BANKING INDUSTRY

ANALYSIS
Mohammad Jibran
Souban Ahmed
Fahad Zafar
History of banking
 The only bank run by the Muslims of the sub-continent
was Habib Bank which was established in 1941.

 Adamjee with the assistance of Isphanis established
Muslim Commercial Bank a few months before the
creation of Pakistan in Calcutta.

 When Pakistan came in to being The Habib Bank shifted
its Headquarters from India to Karachi.

 State Bank of Pakistan was formed in 1948 which used
supervisory and monetary policy powers of State
Bank of India.

 The establishment of the National Bank of Pakistan in
1950 on the pattern of Imperial Bank of India was yet
another milestone in the banking history of Pakistan.

Continued…
 In September 1949 the rupee value was reduced
against the Pound sterling which was a major event in
the banking circles but Pakistan did not reduced its
exchange rate against pounds sterling.

 In the period of 60s to 70s the emergence of a number of
specialized development finance institutions (DFIs) such
as Industrial Development Bank of Pakistan (IDBP) and
the Agricultural Development Bank (ADB).

 In 1974 all domestic commercial banks were nationalized
by the Government. The Pakistan Banking Council was
established, which assumed the role of a banking
holding company but with limited supervisory powers.
However, PBC was dissolved in 1997.

 SBP was made the sole regulatory authority for banks and
financial institutions in Pakistan after dissolution of BCP.

4 major players in banking industry
 MCB
 ABL

 UBL

 HBL
1997-2002
 The central bank has been following a supervisory
framework, CAMEL, which involves the analysis of six
indicators which reflect the financial health of
financial institutions. These are :
1. Capital Adequacy
 Capital to Risk Weighted Assets ratio of 8%.
 Minimum paid up capital of Rs.500 million which was
raised to Rs.1 billion in 2003.
2. Asset Quality
 Ratio of net NPLs to net advances, another indicator of
asset quality.
 This has been remarkable in the case of NCBs, in
terms of reduction in the ratio of loan defaults to
gross advances.
3. Management Soundness
4. Earnings and Profitability
5. Liquidity
6. Sensitivity to Market Risk
 Rate sensitive assets have diverged from rate
sensitive liabilities in absolute terms since 1997. The
negative gap has widened. Negative value indicates
comparatively higher risk sensitivity towards liability
side, while decline in interest rates may prove
Deposit Mobilization
 Deposit mobilization has dwindled considerably after 1997. Deposits as a
proportion of GDP have been going down. Growth rate of overall
deposits of banks has gone down. However, the slow down seems to
have been arrested and reversed in year 2000.

 Foreign banks were affected the most due to their heavy reliance of
foreign currency deposits. They experience 14 per cent erosion in 1999.
However, they were able to achieve over 2 per cent growth in year
2000. Similar recovery was shown by private banks.

 Aggressive posture of private banks in mobilizing more deposits in year
2000 is clearly reflected in their deposit growth, from 1.9 per cent in
year 1999 to 21.7 per cent in year 2000. This has also helped them in
increasing their share in total deposits to over 14 per cent in year 2000.

 Due to the shift in policy, now banks are neither required nor have the
option to place their foreign currency deposits with the SBP because it
does not add to the rupee liquidity. SBP made it compulsory for the
banks not to allow foreign currency deposits to exceed 20 per cent of
their rupee deposits effective from January 1, 2002.

Credit Extension
 Due to an easing in SBP's policy, credit
extension has exceeded deposit
mobilization. This is reflected in advances
growing at 12.3 per cent in year 1j999 and
14 per cent in year 2000.
 Group-wise performance of banks in credit
extension reveals three distinct features.
 Foreignbanks curtailed their lending
 Continued dominance by NCBs
 Aggressive approach being followed by private
banks.
 Private Banks surpassed Foreign Banks and in
terms of shares in total advances by growing
at a rate of over 31% in year 2000.
Banking Spreads
 T-Bills yield in year 1999 decreased massively which led to
declining trend both in lending and deposit rates.
 Consequently banks tried to find creative ways of
mobilizing deposits at low rates. However, due to
inefficiencies of the large banks, the spread has
remained high.


2002-2007
 Banking sector turned profitable in 2002. Their profits rose for the next
five years and peaked to Rs 84.1 ($1.1 billion) billion in 2006

 Privatization played and important role. (E.g HBL)

 Middle Eastern and European Banks started operations in the country . E.g
Barclays, RBS (ABN Amro takeover), Dubai Islamic Bank, Emirates Global
Bank etc

 The State Bank of Pakistan introduced the lowering of discount rates and
a significant decrease in SLR and CLR to increase branch networks.



Effect of Recession
 On a positive side, The Banking sector of
Pakistan has not been as adversely hit
by the financial crisis and recession
as the Banks in America and Europe .

 No bankruptcies have been filed as of late.

 Only one bank, Atlas has asked for a merger
with KASB bank which happens in regular
environment also.

 There have been no defaulters.

Banking Spreads
2007-2009
 By 2008, 80% of banking assets were controlled by the private
sector and Assets of all banks showed a net expansion of Rs.
4,351 billion by 2007.

 Profitability of Pakistan’s banking sector declined sharply in
2008.

 Profits of 22 listed banks, which have so far announced their
results, declined by 21 percent to Rs 50 billion in 2008 from Rs
64 billion in 2007.

