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Presented To:
Sir Waseem Ullah

Project:
Financial Analysis of MCB
Pakistan
Presented By:
Group No: 14

Imran
Khalid
Reg#3414-FMS/MBA/S08 (19B)

Khurram Iftekhar
Reg#3422-FMS/MBA/S08 (19B)

Ismail Khan
Reg#3415-FMS/MBA/S08 (19B)

M.Rizwan Bisharat
Reg#-3427S/MBA/S08 (19B)

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 Table of Contents
Strengths:......................................................................................................... ......6

Threats................................................................................................. ..................8

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 BANKING INDUSTRY

In 2008 there is a financial slump in the world economy effects the solvency, liquidity
and the profitability of the banking system and decline in the consumer spending.

Pakistan was already experiencing economic and financial problems before the world
financial crises. Due to excessive money creation and excessive consumer lending’s in
private sector, rising oil prices, food, electricity crises led to a sharp inflation in the
country which effects the balance of payment due to which the foreign exchange reserve
also effected. Pakistan make an arrangements with IMF which helps for short time to
eased the inflationary pressure, this arrangement also released the banks to continue their
businesses.

The stress emerged in usual timeframe, i.e., Eid-ul-Fitr deposit withdrawal and a number
of global, domestic and industry specific factors further compounded it. The current
account deficit was quite high and the real exchange rate had significantly appreciated to
unsustainable levels, which ultimately put pressure on rupee/dollar exchange rate and led
to capital outflows. On top of it, breakdown of capital market in Pakistan and the series
of news on the financial meltdown in advanced markets raised general public doubts
about the financial strength of some Pakistani banks. By this time, due to relatively
higher growth in advances, the liquidity profiles of the banks had already been burdened.
In this backdrop, the usual post-Eid liquidity pressure in interbank market led to rumour-
mongering about the banks. The impact was severe in some banks especially the small
banks with the constrained liquidity profile in terms of ADR.

The reduction in Cash Reserve Requirements (CRR) and Statutory Liquidity

Requirements (SLR) in early weeks of October 2008 to manage the liquidity stress
resulted in a significant decline in cash and treasury bank balances by the end of
December-08 quarter, thus releasing funds for financing the growth of advances.
State bank of Pakistan enabled the system by some regulations to over come the financial
crises.

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 MUSLIM COMMERCIAL BANK

MCB is among the oldest banks of Pakistan. It was incorporated in 1947. It was among
those private banks that were nationalized in 1974. Nationalization had drastically
impacted its performance as it affected the quality of loan portfolio and services.
Eventually, it was privatized in 1991 and is currently owned by the Mansha group. Post
privatization, MCB’s focus has been on aggressive cost reduction.

MCB has a network of over 1000 branches across Pakistan, of which, around 750 are
automated. The bank offers various services to its consumers, including personal
banking, corporate banking, virtual banking, Islamic banking and other services. In this
rapid expanding banking sector, MCB has been performing well to compete with its
rivals. MCB has won the "Best Bank of Pakistan" award for the 5th time from 2001 to
2006.

During the year 2008 the bank continued to make strong progress in spite of the difficult
market conditions. Revenues grew strongly and considerable advancement due to
expanding our assets base. A number of strategic actions have been taken ensured that
MCB is having well position for the future and are able to excel in the year to come. In
2008 bank awarded best bank in Asia by Euro money.

Further the BOD of the bank taken steps to improve governance in the bank introducing
good policies.

Bank Rating

The bank has made an extraordinary effort to reduce its dependence on debt, as a source
of finance. Debt management figures reveal that the bank has 96% of its assets financed
by debt in 2003. However, it had reached a very high level and there is always a potential

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to fall back from heights, it has been the case with MCB as it had to reduce its
dependence on heavy debts. Furthermore, debt to equity ratio suggests a tremendous
recovery by MCB to improve its credit rating up to AA+ in long term and A1+ in short
term.

SWOT Analysis

Strengths:
• Mainly operated by Mansha's group.
• Offers a wide variety of services to its customers and has a customer bank of
round about 4 million.
• The bank has efficient and experienced management making significant
• The bank has efficient IT infrastructure and network of on line branches.
• Brand image because of "Muslim" word in the name in an Islamic country.
• MCB is working in Pakistan over 60 years of success.
• Muslim Commercial Bank (MCB) falls under the category of 'big five'
domestic commercial banks.
• Rapidly its performance is going up and it has above 10000 employees and it
has 1000 branches network in which 700 are online branches.
• The culture of MCB is strong and employees are professional and committed
to their work.
• Bank is continuously focusing on developing a new and innovative products
to attract their target market.
• Strong customer relationship.
• Asset utilization is very good.
• GPRS enabled banking.
• At present it has the largest ATM network in Pakistan.

