2012

SILKBANK LIMITED
Prepared by: Muhammad Haris Rafi (2009-1-01-10797)

TABLE OF CONTENTS
Letter of Transmittal........................................................................................................................................................... 3 SWOC ANALYSIS ..................................................................................................................................................................... 4 Ratios of Silk Bank................................................................................................................................................................ 5 ANALYSIS ................................................................................................................................................................................... 6 INDUSTRY RATIO .................................................................................................................................................................. 8 INDUSTRY ANALYSIS ........................................................................................................................................................... 9 BANKING SECTOR REVIEW ............................................................................................................................................ 10 FUTURE OUTLOOK & RECOMMENDATIONS ........................................................................................... 11

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LETTER OF TRANSMITTAL
17th April, 2012 Mr. Kamran Rabbani Permanent Faculty, Institute of Business Management, Korangi Creek, Karachi. Dear Sir! Following is the Term Report that you have given to me as my final project. This report is about Ratio Analysis of Silk Bank Pakistan. I have made my best possible efforts to meet the objective of learning required out of the underlying study. As an individual, I have found the task interesting and challenging. Though there were number of limitations faced. I am sure that this analysis will come up to the expectations of the readers and concerned people. Cordially,

Muhammad Haris Rafi (2009-1-01-10797)

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SWOC ANALYSIS
STRENGTHS: Focus on export base structure DIVERSE PRODUCT PLATTER Expansionary phase Conversion of NPLs of Rs. 3.2 billion to performing loans. Relatively reputable & sound group. OPPORTUNITIES: Should focus on other local business sectors (Power Sector) to generate additional revenue. ENHANCEMENT IN INTERNATIONAL TRADE BUSINESS CAN BENEFIT THE BANK Merger with another bank Increasing branch network can enhance of customers and the bank. CHALLENGES: Sluggish Economic Growth Government policies. High Deposit cost, hence increasing cost

WEAKNESSES: Conservative policies and management style Lack of proper IT infrastructure CHANCES OF ADVANCES PORTFOLIO TO CONVERT INTO BAD Small Brach network

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RATIOS OF SILK BANK

DATE
Key Figures Growth No. of Shares outstanding Operating Profit per share Key Ratios Profitability Gross yield on Earning Assets Gross Spread Expense to income Net Interest Margin Net Profit Before Tax to Total Income Net Profit After Tax to Total Income Return on net worth Return on Deposits Return on Total Assets Balance Sheet Capital Adequacy Equity to Assets Equity to Deposits Deposits to Assets Leverage Ratios Liabilities / Net worth Interest Coverage Solvency ADR CASA Rate paid on Funds Dividend Profile EPS Dividend yield (based on cash dividend) Cash Dividend per Share

2008
-45.87% 628,276,843 0.26%

2009
-164.65% 197,253,795 1.17%

2010
-23.40% 760,214,980 0.00%

11.84% 8.05% 100.46% 3.51% -85.48% -60.75% -45.87% -4.91% -3.62% 16.28% 7.89% 10.70% 73.78% 11.67 1.00 79.84% 39.07% 9.02% 22.25 3.13% 11.50

7.09% 0.98% 116.51% 4.00% -116.13% -79.28% -164.65% -5.85% -4.23% 19.07% 2.57% 3.55% 72.25% 37.95 0.86 70.54% 42.37% 10.15% 22.38 2.95% 11.00

6.35% 12.53% 104.54% 0.00% -16.70% -15.29% -23.40% -2.03% -1.56% 22.07% 6.66% 8.68% 76.73% 14.02 0.96 82.62% 47.71% 9.49% 22.20 2.40% 11.50

