Technical Partner IIRA, Bahrain - Askari Bank...CAR (%) 11.35 11.81 10.39 Liquid Assets % Deposits & Borrowings – adjusted for repo 52.4 58 54 Net Infection (%) 4.87 5.36 2.95 July

JCR-VIS Credit Rating Company Limited Rating Report

Technical Partner – IIRA, Bahrain | JV Partner – CRISL, Bangladesh

Information herein was obtained from sources believed to be accurate and reliable; however, JCR-VIS Credit Rating Company Limited (JCR-VIS) does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. JCR-VIS is not an NRSRO and its ratings are not NRSRO credit ratings. JCR-VIS is paid a fee for most rating assignments. This rating is an opinion on credit quality only and is not a recommendation to buy or sell any securities. Copyright 2014 JCR-VIS Credit Rating Company Limited. All rights reserved. Contents may be used by news media with credit to JCR-VIS.

2011 2012 2013

Net Advances

(Rs. in b) 150.7 143.7 163.6

Deposits (Rs.in b)

291.5 306.9 335.2

Deposit Cost (%) 6.9 6.4 5.3

Profit / (Loss)

( Rs.in m) 1,628 1,263 (5,480)

Equity (Rs. in b) 17.7 19.6 18.7

CAR (%) 11.35 11.81 10.39

Liquid Assets % Deposits & Borrowings –adjusted for repo

52.4 58 54

Net Infection (%) 4.87 5.36 2.95

July 14, 2014

Analyst: Maimoon Rasheed Syed Adil Hussain

Askari Bank Limited

Chairman: Lt. Gen. (Retd.) Muhammad Mustafa Khan;

President and CEO: Syed Majeedullah Husaini

Rating Rationale The ratings of Askari Bank Limited (AKBL) take into account implicit support from its principal shareholder, Fauji Foundation Group (FFG). Since the bank’s acquisition, the group has demonstrated its capacity and willingness to support AKBL through equity injection. FFG is one of the largest business conglomerates in Pakistan with well diversified and strong presence in various sectors of the economy. Moreover, entities operating under the umbrella of FFG largely have robust financial profile.

Following the change in shareholding, there was a change at the top management position. Over the years, risk profile of the institution had witnessed deterioration. The bank’s relative positioning among peers had also weakened on a timeline basis. The incumbent President has taken various initiatives to strengthen financial profile of the bank. These include cleansing of balance sheet by making substantial provisions to cover prior losses and enhancement of recovery efforts by revitalizing Special Asset Management division. A well rounded strategy on the business front is also being rolled out which entails penetration in reputable corporate groups/entities with clean repayment history; to enhance bank’s fee based income, the management intends to tap commercial clientele in trade related activities. Meanwhile, the bank is also venturing into public infrastructural projects. In order to ensure that credit risk remains within the bank’s defined appetite, the risk management framework has also been strengthened, including revamp of the Obligor Risk Rating model. These initiatives while enhancing core profitability are expected to keep asset quality under check. Stability in top management and the new board of directors is considered pivotal in effective implementation of the bank’s long-term strategy.

With limited network expansion over the years, the bank’s market share in deposits has witnessed a declining trend. The new management plans to enhance the bank’s footprint, with 431 branches targeted by end 2016 relative to 281 at end FY13. Although deposit profile features relatively high concentration, deposits related to armed forces maintained with the bank have remained stable which somewhat mitigates concentration related risk. Recently, the management has shed some high cost deposits, which has enabled the bank to improve proportion of CASA in 1Q14. AKBL, in line with peers, has also been able to achieve reduction in cost of deposits in FY13.

The bank’s investment portfolio is mainly concentrated in T-bills. The PIBs portfolio is close to one fifth of aggregate investments that poses interest rate risk; decline in portfolio duration has reduced the bank’s exposure to interest rate risk on a timeline basis. Given the interest rate volatility in the market, this may be considered a prudent strategy. The management’s strategy regarding equity portfolio entails investment in high volume stocks using a target price selling discipline. The listed equity portfolio largely comprised dividend yielding scrips with strong fundamentals. Income from capital market operations has supported the bank’s bottom line.

Reported non-performing loans peaked at end June 2013; there has been some decline subsequently. As part of the balance sheet cleansing exercise, provisioning coverage was enhanced during the outgoing year, which resulted in a sizeable loss while core earnings also came under significant pressure. Despite a loss of Rs. 5.5b incurred in FY13, the erosion in equity was contained as the new sponsors injected fresh capital to the tune of Rs. 4.5b in the bank.

The strategic initiatives taken by the new management are likely to enable the bank to maintain current level of capital adequacy ratio (CAR) through internal capital generation while allowing the bank to undertake a measured pace of growth. However, further meaningful capital injection from the primary sponsor will help in realizing the growth targets laid down by the bank, providing impetus to earnings stream and enhancing the risk absorption capacity.