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 • The launch of MCB switch allows other banks to utilize MCB's
ATM network.

Weaknesses:

• Less job satisfaction of employees.

• Customer facing problem of NADRA verification while opening their
accounts because its process is time consuming.
• To give everyone equal protocol is lacking among employees Customers
having account with small amount are not given same services like dealing to
others who have high account.
• Actuarial gains lead to boost the administrative expenses due to decreasing
discount rate.
• Lack of decentralization. Banks is planning to restructure its departments and
is going to be centralized very soon.
• Lack of organizational loyalty among employees.
• Promotions generally on seniority basis.
• Attitude of senior managers at head office has to change towards junior staff
• Competent staff unwilling to serve in the audit due to an absence of firm
rotation policy.
• As most of the employees are young they have more tendencies to switch the
organization and to seek more opportunities.

Opportunities:
• To go global fully.
• Low exposure to consumer banking providing opportunity to explore the
segment.

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 • Emergence of Islamic banking in the country and MCB is
increasing its Islamic Banking operations.
• SBP policy to allow Islamic banking business separately.

• Bank has earned a good name by introducing innovative products like car
financing home financing credit cards these products can easily enhance the
market share.
• Bank introduces Islamic banking in country that attracts large number of
people.
• Free staff training facilities offered.
• Greater profitability can be achieved through strong internal control
• Profit and deposit of banking industry have shown an increasing trend
because of better marketing environment.
• Elimination of risk of fraud through professional training
• Opportunity to open branch in ruler area to increase its branch network and
gain more profit.
• The bank can earn more profit by advancing to farmers and industrialists at
low rates.
• New schemes for deposits and finances should be introduced regularly.

Threats

• Current economic crunch.

• Political instability.
• Strong competition.
• Rising deposit rates.
• Foreign banks in market having more marketing budgets.
• People losing trust in banks.

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 • Decline in private and public sector credit due to tight monetary
policy.

• Participation of foreign banks in local market that can hurt the market share.
• Growing NPL's of the industry which may hurt MCB also.
• Mergers & acquisition activities, consolidating the banking sector and MCB is
also vulnerable to it.

• The market is already saturated Uncertainty in Pakistan and poor law and
order situation are also big threat for bank.
• Restructuring of privatized banks.
• Tough competition by foreign nationalized and privatized banks in foreign
trade business in fact competition is always a threat for organization.
• The stiff competition also causes switching of employee bank have to pay
more salaries to their employees.
• Cost of doing business is increasing day by day so it’s very hard to compete
with financial sector.
• Government policies are changing day by day and government stability is also
not there.`

Michal Porter Analysis

Bargaining power of the Buyers

The banking industry is confronted with diversified customers. Keeping in view

the customer needs and differential customer oriented products and services,
policies have been designed in a way that it meets the requirements of the
customer. In consideration of these services, customer has a lot of options and can
obviously shift to other bank voluntarily if he is not satisfied with the bank he is

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 dealing with. Its is important for bankers should keep his customers
well-informed regarding their offerings because on the basis of which customer
decides that which bank should be chosen with regards to interest rate and mark-
up etc.

Bargaining power of suppliers

The depositors perform the function of suppliers for the bank as they keep their
money with the bank whereas on the other hand it enhances the banks lending
ability which is then invested in some other business activities like providing
personal and business loans etc. The profit earned from these is then paid back to
the customers in the name of interest. The bargaining power of the suppliers is
high because they move where they find the maximum interest rate. The banks
need to concentrate on devising and making policies so as to draw and grab more
customers.
Threat of new entrants

Market always has a room for new entrants. Different Islamic banks have entered
the market claiming that their banking system is according to the sharia’h
complaint solutions commonly known as Islamic Banking, certified by a
distinguished sharia’h board. Along with this their infrastructure deals with all
kinds of solutions for the customers such as consumer banking and corporate
banking. If the culture, norms and religious values are given consideration then

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 they can attract a considerable percentage of target market, which
believes that the existing banking system is against sharia’h.

Threat of substitute products or services

The leasing companies and other financial institutions (e.g. Adamjee Insurance
etc) currently operating are also dealing in consumer products providing them on
different terms and conditions. These can act as a substitute for the customers.