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ANALYSIS
Silk Bank's loss before tax increased by 50% to Rs 4.25 billion in FY09 as compared to Rs 2.83 billion in FY08. The net interest income registered a decline of 84% as it reduced to Rs 57 million from Rs 369 million in FY08. The reason behind this decline was the increase in interest expense resulting from high costs of deposits and increased borrowing from financial institutions. The non-mark-up income registered a sizable growth of 72% in FY09 (to Rs 662.187 million) with almost half of this income coming from fee, commission and brokerage income. Non-interest expenses increased by 36.8% to Rs 2.66 billion with administrative expenses increasing by 41.9% to Rs 2.74 billion. In FY08, Silk Bank declared a loss of Rs 2014 million with earnings per share of Rs 2.83, considerably lower (33.76%) than previous year's loss of Rs 3041 million and loss per share of Rs 6.25. Due to losses, the bank did not pay any dividend. The net interest income after provisions improved by 54.10%; from negative Rs 2.773 billion to negative Rs 1.273 billion. This was mainly because during FY08, the bank's provisioning against the NPLs and advances declined significantly (47%) to Rs 1.663 billion. The non-mark-up income witnessed a decline of 50.50% to Rs 384.5 million mainly on the back of declining fee commission and brokerage income, which went down 49% to Rs 188.6 million. In FY09, net interest income after provisions declined by 76.9%, which can be attributed to a sharp surge in the interest expenses to Rs 5.855 billion (an increase of 38.7%). Impairment expenses for available for sale securities (Rs 138.276 million) drive up provisioning expense. In FY09, investments grew by 67% from the previous year to stand at Rs 20.179 billion. Government securities i.e. Market Treasury Bills and PIBs comprise 88% of the investments (Rs 17.788 billion). Advances show a modest gain of 3.2% from FY08 to stand at Rs 32.097 billion but still represent the major chunk of earning assets at 60% of the earning asset during FY09. Lending to financial institutions declined by 22% to Rs 1.067 billion mainly due to a decline in call money lending. However the ADR has fallen to 64.7% in 2009 as compared to 75.72% in 2008, because the advances rose by 3.2% (to Rs 32.097 billion) and deposits grew by 20% (to Rs 49.610 billion) in 2009. Silk Bank's return on assets has declined to negative 4.2% in FY09 as compared to negative 3.6% in FY08. In FY08 the bank had been able to reduce its loss before tax to Rs 2.83 billion. However it was unable to sustain this performance as loss before tax increased by 50% to Rs 4.25 billion. Most of this loss can be attributed to a decline of 84% in net interest income while the operating charges increased by 42%. Provisions against loans and advances also increased by 30% to Rs 2.17 billion as the bank suffered from high NPLs and economic downturn. The return on equity declined to negative 164% in FY09 from negative 45% in FY08. This has been mainly due to a decline of 60% in the bank's equity. Although the bank was able to increase its assets by 23%; large increase in deposits and borrowings from financial institutions raised the bank's liabilities to Rs 66 billion (an increase of more than 30%). The ratio of earning assets to total assets shows a slight decline in FY09 i.e. 77.69% as compared to 79.93% in FY08. Although earning assets have been increasing but in less proportion to total assets. The advance to deposit ratio has declined from 75% in FY08 to 69% in FY09. The bank has been able to improve on its liquidity in compliance with SBP's notifications. With deposits mainly consisting of term deposits the bank has been able to better match its advance with deposits. This was mainly due to the rise in advances of 20.14% whereas the deposits fell by 3.11% because the bank had large amounts of fixed deposits, which enabled them to extend advances, particularly in the long term advances, which stood at Rs 17.923 billion, 31.20% higher than previous year's Rs 13.661 billion. Whereas short-term deposits for FY08 stood at Rs 20.26 billion, which grew at a comparatively slower rate of 14.13%. Overall, the figures indicated that the bank was striving to maintain a good ADR by making more and more advances, but the issue of default and non-performance loans remained a challenge. There has been a slight increase in yield on earning assets i.e. from 10.54% in FY08 to 10.74% in FY09 but the cost of funding these earning

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assets has increased with a larger amount. In FY09 the cost of funding these earning assets was 11.97% as compared to 9.48% in the previous year. This was due to an increase of 38% in the interest expensed which rose to Rs 5.8 billion as the bank increased its financing by increasing its deposits and borrowings from financial institutions. Silk Bank Limited reported earnings results for the third quarter and nine months ended September 30, 2011. For the quarter, the company reported net mark-up/interest income of PKR 500.3 million against PKR 262.2 million a year ago. Profit before taxation was PKR 62.3 million against loss of PKR 852.4 million a year ago. Profit after taxation was PKR 48.2 million or PKR 0.02 per basic and diluted share against loss of PKR 908.4 million or PKR 0.42 per basic and diluted share a year ago. For the nine months, the company reported net mark-up/interest income of PKR 1,525.75 million against PKR 542.4 million a year ago. Profit before taxation was PKR 399 million against loss of PKR 830.9 million a year ago. Profit after taxation was PKR 210.7 million or PKR 0.08 per basic and diluted share against loss of PKR 700.34 million or PKR 0.32 per basic and diluted share a year ago. Net cash flow from operating activities was PKR 3,217,494,000 against net cash out flow from operating activities of PKR 10,534,899,000 a year ago.