AKBL, a scheduled bank, was incorporated in October 1991 as a Public Limited Company and commenced operations in April 1992. The bank is listed on the Karachi, Lahore and Islamabad Stock Exchanges. The collective shareholding of FFG in the bank was 71.9% at end-Dec’13. Financial statements for FY13 were audited by KPMG Taseer Hadi & Co.

Chartered Accountants who have been reappointed as external auditors for FY14 .

JCR-VIS

JCR-VIS

Overview of the Institution

* based on recurring profit before provision and taxation

Key Financial Trends

Category Latest Previous

Entity AA/A-1+ - Jul 7,’14

Outlook Stable - Jul 7,’14

Outlook xxx Stable xxxxx Jun 28, ’11

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

2011 2012 2013

Basic ROAA* ROAE Efficiency (%)

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

2011 2012 2013

CAR Net Infection Net NPLs % Tier 1 Capital

JCR-VIS Credit Rating Company Limited


2

Corporate Profile

Askari Bank Limited (AKBL) was incorporated in

October 1991 as a public limited company and

commenced operations in April 1992. The bank is

listed on the Karachi, Lahore and Islamabad Stock

Exchanges. AKBL is a schedule commercial bank and

is principally engaged in the business of banking as

defined in the Banking Companies Ordinance, 1962.

At end-FY13, the bank had 281 branches (end-FY12:

261 branches) including 40 (end-FY12: 34) Islamic

banking branches, 29 (end-FY12: 24) sub-branches

and a wholesale bank branch in the Kingdom of

Bahrain. During FY14, the bank plans to set up 40

new branches including 12 Islamic banking branches,

in addition to which 2 Islamic sub-branches will be

converted into full-fledged branches.

In June‟13, Fauji Foundation Group (FFG) acquired

majority stake in the bank from Army Welfare Trust

(AWT). Subsequently, FFG also injected equity against

issue of shares. The collective shareholding of FFG in

the bank was 71.9% at end-Dec‟13. The group

includes Fauji Foundation (FF), Fauji Fertilizer

Company Limited (FFCL) and Fauji Fertilizer Bin

Qasim Limited (FFBL).

Resultantly, shareholding pattern of the bank changed

during the outgoing year which is depicted in the table

below:

All figures are in percentages end-Dec'12 end-Dec'13

Associated Companies 55.8 71.9

Individuals 21.0 14.2

FIs, NIT & others 23.2 13.9

Board of Directors

The Board of Directors (BoD) comprises 11 members

including the Chairman and CEO. FF is represented

on the board by three directors while FFCL, FFBL

and NIT are represented by a single director each. The

rest of the four are independent directors.

Nominee directors of FF include Lt. Gen. (Retd.)

Muhammad Mustafa Khan, Mr. Qaiser Javed and Mr.

Nadeem Inayat. While Lt. Gen. (Retd.) Naeem Khalid

Lodhi represents FFCL, Lt. Gen. (Retd.) Muhammad

Haroon Aslam represents FFBL and Mr. Manzoor

Ahmed represents NIT on the board. A brief profile

of the directors is attached as Annexure 1 to the

report.

With regards to the number of independent directors

on the board, the bank is in compliance with the best

practices as laid down in the Code of Corporate

Governance (CCG), 2012.

Name Status

Muhammad Mustafa Khan Non-Executive Director

Qaiser Javed Non-Executive Director

Nadeem Inayat Non-Executive Director

Naeem Khalid Lodhi Non-Executive Director

Muhammad Haroon Aslam Non-Executive Director

Manzoor Ahmed Non-Executive Director

Asif Reza Sana Independent Director

Zaffar Ahmad Khan Independent Director

Tariq Hafeez Malik Independent Director

Muhammad Arif Habib Independent Director

Syed M. Husaini President & CEO

There are 5 committees functioning at the board level.

These are Audit and Compliance Committee (AC),

Human Resource and Remuneration Committee

(HRC), Board Risk Management Committee (BRMC),

IT Committee (IT) and Executive Committee (EC).

Composition of the board committees is attached as

Annexure 2 to the report.

Participation by board members during the board

meetings is considered satisfactory. The board met 10

times during the outgoing year. In accordance with

CCG, the board audit committee is headed by an

independent board member.

Some major points under discussions at the board

level pertained to disinvestment of a subsidiary

company, MIS and delivery programs hindering

operations and exposing the bank to certain types of

risks, issues with partial implementation of core

banking software and restructuring & rationalization

of staff.



3

Financial accounts of AKBL for FY13 were audited by

KPMG Taseer Hadi & Co. Chartered Accountants

who have been reappointed as external auditors for

FY14.

Sponsors Profiles

Fauji Foundation (FF)

FF was established in 1954 as a charitable trust and is

one of the largest business conglomerates in Pakistan

having presence in 18 industries including fertilizer,

cement, food, power generation, gas exploration, etc.

At-end FY12, FF had net worth of Rs. 76b (FY11: Rs.

65b) and reported net profit of Rs. 27b (FY11: Rs.

21b).

Fauji Fertilizer Company Limited (FFCL)

FFCL is the largest chemical fertilizer producer in

Pakistan. At end-FY13, FFCL had a net worth of Rs.

