased from 1.76m in 2010 to 1.99m in 2011.

PROFIT AND LOSS BEFORE TAXES: (EBT) It is interesting to note that in

2010 BOP had a significant loss before taxation of 6.2m but in 2011 they were able to generate profit before tax of 0.046m. this can partly be attributed to the major decrease in PLL under the regulations changed by SBP.

TAXATION: As a result of positive EBT in 2011 the taxation has increased consequently to
a positive figure of 0.174m.

PROFIT LOSS AFTER TAX (NET INCOME):

This again jumped from a loss of 4.04m in 2010 to profit of 0.0294m in 2011.

FINANCIAL RATIO ANALYSIS

2011 Calculations 294924/1002352 0 2011 2010 Calculations (4046554)/28889 57 2010

PROFITABILTY AND EFFICIENCY RATIO:

1. ROE

FORMUL AS: Net income after tax/total equity capital.

0.02942 31

-1.401

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2. ROA

3. Net interest Margin 4. Net noninterest Margin 5. Net bank operating margin

6. Asset Utilizatio n 7. Net profit Margin

8. Equity Multiplier 9. Yield on earning asset

Net income after tax/Total assets Net income/To tal assets Net noninterest income/To tal assets (Total operating revenuetotal operating expense)/ Total assets (total operating revenue/T otal assets Net income after taxes/Tota l operating revenue Total asset/Tota l equity Interest income/Ea rning asset

294924/2808896 92

0.0010

(4046554)/22913 1774

-0.017

(391210)/280889 692 19897083716432/280889 692 (20682061+198 9708)(21073271+371 6432)/28088969 2

-0.0013 -0.00614

(584259)/229131 774 18854464176654/229131 774 (18217583+1885 446)(18801642+4176 654)/229131774

-0.003 -0.009

-0.00754

-0.0125

22671769/28088 9692 294924/2267176 9

0.0807

20103029/22913 1774 (4046554)/20103 029

0.0877

0.0130

-0.2012

280889692/1002 3520 20682061/23065 4796

28.023 0.0896

229131774/2888 957 18217583/18774 19119

79.312 0.097

10. Cos t of borrowin g on Interest bearing liabilities

FORMUL A: Interest expense/I nterest bearing liabilities

CALCULATIONS : 21073271/26286 0258

2011 2.0801

CALCULATIONS: 28801642/21970 3685

2010 0.085577

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11. Spr ead EXPENSE CONTROL MEASURES: 1. 2.

0.089660.080169

0.0094

0.0970350.085577

0.011458

3. CREDIT RISK: 1. 2. 3. NPL Trend 4. Sector specific risk: NPL/gross loans x 100

Interest expense/T A Interest expense/I nterest bearing liabilities Admin expense/T A PLL/gross loans NPL/gross loans and lease

21073272/28088 9692 21073271/26286 0258

0.0750 0.08016 9

18801642/22913 1774 18801642/21970 3685

0.082056 0.0855

3959217/280889 692

0.0140

3435049/229131 774

0.01499

(3164234)/15343 0862 73643672/15343 0862

-0.0206 0.4799

559604/1501171 59 77393928/15011 7159

0.003727 0.5156

Textile & ginning

29311289/43497 514 x 100

67.386%

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---

Trading & commerce MARKET RISK: 1. EPS LIQUIDITY RISK: 1. Equity capital /TA

9515134/134668 06 10023520/28088 9692

70.656%

---

---

0.0356

2888957/229131 774

0.0126

2. 3.

Cash & due from deposits with other banks/ TA Govt securities/ TA Cash assets &govt sec/ TA

16698333/28088 9692

0.05944 8

14069601/22913 1774

0.06140397

84124660/28088 9692 100822993/2808 89692

0.2994 0.35894

40160087/22913 1774 54229688/22913 1774

0.175270 0.236674

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SOLVENCY & CAPITAL ADEQUACY: 1. P.E Ratio 2. 3.

Market value per share/EPS Equity capital/ TA -Share Capital -State Bank Penalty

10023520/28088 9692 -5287974 -205

0.03568 5287974 -1605

2888957/229131 774

0.01260

PROFITABILTY AND EFFICIENCY RATIOS:

1) The ROE for the fiscal year 2010 was -1.401, which means that the company wasnt earning any profits and the net income after tax came out to be negative leading to a negative ROE. For the year 2011, bank of Punjab earned positive income after tax which made the ROE positive and i.e. 0.0294231, a positive sign for the share holders and the investors. 2) ROA is analysis of the companys return relative to the total assets. As evident from the income statement of BOP, bank was earning a negative net income after tax for the fiscal year 2010 which made the ROA for that year to be negative. Subsequently, BOP made profits in 2011 making the ROA positive and eventually an optimistic advancement for the shareholders. 3) Net interest income is the difference between the revenue that is generated from a bank's assets and the expenses associated with paying out its liabilities. As the net income generated by BOP was negative for both the fiscal years 2010 and 2011 so the net interest income also comes out to be negative i.e. -0.003 and -0.0013 respectively. These ratios show that the BOP had to pay out more for its liabilities than it generated revenues, making the BOPs position weak. 4) The net non- interest margin is also negative for both the years as the major reason could be that the spread between non interest income and non interest expense went up. The value for net non interest margin for the year 2011 is -0.00614 which is smaller than the value of 2010 which was -0.009, but still both are negative, showing poor performance.

