FINANCIAL REPORTING ANALYSIS OF BANK AL-HABIB IN COMPARISON TO PEER GROUP

Submitted to Mr. Nouman Afghan Assistant Professor NBS, NUST Analysis Submitted by Maria Iftikhar | Muhammad Ali | Muhammad Khalid Zafar | Sumbul Zehra Third Semester MBA 2K11

NUST Business School [NBS] National University of Science and Technology [NUST]
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Table of Contents
BANKING SECTOR OF PAKISTAN ........................................................................................... 1 INTRODUCTION OF BANK AL-HABIB .................................................................................... 2 PEER GROUP & RATING ............................................................................................................ 3 Bank Al Habib ............................................................................................................................ 3 Askari Bank ................................................................................................................................ 3 NIB Bank .................................................................................................................................... 3 OBJECTIVES OF STUDY............................................................................................................. 3 METHODOLOGY ......................................................................................................................... 4 Area of Survey: ........................................................................................................................... 4 Plan of Analysis: ......................................................................................................................... 4 Type of Analysis: ........................................................................................................................ 4 Framework of Analysis: .............................................................................................................. 5 CAMELS ANALYSIS.................................................................................................................... 5 RATING OF CAMELS FRAMEWORK ....................................................................................... 5 CAPITAL ADEQUACY ................................................................................................................ 6 CAPITAL ADEQUACY RATIOS IN BANK AL-HABIB ........................................................... 6 1. Capital Ratio:.................................................................................................................... 6 2. Break-Up Value per Share: .............................................................................................. 7 ASSET QUALITY RATIOS IN BANK AL-HABIB .................................................................... 8 1. Non-Performing Loans (NPLs) to Gross Advances: ....................................................... 8 2. Provision against NPLs to Gross Advances: .................................................................... 9 3. NPLs to Equity Ratio: .................................................................................................... 10 MANAGEMENT QUALITY ....................................................................................................... 10 MANAGEMENT QUALITY RATIOS IN BANK AL-HABIB .................................................. 11 1. Admin. Expense to Profit before Tax: ........................................................................... 11 EARNING PERFORMANCE ...................................................................................................... 12 EARNING PERFORMANCE RATIOS IN BANK AL-HABIB ................................................. 12 1. Spread Ratio: .................................................................................................................. 12 i|Page

2. Net Interest Margin Ratio:.............................................................................................. 13 3. Return on Assets: ........................................................................................................... 14 4. Return on Equity: ........................................................................................................... 15 5. Non-interest Income to Total Asset Ratio: ..................................................................... 16 LIQUIDITY .................................................................................................................................. 16 LIQUIDITY RATIOS IN BANK AL-HABIB ............................................................................. 17 1. Cash and Balances with Banks to Total Assets: ............................................................ 17 2. Total Deposit and other Accounts to Total assets: ......................................................... 18 3. Investment to Total Assets: ............................................................................................ 19 4. Advances to Total Assets: .............................................................................................. 19 SENSITIVITY TO MARKET RISK ............................................................................................ 20 SENSITIVITY TO MARKET RISK IN BANK AL-HABIB ...................................................... 20 1. Credit Risk: .................................................................................................................... 20 2. Market Risk: ................................................................................................................... 21 3. Operational Risk:............................................................................................................ 21 RECOMMENDATIONS .............................................................................................................. 22 ANNEXURES

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BANKING SECTOR OF PAKISTAN

The financial sector in Pakistan comprises of Commercial Banks, Development Finance Institutions (DFIs), Microfinance Banks (MFBs), Non-banking Finance Companies (NBFCs) (leasing companies, Investment Banks, Discount Houses, Housing Finance Companies, Venture Capital Companies, Mutual Funds), Modarabas, Stock Exchange and Insurance Companies. Under the prevalent legislative structure the supervisory responsibilities in case of Banks, Development Finance Institutions (DFIs), and Microfinance Banks (MFBs) falls within legal ambit of State Bank of Pakistan while the rest of the financial institutions are monitored by other authorities such as Securities and Exchange Commission and Controller of Insurance.

The banking sector in Pakistan is highly regulated. The State Bank of Pakistan (SBP) is the Central Bank of Pakistan. It regulates the banking sector with complete autonomy, and is also responsible for licensing, directing, supervising, controlling and inspecting banks, as well as exercises various monetary control policy measures. The Securities and Exchange Commission of Pakistan also monitors the operations of the listed banks related to public shareholding matters. The banking sector in Pakistan also consists of Commercial Banks and Specialized Banking Institutions. Commercial banks operating in Pakistan can be divided into four broad categories, namely Nationalized Commercial Banks, Privatized Banks, Private Banks and Foreign Banks. The Pakistani banking sector has seen several changes and trends owing to its reform measures. Besides improved financial performance, the other trends include mergers and acquisitions activities with local private banks, expansion of branch networks of private and foreign banks.