25.1b (FY12: Rs. 25.8b) and reported net profit of Rs.

20.1b for the year (FY12: Rs. 20.9b).

Fauji Fertilizer Bin Qasim (FFBL)

FFBL is the only fertilizer complex in Pakistan

producing Di-Ammonium Phosphate (DAP) fertilizer.

At end-FY13, FFBL had a net worth of Rs. 13.8b

(FY12: Rs. 12.6b) and reported net profit of Rs. 5.6b

for the year (FY12: Rs. 4.3b).

Strategic Investments

Askari General Insurance Company Limited

(AGICO)

The bank held an equity stake of 27.2% in AGICO at

end-FY13. AGICO is engaged in non-life insurance

business comprising fire, marine, motor, accident,

health and miscellaneous insurance coverage. AGICO

has an outstanding Insurer Financial Strength rating of

„A+‟, which denotes high capacity to meet

policyholder and contract obligations. Market value of

investment in AGICO at end-FY13 stood at Rs.

205.8m (FY12: Rs. 118.7m).

Askari Investment Management Limited (AIML)

AIML is a wholly owned subsidiary of the bank and is

engaged in asset management and investment advisory

services. At end-Dec13, AIML was managing assets of

Rs. 10.3b with seven funds under management.

Askari Securities Limited (ASL)

ASL is a partly owned subsidiary of the bank and is

engaged in the business of share brokerage, investment

advisory and consultancy services. ASL had a paid-up

capital of Rs. 114.8m and a break-up value of Rs.

89.2m at end-Dec‟13. Going forward, the bank plans

to divest its stake in ASL.

Risk Management

Risk Management Department (RMD) at AKBL is

headed by Ms. Zehra Khalikdina. Ms. Khalikdina has

previously worked at leading financial institutions in

the country and is a graduate of Institute of Business

Administration, Karachi. RMD is divided into four

units: Credit Risk Management, Market Risk

Management, Operational Risk Management and Risk

Architecture & Analytics. BRMC sets the bank‟s risk

policies and risk appetite. A risk management function

within the bank ensures the implementation of these

policies.

The bank has built and maintains a well defined Credit

Policy and Credit Risk Policy approved by the BoD.

In order to manage credit risk, the bank takes

measures including monitoring credit exposures,

limiting transactions with specific counter parties with

increased likelihood of default and continually

assessing the creditworthiness of counter parties.

Market risk is monitored by the same division. Market

risk policy and risk measurement/monitoring

methodology for review and reporting of market risk

have been developed and implemented by RMD. The

bank uses Value-at-Risk (VaR) methodology to

measure market risk. In addition, sensitivity analysis

and stress tests are carried out to gauge the impact of

extreme market movements.



4

The bank‟s liquidity position is managed by the Asset

and Liability Management Committee (ALCO). ALCO

monitors balance sheet position, liquidity ratios,

depositor concentration both in terms of the overall

funding mix and avoidance of undue reliance on large

individual deposits. Moreover, liquidity contingency

plans are also in place.

The bank also regularly monitors the interest rate

sensitivity profile based on the re-pricing of assets and

liabilities. Periodic gap analysis, sensitivity analysis and

stress testing is performed to monitor and manage

interest rate risk. A notable interest rate sensitivity gap

can be witnessed in up to one month asset/liability

buckets, mainly on account of classification of some of

the savings deposits in this bracket as these do not

have a contractual maturity.

Operational Risk Management Framework has been

reinvigorated and resultantly methodology for RCSA

and KRI has been revised. The implementation of

revised framework is under implementation.

Loan Approval Process

Currently, all loan proposals with the exception of

proposals approved by Branch Credit Committee

(only authorized to approve cash collateralized

exposures) are pre assessed by RMD. RMD reviews

consumer and agriculture loans falling with the

discretionary powers of Head Office Credit

Committee (HOCC). Most of AKBL‟s Credit

portfolio is approved by HOCC. Proposals are sent via

hard copy or scanned documents to RMD. RMD

evaluates loan proposals by using an internally

developed Pre Assessment Risk Evaluation Model.

Obligor Risk Rating (ORR) model has recently been

updated; the revised version was in test phase. The risk

rating model used by the bank relies on a combination

of qualitative and quantitative factors while

incorporating inter-period linkages. RMD also assists

in pricing of loan products by incorporating input

from various ORR, Facility Risk Rating (FRR) and

Probability of Default (PD) models. RMD is not

involved in the approval of a proposal.

The bank is in the process of establishing credit hubs

in three regions; Central, South and North. Loan

requests of the branches/customers that fall under the

Hubs‟ system shall be prepared / initiated in their

respective credit hubs and would then be approved in

their respective Credit Committees.

