Bank: NATIONAL BANK OF PAKISTAN - Analysis of Financial Statements Financial Year

2004 - Financial Year 2009

OVERVIEW (April 08 2010): National Bank of Pakistan is the largest commercial bank of Pakistan.
The bank handles treasury transactions for the government of Pakistan as an agent to the State
Bank of Pakistan.
The bank has a network of 1,232 branches in Pakistan and 18 overseas branches including the
Export Processing Zone Branch. It also provides services as trustee to National Investment Trust,
including the safe custody of securities on behalf of the NIT. National Bank of Pakistan was
established on November 9, 1949 under the National Bank of Pakistan Ordinance, 1949 in order to
cope with the crisis conditions, which were developed after the trade deadlock with India and
devaluation of Indian rupee in 1949. Initially, the bank was established with the objective to extend
credit to the agriculture sector.
The bank commenced its operations from November 20, 1949. Its Karachi and Lahore offices were
subsequently opened in December 1949. The nature of responsibilities of the bank is different and
unique from other banks/financial institutions. The bank acts as an agent to the State Bank of
Pakistan for handling provincial/federal government receipts and payments on their behalf. The bank
has also played an important role in financing the country's growing trade, which has expanded
through the years as diversification took place. NBP enjoys the highest rating of 'AAA' in the industry
assigned by M/s JCR-VIS Credit Rating Company Limited on a standalone basis ie without the benefit
of the 75% government ownership.
OVERVIEW OF BANKING INDUSTRY
In the year 2009, the economy showed signs of stabilisation. Inflation still remained top concern,
although it eased to 10.7% by August as a result of monetary tightening. The current account deficit
improved and the foreign exchange reserves stabilised. Problems in the energy sector played a key
factor in burdening public finances. Further, terrorist attacks remained the biggest challenge in 2009
and the negative effects of international economic meltdown also became evident in the shape of
sharp rise in non-performing loans and operating costs. These factors hampered the business
confidence as well as the performance of the banking sector.
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Growth Rates
2004
2005
2006
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NBP Industry avg
NBP Industry avg
NBP Industry avg
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Profits After Tax
47.58%
44.01%
105.14%
144.27%
33.93%
42.79%
Advances
36.91%
43.44%
21.76%
45.53%
17.58%
19.45%
Deposits
17.72%
21.07%
-0.46%
14.15%
8.30%
16.01%
Investments
-10.14%
-6.45%
5.11%
0.40%
-10.85%
-2.06%
Net Interest Income
13.14%
9.73%
62.43%
83.08%
29.02%
38.05%
Non Interest Income
-39.19% -20.11%
215.77%
68.66%
-29.62%
5.49%
Return on Assets
30.11%
20.93%
85.42%
35.72%
24.89%
18.39%
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2007
2008
2009
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NBP Industry avg

NBP Industry avg
NBP Industry avg
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Profits After Tax
11.82%
4.82%
-18.78%
-4.37%
17.81%
26.07%
Advances
7.77%
14.05%
21.23%
22.89%
15.07%
4.75%
Deposits
17.94%
19.80%
5.58%
12.98%
16.25%
10.03%
Investments
50.62%
69.85%
-18.96%
-8.69%
27.41%
33.53%
Net Interest Income
11.53%
9.86%
10.20%
15.98%
3.78%
19.69%
Non Interest Income
-42.50%
16.85%
264.70%
75.05%
45.44%
21.12%
Return on Assets
-2.95% -10.44%
-28.17%
-13.72%
5.64%
4.02%
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Looking at the banking industry growth rates for the year 2009, we see that the growth rate of NBP's
profit after tax is much lower than the industry average. On the other hand, the growth rate of the
bank's advances is more than 200% higher than industry average, indicating that NBP possesses a
large asset base. Similarly, the growth rate of NBP's deposit base is 62% higher than the industry
average, which shows that the bank has very effective policies for deposit mobilisation.
NBP's investments, however, have an 18.3% lower growth rate than the industry average, while its
net interest income growth rate is 81% lower than the industry average. Alternatively, NBP's noninterest income has a growth rate 115% greater than industry average, mainly due to a significant
increase in fee, commission and capital gains during 2009. The growth rate of the bank's return on
assets is 40.3% greater than the industry average.
FINANCIAL PERFORMANCE FINANCIAL YEAR 2004 - FINANCIAL YEAR 2009
The Asset Quality ratios of NBP show a mixed trend from 2007 onwards. Although, the growth rate of
NPLs has reduced in 2009 as compared to its 2008 levels, the overall ratio of NPLs to advances has
shown a steady rising trend from 2007 onwards. This growth in NPLs is an industry-wide
phenomenon, owing mainly to the impact of the global financial crisis, compounded by a dampening
of the repayment capacity of borrowers due to high domestic interest and inflation rates, power
shortages, pressure on trade volumes and deteriorating law and order condition.
Overall value of provisions has increased in 2009 as compared to 2008 levels. However, the ratio of
total provisions to NPLs has reduced by 5.95% from 2008 to 2009. The increase in absolute value of
provisions is due to both fresh accretions as well as further downgrading of the portfolio.
The profitability or earnings ratios declined in 2007 and 2008, before rising again in 2009. ROA
increased by 5.64% over the last year. ROE and ROD rose by 16.14% and 6.30%, respectively. This
increase in earning ratios is attributed to a 17.8% in profit after tax during 2009. However, this
growth in profits is not reflected well in earnings ratios, because assets and equity also showed an
upward trend during 2008-09.
The liquidity ratios of NBP showed an improvement in 2009. The ratio of Earning Assets to Assets
depicts a stable trend on average from 2004 to 2009. In 2009, the ratio of Earning Assets to Assets
increased by 1.35% over last year. The 11.89% increase in average earning assets was greatly
offset by a corresponding 11.52% increase in average assets. NBP's Advance to Deposits ratio
increased by 6.45%, over the same period last year. In general, advance to deposits ratio of NBP
shows a rising trend from 2004 to 2009, this signifies that most of funds were utilized for advances
rather than any other earning asset.
In FY09 we see that investments, as a share of total earning assets, fell due to changes in market