The banking sector in Pakistan has been going through a comprehensive but complex and painful process of restructuring since 1997. It is aimed at making these institutions financially sound and forging their links firmly with the real sector for promotion of savings, investment and growth. Although a complete turnaround in banking sector performance is not expected till the completion of reforms, signs of improvement are visible. The almost simultaneous nature of various factors makes it difficult to disentangle signs of improvement and deterioration.

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Commercial banks operating in Pakistan can be divided into four categories: 1. Nationalized Commercial Banks (NCBs) 2. Privatized Banks 3. Private Banks and 4. Foreign Banks.

INTRODUCTION OF BANK AL-HABIB

Bank AL Habib was incorporated as a Public Limited Company in October 1991 and started its operations in January 1992. It is a venture of the Habib Group, which owns 50% of the shares 20 % shares are owned bank AL Habib was incorporated as a Public Limited Company in October 1991 and started its operations by NIT and 30% are owned by the general public. The bank operates in the private sector, with 30 branches in the major cities of Pakistan, and has its principle office at Karachi.

It is a scheduled bank principally engaged in the business of commercial banking with a network of 233 branches including a wholesale branch (in the Kingdom of Bahrain, a branch in Karachi Export Processing Zone and four Islamic Banking branches. The Bank has invested in 66.67% shares of AL Habib Capital Markets (Private) Limited.

The principal objective of the company is to engage in the business of equity, money market and foreign exchange, brokerage, equity research and corporate financial advisory and consultancy services. AL Habib Capital Markets (Private) Limited (the Company) was incorporated in Pakistan as a (Private) Limited Company on 23 August 2005 under the Companies Ordinance, 1984 and started operations from14 December 2005.AL Habib Financial Services Limited is a wholly owned subsidiary of the Bank. The principal objective of the company is to engage in arranging / advising on financial products and services. AL Habib Financial Services Limited was incorporated in Dubai on 05 March 2008. Its commercial banking services also include acceptance and placement of funds in the interbank market; purchase and sale of foreign currencies; trade information and research; remittances and transfer of funds; purchase and sale of government securities; Sui gas bills collection; and MCB rupee traveler cheque services.

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PEER GROUP & RATING

The peer groups are Askari Bank NIB Bank

The credit ratings of all three of them are as follows.

Bank Al Habib
Pakistan Credit Rating Agency Limited (PACRA) has upgraded the Banks long term entity rating to AA+ (Double A plus) from AA (Double A), while the short-term entity rating has been maintained at A1+ (A One plus)

Askari Bank
The Bank enjoys "A-" (Single A Minus) for the medium to long term and "A2" (A two) for the short term entity ratings by Pakistan Credit Rating Agency Limited.

NIB Bank
PACRA maintained NIBs long term rating at AA- (Double A minus) and short term rating at A1+ (A one plus) in June 2009, even in this difficult environment. The rating on NIBs term finance certificates issued in March 2008 was also maintained at A+ (A plus).

OBJECTIVES OF STUDY
In the recent years the financial system especially the banks have undergone numerous changes in the form of reforms, regulations & norms. CAMELS framework for the performance evaluation of banks is an addition to this. The study is conducted to analyze the pros & cons of this model.

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To do an in-depth analysis of the CAMELS model. To analyze Bank Al-Habib in comparison to two banks in its peer group for a period of five years from 2007-11 in order to get the desired results by using CAMELS as a tool of measuring performance.

METHODOLOGY Area of Survey:

The survey was done for three banks of Pakistans private sector. The study environment was Financial Institutions particularly the Banking industry. Al-Habib bank in comparison to NIB and Askari Bank was taken into account.

Plan of Analysis:
The data analysis of the information got from the balance sheets was done and Ratios Analysis was used as a methodology to study the relationship between two financial values. Graph and charts were used to illustrate trends.

Type of Analysis:
The following type of Analysis are used in the project:

Macro industry level analysis Comparison of bank Al-Habib with two other banks;
NIB Bank and Askari Bank, in its peer group to compare the ratios.

Past Performance or Historical Trend Analysis An analysis across historical time

periods for the same firm (the last 5 years).

Graphical Trend Analysis The use of graphs and charts for the illustration of financial
performance of the banks.

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Framework of Analysis:
Ratio Analysis is the framework of Analysis used, State Bank of Pakistan has been following a supervisory framework which involves the analysis of six indicators which reflect the financial health of financial institutions. This framework is known as the CAMELS model. The current study uses the same framework as an analysis indicator.