Internal Audit

The Internal Audit (IA) division at AKBL is headed by

Mr. Shahid Abbasi, a qualified Chartered Accountant,

with over 17 years experience in audit, accounts and

finance. The division has approved staff strength of 63

personnel, including 25 at the head office. In addition

to performing internal audit of the bank, the division

also performs audit of the bank‟s subsidiaries, if

required. The scope of the IA division comprises the

following:

Branch audits

Shariah audits

Management audit

IT audit

Spot risk review

For strengthening of internal controls, the bank has

instituted a “Risk Assets Review department” under

umbrella of IA division. This department shall conduct

periodic reviews of bank‟s credit portfolio to provide

independent assessment especially with respect to its

quality and risk profiles.

Ratings of branches are based on a variety of factors

including an evaluation of credit and operations. As

per the IA plan for FY14, large sized branches,

regardless of rating are to be audited once a year. The

audit of branches ranked good or very good are done

every alternate year while below average branches are

audited semi annually.

The IA division carries out IT audit which comprises

an overall evaluation of branch IT environment, a

review of core banking application, alternative delivery

channels and branchless banking.



5

Information Technology

The Information Technology (IT) Group is headed by

Mr. Syed M. Mujeeb as CIO. Mr. Mujeeb holds a

Masters degree in Information Systems and carries

over 20 years of experience in the field of information

technology. Headcount of IT department stands at

around 100 personnel including support staff deployed

at branches. The IT department at AKBL is primarily

divided into six teams, which are further divided into

software developers, system administrators, network

operations, infrastructure management and IT support

staff.

Core banking system (CBS) deployed at AKBL is

Oracle based Flexcube system to support banking and

branch operations. Other software deployed includes

ADAMS – for managing treasury operations, Oracle

Financials, and Oracle People Soft – for management

of the HR function, Oracle Mantas for Anti Money

Laundering, Card Pro - for Credit Card and iNET -

Internet banking Application. All software are

integrated with one another on a real time basis.

Certain CBS related issues have been affecting

operations; according to management, these issues

have largely been settled.

The Primary Recovery (PR) site is located at E11

Islamabad while a Disaster Recovery (DR) site has

been setup G8 Islamabad. DR site is planned to be

built at a distant location.

In order to cope with data backup needs, AKBL has

implemented IBM Tivoli Solution with DS Storage

Systems and Tape Libraries. Two separate enterprise

Storage Area Network (SAN) storages are available

with AKBL. One is installed at PR site while the other

is installed at the DR site. Both storage systems have

43 TB Raw / useable 30 TB capacities. The bank has

also deployed a robotic tape subsystem located at both

the PR Data Center and the DR Site. The selected data

backup can be copied on magnetic tape

manually/automatically.

Financial Analysis

Asset Mix

During the last 3 years, the bank witnessed a

compound annual growth rate of 7.9% in asset base

with growth largely manifested in investment

portfolio. From FY10 till 3Q13, gross loan portfolio

actually shrunk by 3.2% as against 9.6% increase in

gross advances of the banking sector during this

period. With the new top management settling down,

growth in advances portfolio was witnessed in the last

quarter of FY13.

Asset base of the bank increased by 11.9% to Rs. 395b

(FY12: Rs. 353b) in FY13. Overall, growth in the

lending portfolio was largely in line with growth in

investment portfolio at 14%. The bank also carries

non-banking assets acquired in satisfaction of claims

amounting to Rs. 3.9b with a market value of Rs. 4.9b

at end-FY13.

Asset base declined to Rs. 389b (FY13: Rs. 395b) at

end-1Q14. In absolute terms, investments declined to

Rs. 154b (FY13: Rs. 166b) while advances were higher

at Rs. 170b (FY13: Rs. 164b).

Islamic Banking

Total assets of Islamic Banking Business (IBB)

increased to Rs. 18.7b (FY12: Rs. 15.8b) with the

growth manifested in placement with other banks and

advances portfolio. At end-FY13, investments and

advances comprised 35% (FY12: 65%) and 28%

(FY12: 20%) of total assets, respectively. In absolute

terms, investments were lower at Rs. 6.5b (FY12: Rs.

10.2b) while advances were higher at Rs. 5.3b (FY12:

Rs. 3.1b) at end-FY13. At end-1Q14 asset base stood

at Rs. 19.7b with the increase largely manifested in the

advances portfolio.

The bank generates deposits on the basis of Qard and

Mudaraba modes. Deposits mobilized on Qard basis

are classified as current accounts while deposits

generated under Mudaraba basis are classified as either

savings or fixed deposit accounts.

Cost of deposits of IBB declined to 4.9% (FY12:

6.5%) on account of a downward revision in the



6

discount rate along with a more favorable deposit mix.

By end-FY13, CASA increased to Rs. 11b (end-FY12:

Rs. 6.7b) depicting a growth rate of 65%. Deposit mix

of IBB is presented in the table below:

2012 2013

CASA 48.2% 63.1% Term 43.4% 31.5% Others 8.4% 5.4%

Despite higher profit bearing earning assets, net profit

income of IBB declined to Rs. 528m (FY12: Rs. 633m)

during FY13 on account of lower average benchmark

rates while non-markup income increased to Rs. 54.4m

(FY12: Rs. 41.3m). In line with the bank‟s strategy of

cleansing the balance sheet, provisioning against NPLs

and investments increased to Rs. 443.6m (FY12:

Rs.46.2). IBB reported a loss of Rs. 434.6m (FY12:

profit of Rs. 75.8m) during FY13.