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5) Net bank operating margin shows net operating income divided by revenues, expressed as a percentage. This number is a measure of how profitably the company is operating. The ratios for both the fiscal years comes out to be negative showing that the Bop is not performing well as their net operating margin for both the respective years is negative and they are unable to meet their total operating expenses in an efficient way. 6) The asset utilization ratio calculates the total revenue earned for every dollar of assets a company owns. This ratio slightly decreased for Bop from 2010 to 2011 showing that the operating total revenues have decreased a little bit which is a direct result of BOPs low efficiency. 7) The net profit margin has improved from -0.2012 to 0.0130 showing that the net income after taxes have increased from 2010 to 2011. This ratio is undeniably an important number, investors can easily see from a complete profit margin analysis that there are several income and expense operating elements in an income statement that determine a net profit margin. It behooves investors to take a comprehensive look at a company's profit margins on a systematic basis. 8) Equity multiplier shows BOPs total assets per dollar of stockholders' equity. The ratios tremendously decreased from 79.312 to 28.023 respectively for the years 2010 and 2011 showing that the company is now relying less on debt and more on equity. And this can be healthy as well as disastrous depending on the scenario company is facing at a particular time. 9) Yield on earning asset for BOP went down from 0.097 to 0.0896 showing that the banks interest income increased but simultaneously on the other hand the earning assets decreased. Money managers often compare the earnings yield of a broad market index (such as the S&P 500) to prevailing interest rates, such as the current 10-year Treasury yield. If the earnings yield is less than the rate of the 10-year Treasury yield, stocks as a whole may be considered overvalued. If the earnings yield is higher, stocks may consider undervalued relative to bonds. 10) Interest bearing debt is any debt where the lender charges a fee for the right to borrow money. This ratio for BOP has increased from 0.085577 to 2.0801 showing that the company is now paying more for the debts they have taken showing an alarming situation.

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11) The spread shows the difference between yield on earning assets and cost of borrowing on interest bearing liabilities. The spread for BOP went down from 0.011458 to -1.99044 for the years 2010 and 2011 respectively showing that the assets that yielded profits for BOP were less than the cost of borrowing on interest bearing liabilities. So BOP has to pay more interest for their debts and they are earning less which is a distress situation for the bank.

EXPENSE CONTROL MEASURES:

In expense control measure the (Interest expense/TA) decreased from fiscal year 2010 to 2011 as the bank lowered their interest expense and increased their total asset concurrently. This is an efficient step towards prosperity as every effective organization wants to decrease their debt and increase their profits and total assets. Whereas on the other hand (Interest expense/Interest bearing liabilities) and (Admin expense/TA) remained approximately same for both these years showing that BOP have still the tendency to improve itself by lowering the interest expense and Admin expense.

CREDIT RISK
BOP is going towards rapid credit risk as (PLL/gross loans) has gone down from 0.003727 to -0.0206 respectively. This shows that BOP has lower down their provision for loan loss and if any debtor or customer defaults there would be much greater and worse impact on the bank as they are not prepared for it. And also the funds in the PLL are gone negative. So if BOP wants to work on the safe side their PLL must remain positive.

MARKET RISK
EPS shows the portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serve as an indicator of a company's profitability. BOPs EPS increased from 0.0126 to 0.0356 which means that it is beneficial to the shareholders and prospective investor to invest the money in this bank.

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LIQUIDITY RISK
BOPs (Cash & due from deposits with other banks/ TA) decreased and on the other hand the (Government securities/TA) & (Cash assets & government sec/ TA) increased from 2010 to 2011 which shows that BOP is more at liquidity risk from cash and dues from deposits with other banks rather than government securities. SO BOP should tighten their credit policy for the other banks so that they can improve their liquidity position. As far as government is concerned, government is always default free so BOP doesnt have to apprehend anything from the government.

SOLVENCY & CAPITAL ADEQUACY:

The (Equity capital/ TA) ratio has increased from 0.01260 to 0.03568 in both these years showing that BOP is now using more equity capital rather than debt to finance its total assets. This is good for BOP as they need to decrease their debts and be self sufficient so that they can reduce the pressures of the outside forces and can work smoothly.

DUPONT ANALYSIS

Calculation 0106104996*280889692/10023520=0.028

2011 2.8%

Calculation (0.0176603)*229131774/2888957

2010 (134.8)%

ROA has increased because our net income has gone up drastically from negative 4046554 to a positive 294924.Total assets have also increased from 229131774 to 280889692.This increase in total assets coupled with an increase in equity from 2888957 to 10023520 has also resulted in an ultimate increase in the ROE. Thus according to the DuPont analysis the ROE has risen from a negative 134.8% to a positive 2.8%

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