CAMELS ANALYSIS
CAMELS framework is a common method for evaluating the soundness of Financial Institutions. 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. CAMELS is a rating system for domestic and foreign banks based on the international CAMELS model combining financial management and systems and control elements introduced for the inspection cycle commencing. It recommended that the banks should be rated on a five point scale (A to E) based on the lines of international CAMELS rating model. CAMELS evaluate banks on the following six parameters:1. Capital Adequacy 2. Asset Quality 3. Management Soundness 4. Earnings and Profitability 5. Liquidity and 6. Sensitivity to Market Risk.

RATING OF CAMELS FRAMEWORK

The five point scale (A to E) based on the lines of international CAMELS rating model is given as under: Symbol A B C D E 5|Page Interpretation Bank is sound in every respect Bank is fundamentally sound but with moderate weaknesses Financial, operational or compliance weaknesses that give cause for supervisory concern. Serious or immoderate finance, operational and managerial weaknesses that could impair future viability Critical financial weaknesses and there is high possibility of failure in future

CAPITAL ADEQUACY
The first component, capital adequacy ultimately determines how well Financial Institutions can manage with shocks to their balance sheets. Thus, it tracks capital adequacy ratios that take into account the most important financial risksforeign exchange, credit, and interest rate risksby assigning risk weightings to the institution's assets.

Leverage ratio can be used to measure the capital adequacy of a bank. This is the ratio of bank's book value of core capital to the book value of its assets. The higher ratio shows the higher level of capital adequacy. The leverage ratio falling in the first zone implies that bank is well capitalized. Similarly, the leverage falling in the second zone shows that bank is adequately capitalized.

CAPITAL ADEQUACY RATIOS IN BANK AL-HABIB

1. Capital Ratio:
Capital Ratio = Total shareholders equity / Total Assets *100 2007 Bank Al Habib NIB Bank Askari Bank 5.67% 12.79% 6.64% 2008 5.62% 16.21% 5.84% 2009 4.92% 20.01% 5.18% 2010 4.89% 4.80% 4.71% 2011 4.65% 36.70% 4.82%

The ratio between shareholders equity and total assets expresses the

percentage of equity in total assets. This ratio is used to measure an entity's leverage. This is a measure of the total debt a company takes to acquire assets. Equity is the amount of the company that the shareholders 6|Page

own. This ratio also measures a company's solvency in the long run. Solvency is the company's capability to meet its financial needs. The results of this analysis are used to make financial decisions regarding further incurring of debt through increased equity. Capital Ratio of Bank Al Habib is relatively lower throughout the 5 years and this is an indicator of high leverage ratio for the Bank. Less of its assets are financed with equity and it also increases the risk of solvency for the Bank. Askari Bank is also high on leverage but NIB has financed more of its Assets with equity.

2. Break-Up Value per Share:

Break-Up Value per Share = Total shareholders equity/ No. of ordinary shares 2007 Bank Al Habib NIB bank Askari Bank 21.77 10.26 40.24 2008 20.83 10.20 29.65 2009 20.14 10.30 25.95 2010 20.14 1.95 23.06 2011 20.35 5.82 23.46

Break-up Value is net worth per share and is an important

45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 2007 2008 2009 2010 2011 Askari Bank Bank Al-Habib NIB

criterion to measure financial soundness of a company. The break-up value is calculated for whole financial sector except in case of foreign banks and Net called

Modaraba worth

Companies. also be

may

shareholder equity, and it's one of the factors you consider in evaluating a company in which you're considering an investment. To figure your own net worth, you add the value of the assets you own, including but not limited to cash, securities, personal property, real estate, and retirement accounts, and subtract your liabilities, or what you owe in loans and other obligations. Net worth per share for Bank Al-

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Habib is relatively constant for the five years and shows a constant trend. It is higher than its peer NIB bank and Askari falls almost equal to Bank-Al Habib.

ASSET QUALITY
Credit risk is one of the factors that affect the health of an individual Financial Institution. The extent of the credit risk depends on the quality of assets held by an individual Financial Institution. The quality of assets held by an FI depends on exposure to specific risks, trends in non-performing loans, and the health and profitability of bank borrowersespecially the corporate sector. We can use a number of measures to indicate the quality of assets held by Financial Institutions. Suggested measures could be loan concentration by industry, region, borrower and portfolio quality; related party policies and exposure on outstanding loan, approval process of loan, check and balance of loans; loan loss provision ratio; portfolio in arrear; loan loss ratio; and reserve ratio could be calculated for checking the quality of assets of a Financial Institution.