Credit Risk

After two years of stagnancy, the loan portfolio

depicting healthy growth in 2013, that was primarily

realized in the last quarter of the year. Post acquisition,

the new management followed a strategy of selective

disbursements towards high credit quality clients while

providing more prudently against inherited non-

performing loans.

Gross advances increased to Rs. 192.2b (end-FY12:

162.8b) depicting a growth rate of 18%, surpassing

industry growth of 5.6% during FY13. By end-1Q14,

gross advances increased further to Rs. 198.2b.

The corporate sector constitutes around two thirds of

the lending portfolio followed by commodity

financing (19%), consumer (5%), SME (5%), staff

loans (3%) and agriculture (2%). The table below

depicts the portion of advances and gross infection for

each sector for the period FY13 and 1Q14.

2013 1Q14

%age of gross advances

Gross Infection

%age of gross advances

Gross Infection

Corporate 66% 20% 67% 19%

Commodity 19% 0% 19% 0%

Consumer 5% 26% 5% 27%

SMEs 5% 29% 5% 31%

Staff Loans 3% 2% 2% 2%

Agriculture 2% 44% 2% 40%

The corporate sector comprises exposure towards

corporate entities, government entities and armed

forces having outstanding loan amount of Rs. 300m

and above. Gross infection continues to remain high

in the corporate loan book. As per management, asset

quality in the corporate loan book will continue to

improve as increased efforts are being made towards

recoveries. Going forward, the bank intends to

increase overall exposure in corporate sector with a

focus towards groups with clean repayment history.

Commodity financing remained the second largest

segment in the bank‟s loan book. Gross infection

under this category has remained nil; commodity

financing is being availed by the public sector.

During the last few years, the consumer banking

business has been slowed down owing to high level of

delinquencies. Share of consumer sector remained

largely unchanged at 5% during the outgoing year with

emphasis on recovery of outstanding NPLs. Going

forward, the bank will continue to follow cautious

strategy in clean lending while undertaking selective

growth in secured business e.g. mortgages and auto

finance. Overall share of the consumer sector is

expected to remain around the same level while

portfolio mix is targeted at 70:30 of

secured/unsecured loans that is currently around

58:42.

SME segment has also witnessed high delinquencies in

prior years. The management now intends to focus on

improving service quality while targeting trade related

businesses which will generate ancillary business as

well. This strategy will help in increasing non-fund

based income for the bank.



7

Agriculture financing constitutes the smallest portion

of the gross lending portfolio (2%). Infection levels in

this segment have remained high; gross infection stood

at 40% (FY12: 44%) at end-1Q14. As per

management, high infection in agriculture segment was

on account on inadequate post disbursement follow

ups. Going forward, the focus will be on recoveries

while improving loan disbursement process and

recovery mechanisms.

Bifurcating advances by segments, the largest portfolio

concentration continues to be in the public sector. In

local context, credit risk arising from the same is

considered minimal. In line with industry dynamics,

the textile sector contains the largest NPLs followed

by Fuel/Energy. The table below depicts the share of

advances and gross infection within a few major

sectors.

2012 2013

% share

Gross Infection

%share Gross Infection

Public sector 24% 0% 33% 0%

Textile 14% 51% 14% 48%

Fuel/Energy 11% 8% 10% 18%

Transport and communication

6% 3% 3% 5%

Agriculture finances

4% 13% 2% 44%

In recent years, asset quality indicators have continued

to depict weakening, with a sharp increase in reported

NPLs in 2013 to Rs. 33.1b (FY12: Rs. 26.5b); NPLs

were recorded at the highest level of Rs. 35.1b at end-

June 2013. At end 1Q14, NPLs were lower at Rs.

32.2b. Gross infection stood at 16.3% at end-1QFY14

(FY13: 17.2%; FY12: 16.3%). As part of the new

management‟s balance sheet cleansing exercise,

provisioning coverage has been enhanced to 86.4%

(FY12: 72.1%) by end-FY13. Resultantly, net infection

improved to 2.95% (FY12: 5.36%) at end-FY13.

Cumulative FSV benefit availed by the bank at end-

1Q14 decreased to Rs. 3b (FY13: Rs. 3.4b).

Recovery against NPLs was made to the tune of Rs.

1.8b (FY12: Rs. 2.1b) during FY13. NPLs in litigation

increased to Rs. 17.3b (FY12: Rs. 10.8b) which could

delay future recoveries. Amount rescheduled increased

to Rs. 788.6m (FY12: Rs. 651.3m) during FY13. The

management is confident of further recoveries while

disposal of non-banking assets acquired in satisfaction

of claims is also expected to help in improving the

bottom line.

