Trends in Pakistani Banking Sector

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA1

Trends in Pakistani Banking Sector

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA2

Sector transformation lower systemic risk

In the past 8 years, Pakistan’s banking sector has undergone

transformation from a loss generating, state dominated, under-

capitalized, poor asset quality and inefficient sector to a predominated

privately owned, highly profitable, fast growing, leaner, well capitalized

and cleaner balance sheet holding sector.

However, the sector is NOT insulated from weakening in the real

economy.

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA3

Aggregate Post-tax Profits

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

PKR Billion

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA4

Return on Equity (ROE)

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA5

Return on Assets (ROA)

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA6

0.0%

4.0%

8.0%

12.0%

16.0%

20.0%

24.0%

28.0%

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Banking Deposit Growth

CAGR: 12.6% pa

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA7

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Advances (Loans) Growth

CAGR: 15.3% pa

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA8

Higher interest rates higher spreads

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Lending-Deposit Rate Spread T-bill Yield

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA9

Net NPLs as % of Net Loans

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA10

Analyzing a Bank – Concepts & Application

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA11

Quantitative Analysis

FINANCIAL SOUNDNESS

Profitability

Solvency

GROWTH and FUNDING MIX

Deposits

Borrowings

Loans

Investments

RISK ASSESSMENT

Credit Risk

Market Risk

Liquidity Risk

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA12

Risk Assessment

CREDIT RISK

Concentration in fewer sectors.

How much of banks’ lending is to pro-cyclical sectors.

LIQUIDITY RISK

GAP Analysis: Difference between a bank’s liabilities and assets as both

mature over time.

MARKET RISK

Exposure to equities, derivatives and bonds.

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA13

Non-Quantitative Factors

Ownership

Market Positioning & Strategy

Product Mix & Delivery Channels

Human Resource Quality

Internal Control Systems

IT Platform (Core Banking Solution, ATM Network, On-line networks,

Internet banking, etc. )

Investor Relations

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA14

Profit & Loss Statement

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA15

Balance Sheet

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA16

Return on Assets (ROA)

-1.4%

0.3%0.1%

1.8%2.0%

1.4%1.2%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2002

2003

2004

2005

2006

2007

2008

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA17

Return on Equity (ROE)

-10.3%

6.1%

26.0%28.6%

21.7%19.7%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

2002

2003

2004

2005

2006

2007

2008

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA18

Revenue Analysis

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA19

Net Interest Margin (NIM)

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA20

Non-Interest Income

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA21

Balance Sheet Growth - Liabilities

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA22

Balance Sheet Growth - Assets

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA23

Loan Book

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA24

Efficiency Ratio

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA25

Building a financial model

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA26

Key Assumptions – Macro/Sector

Translate economic/sector analysis in forecasts for:

M2 growth

Interest rates

Deposit growth

Advances growth

Sources of economic forecasts

Multilaterals: IMF/WB/ADB

State Bank of Pakistan

Consensus forecasts maintained by data services such as Reuters,

Bloomberg, etc.

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA27

Key Assumptions – Bank Specific

Balance Sheet – Develop forecasts for:

Deposit Growth

Deposit Mix

Borrowing

Advances Growth

Non-Performing Loans (NPLs)

Investment Portfolio Mix

Cash/FI lending

Net Interest Margin (NIM) – Forecast based on:

Interest Yield = f (interest rates, portfolio mix)

Cost of Funds = f (interest rates, deposit/borrowing mix)

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA28

Key Assumptions – Bank Specific

Non-Interest Income

Fee income = f (trade, guarantees, advisory, etc)

FX income = f (exchange rate, trade, remittances)

Dividend/Capital Gains = f (equity portfolio)

NPL provisioning

NPL charge = f (credit risk)

Administrative Cost

Taxation Rate (35%)

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA29

Allied Bank – Key Assumptions

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA30

Allied Bank – P&L Statement

Security Analysis (Fall 2009) Asif Ali Qureshi, CFA31

Allied Bank – Balance Sheet