conditions. This signifies that the bank drew money from investments to advances - a trend depicted
at the overall banking industry level. One reason for this trend is a change in bank's approach to
NPLs treatment. Banks are now rescheduling the advances given to major customers in order to
avoid NPLs. This shows optimism of banks about the future state of economy.
The cost of funding earning assets shows a rising trend from 2004 to 2009. In 2009 the cost of
funding earning assets rose by 47.7% over last year. This can be mainly attributed to the record
level interest rates at the beginning of the year, which increased the interest expense. The yield on
earning assets also showed an increase by 14.35% over the last year. As the cost of earning asset
increased by a greater percentage than the yield on earning assets, the overall performance of NBP's
earning assets decreased in 2009.
The solvency situation of the bank showed marked improvement from 2004 to 2008. However, in
2009 the solvency ratios of NBP showed a mixed trend. The equity to assets and equity to deposits
ratios declined by 9.03% and 8.62% in 2009, respectively. This shows that the NBP's average
increase in assets and deposits during 2009 more than offset its average increase in equity during
the same period. A decline in equity to deposits ratio indicates that the liabilities of the company are
increasing at a greater rate than its stock of capital - such a trend if allowed to continue can have an
adverse impact on the long-term solvency of NBP. On the other hand the earning assets to deposits
ratio of NBP increased by 1.04% in 2009. Overall, the solvency of the bank deteriorated in 2009.
NBP has shown strong market performance over the years. However, in 2009 this market
performance declined significantly. In particular, the Bank's price to earnings ratio fell by 64.75%
and the market value to book value ratio fell by 59.3%. Moreover, the bank's average share price
per year also fell by 58.5%. This shows a decline in overall market value of NBP during 2009. A
decline in P/E ratios and other market value ratios suggests decline in investor confidence and hence,
growth prospects for NBP. This decline can mainly be attributed to a tight monetary policy and
adverse economic and social environment of the country, rather than to any inherent factor of the
Bank itself.
In 2009, NBP's after-tax profit increased by 18%, from Rs 15.5 billion to Rs 18.2 billion. The said
increase is owing to higher fee and commission income, tax credit and capital gains. The bank's net
interest income increased by 3.8% from the corresponding period last year, mainly due to volume
growth.
NBP's deposits grew by 16.25% over last year, despite the rise in cost of deposits. The bank
increased its deposits to strengthen liquidity position. In this regard, NBP launched the CASA Deposit
Mobilization Scheme in late 2009, aimed at mobilizing Current/Savings Accounts through
incentivizing employees. The overall impact of the rise in deposits on the system's stability and
liquidity outweighed the associated rise in cost.
Advances of the bank showed a 15% growth, mainly in commodity and corporate sector on account
of higher borrowings by government from the commercial banks. Loans under commodity operations
witnessed robust growth due to increase in commodity support prices by the government.
Nevertheless, the growth in advances in 2009 is less than that of last year; this is mainly due to
unfavourable business environment in the country, which reduced the demand for loans. In
particular, SME loans registered a decline due to reduction in the repayment capacity of borrowers
and in their willingness to go for fresh financing.
FUTURE OUTLOOK
Since most of the NPLs were the result of business cycle/circumstantial defaults, with the economy
picking up and reduction in interest rates, the quantum of non-performing loans is expected to