Total non-funded exposure increased to Rs. 319.6b

(FY12: Rs. 192.6b) at end-FY13. Public sector

exposure represented 40.2% (FY12: 23.2%) of the

total non-funded credit-related exposure.

Investment portfolio

Government securities constituted 94% (FY12: 92%)

of the investment portfolio, at market value. Credit

risk arising from the same is considered minimal in the

local context. Market value of investment in corporate

TFCs and Sukuks decreased to Rs. 3.9b (FY12: Rs.

6.2b) during FY13. Classified TFCs remained largely

unchanged at Rs. 1.43b while provisioning coverage

against these TFCs was enhanced to 58% (FY12:

17%).

Market Risk

In line with the industry, investment portfolio of the

bank continued to be dominated by government

securities. With treasury bills constituting around

three-fourths of total investment in government

securities at end-FY13, market risk arising from these

instruments is considered minimal. The overall PIBs

portfolio is close to one fifth of aggregate investments

that continues to pose interest rate risk. The decline in

portfolio duration to 2.2 (FY12: 2.86) has reduced

interest rate risk on a timeline basis; given the interest

rate volatility in our market, this may be considered a

prudent strategy.

The bank‟s strategy regarding equity portfolio has been

on investing in high volume stocks using a target price

selling discipline. The listed equity portfolio largely

comprised dividend yielding scrips with strong

fundamentals. At end-FY13, the listed equity portfolio

comprised 2% (FY12: 1.8%) of total investments at

market value. Aggregate equity market exposure, both

directly and by way of mutual funds, represented 24%



8

of the bank‟s own equity and is considered slightly on

the higher side.

Investment in mutual funds remained largely

unchanged at Rs. 1.8b during the outgoing year and

primarily constitutes funds of a related party. Most

mutual funds comprise fixed income instruments and

pertained to funds rated above investment grade.

Investment in TFCs/corporate Sukuk certificates

decreased to Rs. 3.9b (FY12: Rs. 6.1b). Interest rate

risk emanating from these instruments is considered

minimal as return on most TFCs/Sukuk instruments

are linked to market benchmark rates. As per

management, no fresh exposure is to be taken against

TFCs in the ongoing year.

The table below presents the investment portfolio at

market value:

2012 2013

Amount %share Amount

%share

Federal Government securities

133.76 92.0% 155.36 93.7%

TFCs/Sukuks 6.20 4.3% 3.95 2.4%

Equity - Listed 2.56 1.8% 3.30 2.0%

Mutual funds 1.80 1.2% 2.04 1.2%

Others 0.64 0.4% 0.64 0.4%

Preference shares 0.21 0.1% 0.31 0.2%

Equity - Unlisted 0.21 0.2% 0.26 0.1%

All figures are in Rs. bil

Liquidity Risk

With limited increase in advances portfolio over the

years, liquid assets have increased at a healthy rate,

recording a cumulative annual growth rate (CAGR) of

13.5% during the period FY10 to FY13. Since the last

quarter of 2013, lending activities have picked pace;

accordingly, liquid assets in relation to deposits &

borrowings declined slightly to 54% (FY12: 58%).

Gross advances to deposits ratio (ADR) was recorded

higher at 57% (FY12: 53%) at end-FY13, increasing

further to 64% by end 1Q14; this is significantly higher

than the industry ADR of 54%. As per projections, the

bank is targeting to maintain ADR in the range of 50%

over the next three years, on the back of a much

higher pace of increase in deposits vis-à-vis advances.

Liquidity levels are likely to remain comfortable if the

bank is able to achieve broad based growth in

deposits, in line with its projections.

Funding mix comprises borrowings, deposits and

subordinated loans. Deposits constituted the largest

portion of total funding at 92% (FY12: 95%) at end-

FY13. Composition of the funding mix is shown in

the table below:

2012 2013

Deposits 95.3% 92.2%

Borrowings 2.6% 6.7%

Sub-ordinated loans 2.1% 1.1%

Total deposits stood at Rs. 335.2b (FY12: Rs. 306.9b)

at end-FY13 depicting year-on-year growth of 9.2%.

Growth in deposit base was lower than the banking

sector deposit growth of 12.6%; with market share of

AKBL (in terms of deposits) declining slightly to

4.45% (FY12: 4.59%) by end-FY13. At end-1Q14,

deposit base declined to Rs. 307.4b. According to

management, the bank shed-off some of the high cost

deposits during this period.

The bank utilizes borrowings under various financing

schemes provided by SBP along with short term

borrowings from FIs. Year-end 2013 balance of

borrowings was higher at Rs. 24.5b (end-FY12: Rs.

8.4b) with the increase manifested in repo borrowings,

which amounted to Rs. 15.2b (FY12: nil).

Composition of deposit mix remained largely

unchanged during FY13 while improving in 1Q14.