Therefore it is important to keep an eye on these companies and revise the policies
accordingly.

Intensity of Rivalry among Competitors

In traditional banking system, competition among rival banks turns down the
profit, but competition is not perfect and banks are not unsophisticated passive
price takers. Rather banks strive for a competitive advantage over their rivals. The
intensity of rivalry among banks varies according to products and services they
offer to their target market, whereas strategic analysts are interested in these
customer oriented differences.

Financial Analysis of statement of financial year

2006, 2007 and 2008

Risk

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1) Credit Risk: Annual provision for loan losses to equity ratio was 0.065 in FY06
but in FY07 and FY 08 it decreased to 0.026 and remain constant in both the Financial
years, which is positive sign for bank because it means that borrowers are repaying their
loans properly, and the Peer group average is 0.079. Total loans to Total deposits ratio
was 0.770 in FY 2006 and in FY 2007 it decreases to 0.750, and in current FY it is 0.795,
and peer group average is 0.677.

0.900
Credit Risk
0.800
0.700
0.600 Total Loans To Total
0.500 Deposits
0.400
Annual Provision for
0.300
Loans Losses To Total
0.200 Equity
0.100
0.000
2006 2007 2008 Peer Group

2) Liquidity Risk: MCB Advances have grown by 19 percent in FY 2008 as compare

to FY 2007. Cash and due-from balances held at other financial institutions to total assets
ratio was pretty low in FY 2006 (0.56) it increased to 0.72 in FY 2007 and now in FY
2008 it is 0.108 which is still high with its peer group ratio which is 0.144. This means
that MCB is having low liquidity risk as compare to Peer Group.

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 0.900
LiquidityRisk
0.800
0.700
Earning Assets To
0.600 Total Assets
0.500
0.400
0.300
Cash & Balance due
0.200 from other financial
0.100 Institutions To Total
0.000 Assets
2006 2007 2008 Peer
Group

3) Interest Rate Risk: Interest rate fluctuated in the last three years in the country,
but the banks interest rate risk ratio remain same in FY 2006 and 2007, some how it is

increased .03 in 2008, this is because the ratio of increase in deposits is too much than
MCB’s investments and other return portfolio. And the Peer Group average is 1.28.

PROFITABILITY

The profits of FY08 are lower than profits for the last two years, but MCB is still
profitable. The overall profitability is affected due to increase in operating expenses and
provisioning for loan losses. In absolute terms, expenses increased by about 50 %in
FY08 as compare to previous year, which affected the overall profitability of the bank.
Non-interest income decreased by 3.1 % as compare to previous year. And interest
income also decreased by 3 % as compare to previous year this was due to slump in
economy. ROA also decreased by 4% to 3 % this year and the reason was same.

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 0.40
0.35 Profitibilty Ratios
0.30
0.25 Return on Equity capital

0.20 Return on Asset

0.15 Net operating margin
0.10 Net non-interest margin
0.05 Net interest margin
0.00
-0.05 2006 2007 2008 Peer
Group

As a whole all the profitability ratios decreased but as compare to Peer group MCB is in
profit and earning more than its competitors.

Return on Asset

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 0.07
BreakDown of ROA
0.06
0.05
0.04
Net interest margin
0.03
Net non-interest margin
0.02
ROA
0.01
0
-0.01 1 2 3 4

-0.02

DuPont Analysis

16.000
Dupont Analysis
14.000
12.000
10.000 Net Profit Margin
Asset Utilization
8.000
Equity Multiplier
6.000
ROE
4.000
2.000
0.000
2006 2007 2008 Peer Group

INVESTMENTS

The investments, especially the government papers, which declined in both absolute
rupee terms as well as a proportion of total assets during the first nine months of CY08,

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 registered a slight increase during the last quarter. Actually, the heightened
credit risk on account of deterioration in macroeconomic fundamentals and already
constrained liquidity profile induced the banks to shift their preference towards risk-free
.
The banking system is marked with a high concentration as a few number of banks hold a
major share of the systems total assets and deposits. This concentration has been
following an overall declining trend as the medium sized banks gradually gained market
share. However, due to unusual liquidity stress that affected mainly the small and
medium sized banks, the market share of five large banks inched up to 52.4.

Investment Portfolio
0%
1% 3% 1%
Federal Govt. Securities
1%
0% 9%
1% Overseas Govt. securities

Provincial Govt.
Securities
Subsidiaries and
Associated undertakings

84% Fully Paidup Ordinary

Share / Certificates

DEPOSITS
The deposit component is a indicator of strong growth, foreign remittances, is the main
factor behind the recent years strong growth in deposits, and grew by 13.07 percent over
CY08.