ASSET QUALITY RATIOS IN BANK AL-HABIB 1. Non-Performing Loans (NPLs) to Gross Advances:
Non-Performing Loans (NPLs) to Gross Advances = Non-Performing Loans (NPLs) / Gross Advances *100 2007 Bank Al Habib NIB Bank Askari Bank 0.27% 14.31% 6.38% 2008 0.85% 17.18% 8.36% 2009 1.19% 15.75% 12.01% 2010 2.28% 35.29% 12.82% 2011 2.67% 40.47% 14.13%

This ratio expresses the quality of loan portfolio of a bank. It shows the percentage of NPLs as gross advances made by a bank and evaluates assets quality based on loan portfolio. A nonperforming loan (NPL) is a loan on which the borrower is not making interest payments or repaying any principal. Local banking regulations determine the delinquency point to be classified as non-performing. Many banking systems define NPLs as those overdue by 90 days 8|Page

or more. Banks normally set aside money to cover potential losses on loans (impairment loss provisions) and write off bad debt in their profit and loss account. This ratio is useful for banks and DFIs. Overall. For Bank Al Habib this ratio is a good indicator of its low non-performing loans and efficient performance.

45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 2007 2008 2009 2010 2011

Askari Bank Bank Al-Habib NIB

2. Provision against NPLs to Gross Advances:

Provision against NPLs to Gross Advances = Provision against NPLs /Gross Advances *100 2007 Bank Al Habib NIB Bank Askari Bank 0.28% 11.26% 6.85% 2008 1.19% 17.45% 7.80% 2009 2.20% 15.96% 8.53% 2010 2.56% 24.17% 9.29% 2011 4.28% 27.97% 9.96%

The

ratio

between

provisions

30.00% 25.00% 20.00% Askari Bank 15.00% 10.00% 5.00% 0.00% 2007 2008 2009 2010 2011 Bank Al-Habib NIB

against classified loans/advances to gross advances reflects the quality of advances of banks and DFIs. Bank's NPLs/advances ratio and provision for NPLs have been lower than the industry averages. Lower provision on one hand may leave the bank with greater

amount of assets for more productive uses but the bank should increase its provisions until the declining trend in the NPLs becomes more visible. NIB Bank has kept more proportion for nonperforming loans and due to high ratio of non-performing loans, it has to block its productive 9|Page

assets and keep them for provision. Askari Bank has maintained a lower proportion for provision with an increasing trend, as the number of nonperforming loans increases.

3. NPLs to Equity Ratio:

NPLs to Equity Ratio = Non-Performing Loans / Equity Ratio *100 2007 Bank Al Habib NIB Bank Askari Bank 2.70% 56.65% 67.09% 2008 8.65% 57.63% 97.13% 2009 16.83% 37.81% 134.65% 2010 19.97% 439.82% 145.74% 2011 17.92% 57.02% 142.56%

500.00% 400.00% 300.00% 200.00% 100.00% 0.00% 2007 2008 2009 2010 2011 Askari Bank Bank Al-Habib NIB

The

ratio

between equity

NPLs indicates

to the

shareholders

exposure of the common shareholders to NPLs. This ratio is useful for banks and DFIs. Bank al-Habib is performing better than its peer group in respect to exposure of NPLs to common equity holders. With the increase in Nonperforming loans, equity shareholders

also get exposed to the risk of defaulted loans and the financial risk. Shareholders of NIB Bank and Askari Bank are more exposed to this risk than Bank Al- Habib.

MANAGEMENT QUALITY
Sound management is a key to bank performance but is difficult to measure. It is primarily a qualitative factor applicable to individual institutions. Given the qualitative nature of management, it is difficult to judge its soundness just by looking at financial accounts of the banks. Several indicators, however, can jointly serve as an indicator of management soundness. Nevertheless, total expenditure to total income and operating expenses to total expenses can help in gauging the management quality of any commercial bank. Expenses ratio, earning per

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employee, cost per loan, average loan size and cost per unit of money lent can be used as a proxy of the management quality.

MANAGEMENT QUALITY RATIOS IN BANK AL-HABIB 1. Admin. Expense to Profit before Tax:
Admin. Expense to Profit before Tax = Administrative expenses /Profit/(loss) before taxation 2007 Bank Al Habib NIB Bank Askari Bank 1.04 -3.51 2.08 2008 1.20 -5.85 12.80 2009 1.12 8.30 4.45 2010 1.09 -0.58 6.35 2011 1.30 -1.38 3.58

This ratio expresses the relationship between administrative expenses and profit before tax. It is useful for whole financial sector. The Management of the Bank Al-Habib is responsible for establishing the Internal Control

15 10 5 0 2007 -5 -10 2008 2009 2010 2011 Bank Al Habib NIB Bank Askari Bank

System with the main objectives of ensuring effectiveness and efficiency of operations; reliability of financial

reporting; safeguarding of assets; and compliance with applicable laws and regulations. This ratio is showing that administration expenses of Bank relatively remained in the same range and it managed to control its expenses; in comparison with Askari Bank. Bank al-Habib is more successful in maintaining its managerial expenses. NIB Bank has negative admin expenses to profit ratio because of its overall loss and admin expenses is a major chunk of their expenses.