CASA increased to 79% (FY13: 72%) of total deposits

by end-1Q14. Following the acquisition of AKBL in

the outgoing year, the FC transferred salary accounts

of the group companies to the bank. These accounts

are largely current accounts and also allow cross selling

opportunities to the bank. As a result of these efforts

and with a decline in term deposits, deposit mix has

improved during 1Q14 as depicted in the table below:



9

2012 2013 1Q14

CASA 71% 72% 79%

Term 25% 25% 20%

Others 4% 3% 1%

Deposit profile features concentration with top 20

deposits representing 28% (end-FY12: 24%) of total

deposits at end-FY13. These largely pertain to saving

accounts and TDRs with high markup rates.

Moreover, deposits included Rs. 13.5b (FY12: Rs.

18.6b) due to related parties. Deposit related to armed

forces maintained with the bank have remained stable

which somewhat mitigates risk associated with

concentration. Aggregate deposits from the public

sector / government represented almost 35% of the

bank‟s total deposits, and remains a key distinguishing

feature vis-à-vis most peers.

AKBL has issued sub-ordinate debt in the past.

Outstanding balance of the same amounted to Rs. 4b

(end-FY12: Rs. 7b) at end-FY13. Sub-ordinate debt

consists of two TFCs maturing in Nov‟19 and Dec‟21.

These TFCs are not redeemable before maturity

without prior approval from SBP.

Profitability

Since 2011, the bank‟s core earnings have experienced

a downward trajectory primarily on account of

stagnant business volumes and rising trend in non-

performing assets. While lending activities picked up

pace in the last quarter of the out-going year, core

earnings came under significant pressure (FY13: Rs.

0.9b; FY12: Rs. 2.6b) as the bank recognized

significant additional non-performing loans, having an

adverse impact on mark-up earnings thereon in

addition to compression in spreads, faced in line with

the sector at large. As NPLs peaked at end-June 2013,

the bank recognized a loss from core operations to the

tune of Rs. 0.4m in the second quarter of 2013; results

from core operations have remained positive in the

remaining quarters of the year, as reflected in the chart

below. Earnings from core operations have however

depicted an inconsistent trend.

Return on markup bearing assets was recorded lower

at 8.8% (FY12: 11.1%) during FY13. The decrease was

on account of lower return on performing advances

and markup bearing investments that stood at 10.37%

(FY12: 12.23%) and 8.7% (FY12: 10.8%) respectively.

Mark-up income was lower at Rs. 28b (FY12: Rs. 32b)

for the year.

Cost of funds was lower at 5.6% (FY12: 7.1%), also in

line with the decrease in discount rate during the

outgoing year. Average cost of deposits stood lower at

5.3% (FY12: 6.4%) during FY13 that is largely at par

with peers. Spreads of the bank at 3.2% (FY12: 3.9%)

have been trending downwards and are presently

lower than some peer banks.

Fee based income amounted to Rs. 1.2b, representing

14% of net mark-up income. The current level of fee

based income reflects room to deepen non-fund based

relationships with existing clientele. Total non-markup

income amounted to Rs. 3.6b (FY12: Rs. 4.1b),

comprising sizeable proportion from investment

activities.

During FY13, growth in administrative expenses was

largely contained at 4.1% against CPI inflation of 9.2%

while increase in administrative expenses of the

banking sector was around 6%. Employee related

costs remained largely stagnant at Rs. 4.1b (FY12: Rs.

4b) and comprised 43.7% (FY12: 45%) of total

administrative expenses. Staff strength reduced

modestly to 5,531 employees (FY12: 5,597). Owing to

a decline in core income, efficiency of the bank

deteriorated to 91% (FY12: 78%) and compares

unfavorably to most of peer banks.

-600-400-200

0200400600

1Q13 2Q13 3Q13 4Q13 1Q14

Core Earnings



10

Fresh provisions booked against non-performing loans

and advances were higher at Rs. 9.8b (FY12: Rs. 2.3b)

during FY13. Resultantly, the bank booked a net loss

of Rs. 5.5b during FY13 compared to a profit of Rs.

1.3b in FY12.

During 1Q14, profit after tax stood higher at Rs. 1.02b

(1Q13: Rs. 276m). While core earnings in this period

are actually lower vis-à-vis corresponding quarter of

last year (1Q14: Rs. 216.7m; 1Q13: Rs. 327.8m),

bottom line received impetus from the sizeable capital

gains of Rs. 680.0m booked during the quarter.

Going forward, AKBL aims to become a traditional

trade finance bank while also engaging in investment

and corporate banking activities. Moreover, the bank

plans to focus on infrastructure financing while

increasing its share Islamic banking within the country.

Success will depend on keeping asset quality intact

while improving its liquidity position.

Capitalization

Despite a loss of Rs. 5.5b incurred in FY13, the

erosion in equity was contained as the new sponsors

injected fresh capital to the tune of Rs. 4.5b in the

bank. Accordingly, core equity of the bank declined

from Rs. 17.6b to Rs. 16.6b in FY13. Net worth was

reported at Rs. 18.7b (FY12: Rs. 19.6b), which takes

into account surplus on revaluation of assets (net of

tax).