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In the current year trend shows the shift in deposite from saving to term deposite.
It is due to in response to SBPs policy incentives to encourage long term deposit
However, the SBPs policy drive to increase the CRR and SLR in last week of Jun-08 and
exemption of long-term deposits also from SLR requirements during the last quarter and
other factors like general rise in interest rates and innovative deposits scheme have also
increased depositors preference for terms deposits.

ADVANCES

Advance is the one of the big asset in balance sheet of financial situation in year 2006 to
2007 there is a 10% increase but with respect to the FY 2007 in FY 2008 it is increased
by 19.90%.

Advances witnessed a significant slowdown in sharp contrast to industry established

patterns for the last quarter. The worsening business and economic environment
somewhat increased the credit risk, which compelled the banks to adopt cautious lending
strategy, particularly in consumer sector where the advances have been decreasing since
the start of CY08. Some new loans have been issued, of which, a significant portion
disbursed to public sector enterprises (PSEs).
FY08 however, observed a deviation in the growth pattern of advances. Slackness in the
demand for bank credit during FY07 coupled with slowdown in economic activities and
tightening of the monetary regime, forced the banks to reposition their lending strategy
and asset profile. The asset mix of the banking system gradually shifted from lending to
investments during the first three quarters of FY07.

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 AdvancesPortfolio
2%
2%

Loans Cash Credits

Finances Lease

Bill Discounted and

96%
Purchased

Non Performing Loan

Rise in NPLs observed across all the banking groups except specialised banks, where
NPLs have actually decreased. NPLs have been on the rise mainly due to poor economic
performance of the economy.
Total provisions for NPLs surged to Rs 53 billion in 2008 as against Rs 42 billion in
Rising inflation and contained disposable incomes coupled with increasing lending rate
have reduced consumers appetite for credit as well as their repayment capacity, resulting
in increasing defaults rate in the consumer finance. Interestingly, in the wake of

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 economic slowdown, banks seem to facilitate the businesses through
rescheduling/restructuring of loans, the textile sector being the major beneficiary. Latest

banking industry numbers show an effort to keep balance sheets clear of NPLs by
recognizing and providing for NPLs on criteria that are more stringent. This approach
might look costly in the meantime but in the long run it will definitely benefit banks by
providing a cushion to withstand losses.

FUTURE OUTLOOK
The global financial crisis has badly effects banking systems. The financial sector is
facing problems but its better than other neighbouring countries due to regulations and
the role of SBP to take timely corrective measures. Measures include relaxation of CRR
and SLR in phases. The banking sectors spread continues its rising trend after witnessing
a dip to the level of 6.78% in June 2008 that has being taken as an after effect of
minimum profit payment of 5% on saving accounts. The profits show that long term
investment in Pakistani banking system will be lucrative, as the assets quality is quite
satisfactory.

Pakistan continued to follow stance of tightening of the monetary policy using the high
interest rate as a tool to contain inflationary pressures at the cost of stalled economic
activities. It can be noted that SBP already charging lower mark-up rate from exporters
against export refinance facility under EFS in order to enable them to become
competitive in the international market. The trade and industry however feels in order to
ignite a spark in the dull and dreary economic conditions and to come out of the
persisting recession the incentive of low interest should have been given to all
stakeholders across the board to achieve the desired results.

Some of the market expectations are that current discount rate at 15% is likely to be on a
slope by at most 400bps (basis points). In fact, the cut in the interest rate was long
overdue as done by other economies elsewhere as well as in the face of stability returned

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 into macro situation under the IMF programme. Trade experts feel that in
current times, low cost credit is vital to stimulate the economy and international trade.
Pakistan exports

have a combination which can be well suited to the current world economic situation, ie,
low value added goods have income elasticity and are least likely to be affected by the
economic slowdown.

Challenges faced by the economy, in general, and the banking sector, in specific, include
restrained liquidity, slowdown of economic activity, and high inflation. Despite these
issues, MCB has been able to maintain its profitability and only concern is of higher
NPLs, which have to be checked as it has surpassed to alarming levels. Besides this, the
bank is equipped to face challenges with its dynamic management and trained workforce.

In this situation the MCB is growing day by day and is going to acquire the RBS bank,
which shows that the MCB is the market leader and management is doing work in this
crunch and getting the benefit of this and purchasing the banks to expand the business.

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