decline. For the next year, NBP plans to continue with its strong focus on recovery and reduction in
non-performing loans, deposit mobilization, expense management, consolidation of loans and
tapping into untapped markets. Further, NBP is embarking on industry leading IT initiatives to
upgrade and implement new application solutions to meet the challenges of the growing competition
and enhanced business requirements. This will greatly improve operational efficiency and control,
customer service and facilitate launch of new products. NBP remains committed to the interest of all
stakeholders including its employees, owners, regulators and the Pakistani nation. To that effect, the
bank has implemented the new 'Core Banking Package' in order to enhance work efficiency by
completely automating its functions. The bank has also initiated five new capacity building projects.
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RATIOS
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Asset Quality Ratios
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2004
2005
2006
2007
2008
2009
-------------------------------------------------------------------------------------------Growth of NPLs
-9.24% -6.54% 7.48% 5.68% 47.35% 25.61%
NPL to Advances
19.86% 14.26% 11.97% 11.35% 12.58% 14.34%
Provisions to NPL
0.75
0.85
0.90
0.89
0.84
0.79
-------------------------------------------------------------------------------------------Earning Ratios
-------------------------------------------------------------------------------------------2004
2005
2006
2007
2008
2009
-------------------------------------------------------------------------------------------ROA
1.21% 2.25% 2.81% 2.72% 1.96% 2.07%
ROE
16.78% 20.82% 21.58% 19.20% 14.13% 16.41%
ROD
1.44% 2.74% 3.53% 3.48% 2.54% 2.70%
-------------------------------------------------------------------------------------------Market Value Ratios
-------------------------------------------------------------------------------------------2004
2005
2006
2007
2008
2009
-------------------------------------------------------------------------------------------Price to Earnings
6.48
7.04 12.05 10.77 12.17
4.29
Market Value to Book Value
1.09
1.47
2.26
2.07
1.72
0.70
Average Share Price for the Year
67.91 126.18 251.63 251.46 174.76 72.60
-------------------------------------------------------------------------------------------Solvency
-------------------------------------------------------------------------------------------2004
2005
2006
2007
2008
2009
-------------------------------------------------------------------------------------------Equity to Assets
7.22% 10.79% 13.01% 14.19% 13.85% 12.60%
Equity to Deposits
8.57% 13.14% 16.34% 18.13% 17.98% 16.43%
Earning Assets to Deposits
0.86
0.89
0.95
0.96
0.96
0.97
-------------------------------------------------------------------------------------------Debt Management
-------------------------------------------------------------------------------------------2004
2005
2006
2007
2008
2009
-------------------------------------------------------------------------------------------Debt to Equity
12.85
8.27
6.69
6.05
6.22
6.94

Debt to Assets
0.93
0.89
0.87
0.86
0.86
0.87
Deposit times Capital
11.66
7.61
6.12
5.52
5.56
6.09
-------------------------------------------------------------------------------------------Liquidity
-------------------------------------------------------------------------------------------2004
2005
2006
2007
2008
2009
-------------------------------------------------------------------------------------------Earning Assets to Assets
0.72
0.73
0.76
0.75
0.74
0.75
Advance to Deposit
0.44
0.53
0.61
0.60
0.62
0.66
Composition of Earning Assets
-------------------------------------------------------------------------------------------2004
2005
2006
2007
2008
2009
-------------------------------------------------------------------------------------------Lending to Financial Institutions
5.48% 3.26% 4.27% 4.23% 3.29% 2.80%
Investments
42.75% 37.23% 32.23% 33.34% 32.51% 29.58%
Advances
51.77% 59.51% 63.50% 62.43% 64.20% 67.63%
-------------------------------------------------------------------------------------------Performance of Earning Assets
-------------------------------------------------------------------------------------------2004
2005
2006
2007
2008
2009
-------------------------------------------------------------------------------------------Yield on Earning Assets
5.68% 8.19% 9.51% 9.61% 10.38% 11.87%
Cost of Funding Earning Assets
1.78% 2.51% 2.96% 3.22% 4.07% 6.01%
-------------------------------------------------------------------------------------------Growth Rates
-------------------------------------------------------------------------------------------2004
2005
2006
2007
2008
2009
-------------------------------------------------------------------------------------------Profits After Tax
47.58% 105.14% 33.93% 11.82% -18.78% 17.81%
Return on Assets
30.11% 85.42% 24.89% -2.95% -28.17% 5.64%
Net Interest Income (before provisions) 13.14% 62.43% 29.02% 11.53% 10.20% 3.78%
-------------------------------------------------------------------------------------------2004
2005
2006
2007
2008
2009
-------------------------------------------------------------------------------------------Deposits
17.72% -0.46% 8.30% 17.94% 5.58% 16.25%
Investments
-10.14% 5.11% -10.85% 50.62% -18.96% 27.41%
Advances
36.91% 21.76% 17.58% 7.77% 21.23% 15.07%
Net Interest Income (after provisions) 25.17% 67.31% 31.38% 4.05% -9.75% 2.69%