With decline in eligible regulatory capital held along

with higher credit risk weighted assets, capital

adequacy ratio (CAR) of the bank decreased to 10.39%

(FY12: 11.81%) by end-FY13. While operational risk

weighted assets remained largely unchanged, market

risk weighted assets witnessed a slight decline. A

greater cushion in CAR would provide the bank with

additional risk absorption capacity.

Given the bank‟s expansion plans, the current level of

CAR does not provide adequate room for growth;

keeping eligible capital constant, the bank has room to

grow risk weighted assets by Rs. 6.8b before CAR

drops to 10%. Moreover, cushion available in the

current capital structure to absorb fresh accretion of

NPLs is also considered low. Although net non-

performing exposures as a percentage of Tier-1 capital

have declined to 29.1% (FY12: 44%) by end-FY13,

these are still considered high in relation to peers.

Various initiatives taken by the management are likely

to help in maintaining the current level of CAR

through internal capital generation while allowing the

bank to undertake a measured pace of growth. Further

meaningful capital injection from the primary sponsor

will help in realizing the growth targets laid down by

the bank, providing impetus to earnings stream and

enhancing risk absorption capacity

JCR-VIS

11

Annexure 1: Profile of Board Members

Muhammad Mustafa Khan (Chairman)

Lt. Gen. (Retd.) Khan joined the BoD in June‟13. He is the Managing Director of Fauji Foundation and Chairman on the board of various group companies. He is a graduate of Command and Staff College Quetta and Command & Staff College Fort Leavenworth, USA.

Qaiser Javed Mr. Qaiser Javed has long been associated with FF and presently is working as Director Finance at FF. He is a Member of Institute of Chartered Accountants of Pakistan and a Fellow Member of Institute of Taxation Management of Pakistan

Nadeem Inayat Dr. Inayat also joined the BoD in June‟13 and is currently the Director Investment at FF. He is also serving on the boards of various group entities. He holds a Doctorate in Economics.

Naeem Khalid Lodhi Lt. Gen. (Retd.) Lodhi is the Chief Executive & Managing Director of the FFCL. He is a graduate of Command and Staff College Quetta. He holds bachelor in Civil Engineering and Master degrees in Defense Studies and International Relations.

Muhammad Haroon Aslam

Lt. Gen. (Retd.) Aslam is the Chief Executive and Managing Director of FFBL. He has 40 years of military experience and is a graduate of Command and Staff College Quetta.

Manzoor Ahmed Mr. Ahmed is Chief Operating Officer at NIT which is the largest Asset Management Company of Pakistan. He is an MBA and also holds D.A.I.B.P

Asif Reza Sana Mr. Reza is a consultant by profession and has previously worked with multinationals in the fields of Finance, General Management and Marketing. He holds an MBA degree and has been trained at the Institute of Management Development in Lausanne, Switzerland and INSEAD, France.

Zaffar Ahmad Khan

Mr. Zaffar Khan is a retired corporate executive. Previously he had worked in Hong Kong, USA & Singapore with Exxon in the field of petrochemicals. He is associated with the boards of various private, public & civil society organizations

Tariq Hafeez Malik Mr. Hafeez Malik joined the BoD in Oct‟13. He carries over 26 years of experience in global IT industry. He holds a bachelors degree in Applied and Information Science from Edith Cowan University, Western Australia

Muhammad Arif Habib

Mr. Arif Habib is currently the Chief Executive of Arif Habib Corporation Limited. He also serves on the board of various companies including Fatima Fertilizer Co. Ltd. and Sui Northern Gas Pipelines Ltd.

Syed Majeedullah Husaini (President and CEO)

Mr. Husaini joined the bank as President in June‟13. Mr. Husaini has a Masters degree in Economics from Karachi University and carries over 30 years of banking experience. He has previously served as the President of KASB Bank Ltd., and as Head of Corporate Banking Group at MCB Bank Ltd. and National Bank of Pakistan Ltd.



12

Annexure 2: Composition of Board Committees

Committee Composition

AC Mr. Asif Reza Sana (C) Mr. Qaiser Javed (M) Mr. Nadeem Inayat (M) HRC Mr. Naeem Khalid Lodhi (C) Mr. Qaiser Javed (M) Mr. Zaffar Ahmad Khan (M) Syed M. Husaini (M) BRMC Dr. Nadeem Inayat (C) Mr. Qaiser Javed (M) Mr. Asif Reza Sana (M) Syed M. Husaini (M) IT Mr. Tariq Hafeez Malik (C) Mr. Naeem Khalid Lodhi (M) Brig. (Retd.) Mukhtar Hussain (co-

opted member) Syed M. Husaini (M) EC Muhammad Mustafa Khan (C) Mr. Qaiser Javed (M) Mr. Nadeem Inayat (M) Syed M. Husaini (M)

C: Chairman

M: Member

Technical Partner IIRA, Bahrain - Askari Bank...CAR (%) 11.35 11.81 10.39 Liquid Assets % Deposits & Borrowings – adjusted for repo 52.4 58 54 Net Infection (%) 4.87 5.36 2.95 July

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