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INDUSTRY RATIO

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INDUSTRY ANALYSIS
The year 2010 remained fraught with challenges, which impacted the macroeconomic landscape of the country. In the second half of the year, record floods inundated nearly 20% of the country and inflicted significant damage to the fragile economy. Continuing severe shortages of power and gas have exacerbated the situation and Large Scale Manufacturing (LSM), after exhibiting good growth of 5% in FY10, remained subdued during the first half of the current fiscal year. As a consequence, GDP growth estimates for 2010-11 have been scaled down to 2.8% from pre-flood estimates of 4.3%. The destructive floods in the second half of 2010 derailed the economy further with total losses of USD 910 billion, of which USD 3-4 billion were in the agricultural sector. This together with acute electricity and gas shortage has taken a toll on the growth of economic activity which is now widely expected to be around 2-3% for FY11 from an initial target of 4.5%. Meanwhile, global outlook continues to remain fragile and uneven as the weaknesses in major developed economies continue to drag the global recovery despite exceptional performance of emerging markets. Inflationary pressures remained active throughout the year, with CPI at 15.5% year-on-year in December 2010 and averaging 13.9% for the year. Supply chain interruptions caused by crop damage resulted in volatile food prices and remained a key driver behind surging price pressures. Escalating power tariffs remained a regular feature throughout 2010, further fueling inflation. The fiscal position remained fragile as revenue generation remained weak whilst expenditures escalated. FY 2010 fiscal deficit stood at 6.3% of GDP, far exceeding the IMF target. Furthermore, taxation reforms including the Reformed General Sales Tax (RGST) have not yet been implemented due to severe opposition by political parties. Recognizing the risks to the economy caused by high inflation that was being exacerbated by a structural fiscal deficit, the State Bank of Pakistan resorted to three successive 50bps hikes in the policy rate in FY11. Despite an increase in the policy rate and its transmission to market interest rates, the growth in key monetary aggregates remained substantial as M2 grew by 15.1% during the 1H-FY11 due to sharp growth in credit to the Government from the banking system. In addition, the outstanding stock of credit extended to the public sector for procurement of commodities and Public Sector Enterprises (PSEs) remained at an elevated level. Meanwhile, the credit to the private sector depicted a modest growth of 4.8% as against a contraction of 1.8% a year earlier. The credit to private sector was primarily for working capital financing whereas credit for fixed investment showed a consistent declining trend. The external account position remained a key positive as the current account deficit for FY 2010 was better than the expectations at 2% of GDP due to higher remittances and aid inflows, services inflows and increased exports. This trend has continued in FY 2011 as the country posted its first half-yearly current account surplus since 2003. Pakistans equity markets also performed well and continued to attract foreign investment, with KSE-100 index gaining approximately 26% during 2010.

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BANKING SECTOR REVIEW

The banking sector of Pakistan has been in a consolidation phase since the beginning of 2009 due to the countrys economic vulnerabilities. The sector has remained focused on deposits, which grew by nearly 16% in 2010, with aggressive solicitation of current and savings accounts (CASA). Credit lending has remained subdued and gross advances increased by only around 5% during 2010. Despite adequate liquidity, the banking sector largely remained cautious in extending credit to the private sector mainly due to prevalent circumstances in the country; which partly also fueled the growth in Non-Performing Loans (NPLs), rising close to Rs. 500 billion by the end of Q1-FY11. At the same time, governments growing financing needs provided banks the opportunity to invest in risk free government securities. Investments too continue to generate increased interest, especially amid better yields, post the discount rate hikes and enhanced returns at the local equity markets. The 6% rise in 4Q Investments has taken the calendar year growth to 17.3%, compared to an avg. growth of 27.8% in 2006-09.

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FUTURE OUTLOOK & RECOMMENDATIONS

2010 results have validated the view of higher NII and lower loan losses driving the bottom line growth. However, we flag concerns over provisioning to come forth again in 2011, as NPLs are likely to continue ascending as loans are re-priced at higher rates. Further, meeting capital requirements will pose a challenge for smaller banks. Though it is expected that advances growth would remain lower at 5% in 2011 amid higher interest rate scenario and lower appetite for credit, better spread will keep NII on the higher side. Moreover, we expect provisioning against non performing loans and continuous growth in operating cost will slightly dilute the top line growth. Thus, it is expected that overall banking sector earnings to grow by 16% in 2011. The banking sectors increased preference for risk free investment in government papers (supported by the GOPs demand for such funds to finance the rehabilitation of the flood struck areas) is no doubt expected to put a limit to the flood related NPLs. Year over year, Silk Bank Limited has been able to grow revenues from 489.8M to 1.1B. Most impressively, the company has been able to reduce the percentage of sales devoted to selling, general and administrative costs from 551.52% to 280.18%. This was a driver that led to an improvement in the bottom line from a loss of 2.9B to a smaller loss of 1.1B. Silk Bank needs to cater its non-performing loans to enhance the efficiency and profitability of cash flow. It also needs to increase its branches to reach out customers; good product is of no use until it is not available.

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APPENDIX

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