 The 22 banks represent 96 percent of the sector’s market
capitalization and constitute 82 percent of the overall
industry’s total assets.

 Interest expense to interest income ratio stood 4 percentage
points higher at 48 percent, owing to half year impact of SBP’s
regulation requiring the banks to give minimum 5 percent on
saving accounts deposits.

 Non-interest income, other than capital gain, registered a growth
of 35 percent supported by income from dealing in foreign
currency
Demand factor: Deposits
 Discount Rate
 Income
 Economic Conditions
 Recessionary & Inflationary Pressures
 Exchange Rate Risk
 Conditions of Housing, Mutual Funds and
Other Investment Areas
 Reliance on Government Securities
 Lifestyle changes
 Increasing Population
 Increasing Literacy Rate, Cultural/Religious Values
 Remittances
 Security
Demand Factor: Borrowings
 Level of confidence in the system
 Need for Consumer Credit
 Credit policy of the bank (collateral, period of
repayment, frequency of interest charge)
 Growth in industries; local companies and
multinationals
 Transition towards services
 Power crises and resulting multiplier effect

Supply Factors
 Discount Rate (12%), Reserve Ratio (8%) & CAR (10%)

 Inflation (11% in 2009-10)

 Macro-economic conditions (state of industries)

 Political stability

 Religious views

 Foreign Investment

 Government regulations & role of SBP

Recent trends in the Supply of Banking
 Increased merger & acquisition activity & large expansion of branch
network by private banks

 Increased focus towards consumer finance & customer service

 Reduction in the growth rate of non-performing loans

 Internal composition of borrowings changed from unsecured to secured
borrowings

 The deposits base contracted. On the asset side, decline in advances took
place in both public and private sector lending.

 Investment – GDP ratio rose to 20 %.

 Manufacturing, transport & communications & housing account for 70 %
of fixed capital formation by the private sector.
Investment, npl’s and advances
 Local Demand : Deposits

Growth Rate lower then required
Law and order situation.
Fight of capital the impact war on terror.


Increase in absolute amount of deposits due to lack of alternatives.
SBP’s requirement for banks to offer at least five per cent annual return on 
bank deposits.
Mobile / Online banking and other facilities.
Increasing trend in Foreign Currency Accounts.
Reasons
 Property down fall and business failures
 Rate of return is comparatively high.

 Minimum rate 5% - now it is increased

because of high competition
 Growth rate

 Mobile banking , online banking, facilities

 Law n order, bankrupt people no money and

people started to consume more and save
less.



Local Demand: Loans



Personal Loans Pricing by Big 4
 Habib Metropolitan Bank:
 For a salaried person, up to 3 years 22.32%.
 For a businessperson, up to 3 years 25.31%.
 Min Loan= Rs. 25,000
 Max Loan= Rs. 500,000
 Rates= Floating
 National Bank of Pakistan:
 Max repayment period= 5 years
 Mark-up Rate= 17.5%
 Max Loan amount= Rs. 490,000
 Muslim Commercial Bank:
 Speedy loan approvals
 Max amount= Rs. 1,000,000
 Tenure is from 1 to 5 years
 Loan amount can be renewed after 6 months
 No collateral required
 United Bank Limited:
 Speedy loan approvals
 Min Loan Amount= Rs. 50,000
 Max Loan Amount= Rs. 500,000
 Tenure is from 1 to 5 years
 Complimentary credit insurance.


Porter’s Model five forces:
1) Barriers to entry - high
 High Economies of Scale
 High Capital Requirement

 Some Product Differentiation

 Brand Name
 Small Incentives
 Innovative Products
 High Tax Rates
 High Exit Barriers

 Complex Laws & Regulations


2) Threats to substitutes
 Non-Banking Financial Institutions
 Company Financing/ Leasing

 Money Transfer Services


Bargaining power of customers
Large Customers (Companies & HNWI): High


Bargaining Power
 Better-informed, professionally managed funds
 High Switching Costs
 Multiple Investment Options
 Multiple avenues for raising capital


Small Customers (Retail Customers): Low Bargaining



Power
 Low Awareness about available options and ability to
compare them.
 Limited Accessibility
 High Switching Costs
 Price Fixing and Deceptive Marketing Practices
 No depository insurance.


Bargaining power of suppliers - low
 Depositors
 Inter-Bank Lending

 Technology and Other Material


Rivalry Among Existing Firms - High
 Numerous Competitors
 Slow Industry Growth

 Lack of Product Differentiation

 High Switching Costs

 Diverse Competitors

 High Strategic Stakes

 Herfindahl Index
Ratio Analysis 2007-2009
 MCB
 UBL ( our assigned bank )

 HBL

 ABL
Ratio Analysis
 The last quarter of 2009 saw growth in the
banking sector.
 The sector reported a growth in the assets and
deposits of the banks.
 The banks have been investing in govts.
Bonds, which has been shown by the growth
in the investments.
 Accumulation of year to date profits, equity
injections, and growth in revaluation
surpluses have significantly raised the
equity base of the system.
 The leverage of the sector also increased.


 The deposit base of the system also increased
and these additional funds was invested in
short-term government papers, thus
improving the liquidity of the system.
 ROA slightly declined, but was more as
compared to that of last year, which shows
an incese in the profitability of the sector.
 The NPLs of the sector was growing during the
year but the last quarter saw a decline in the
NPLs.