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EARNING PERFORMANCE
Earning capacity or profitability keeps up the sound health of a Financial Institution. Strong earnings and profitability profile of banks reflects the ability to support present and future operations. More specifically, this determines the capacity to absorb losses, finance its expansion program, pay dividend to its shareholders and build up adequate level of capital. Being front line of defense against erosion of capital base from losses, the need for high earnings and profitability can hardly be overemphasized. Chronically unprofitable Financial Institution risks insolvency on one hand and on the others, unusually high profitability can reflect excessive risk taking of an FI. There are different indicators of profitability. Although different indicators are used to serve the purpose, the best and most widely used indicator is return on assets (ROA). Net interest margin is also used. Interest-spread ratio, earning-spread ratio, gross margin, operating profit margin and net profit margin are also some commonly used profitability indicators.

In addition, interest income, net interest income, non-interest income, net non-interest income, non-operating income, net non-operating income and net profit are also used to evaluate the profitability of a commercial bank.

EARNING PERFORMANCE RATIOS IN BANK AL-HABIB 1. Spread Ratio:

Spread Ratio = Interest Earned/Interest Expense * 100 2007 Bank Al Habib NIB Bank Askari Bank 42.04% 26.63% 42.64% 2008 45.13% 26.96% 42.09% 2009 40.99% 29.55% 40.05% 2010 39.35% 2011 38.75%

18.27% 35.85%

14.70% 30.73%

Spread is the gap between interest rate a bank charges on loans and rate pays on deposits. The amount of total interest earned divided by the total interest paid to depositors as mentioned in the income statement. This ratio is useful for Banks and DFIs. Net interest spread is similar to net interest margin; it expresses the nominal average difference between borrowing and lending rates 12 | P a g e

50.00% 45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 2007 2008 2009 2010 2011

of

financial

institutions,

without compensating for the fact

Askari bank Bank Alhabib NIB

that

the

amount

of

earning assets and borrowed funds may be different. The spread ratio of Bank AlHabib increased to 45.13% in 2008 and again decreased to 40.99%, 39.35% and 38.75%

in 2009, 2010 and 2011 respectively. The spread ratios of NIB in comparison are much lower than both Askari and Bank Al-Habib because of the lower interest earned and the interest expense in comparison to the other banks in its peer group. Still the ratio of NIB showed an increasing trend throughout 2007-09 but decreased in the later period to a value of 18.27% and 14.70% respectively in 2010 and 11. The ratio for Askari Bank in the same period was 35.85% and 30.73%; larger than NIB but less in comparison to Bank Al-Habib.

2. Net Interest Margin Ratio:

Net Interest Margin Ratio = (Total Interest Income Total Interest Expense)/Total Assets * 100 2007 Bank Al Habib NIB Bank Askari Bank 2.96% 1.13% 3.54% 2008 3.71% 2.46% 3.76% 2009 3.63% 2.59% 3.56% 2010 3.58% 1.83% 3.18% 2011 3.68% 1.35% 2.93%

This ratio indicates the earning capacity through core banking business by utilizing all assets. Banks normally borrow from savers and lend to investors. It is the ratio between the differences of interest income and interest expense to total assets. The net interest margin shows an increasing pattern for bank Al-Habib which is profitable for bank as management is successfully able to control the expense as statements shows that interest earned through loans and advances and also through investment is increasing whereas interest expense in year 2007 long term facility for imported machinery and plant are zero whereas biggest change is that from 20072011 there is a constant decrease in short-term borrowing and even borrowing from SBP.Net interest Margin of Bank Al-Habib along with its peer group increased initially in 2008 but again 13 | P a g e

decreased in 2009 and 2010. For NIB, Net interest margin is showing decreasing trend in last few years because the interest expenses and income changed with the same proportion. AlHabib initially had a lower NetInterest margin in 2007 as compared to the banks in peer

4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 2007 2008 2009 2010 2011 Askari Bank Bank Al-Habib NIB

group but from 2009-11 the ratio increased for Al-Habib in comparison to both Askari Bank and NIB Bank.

3. Return on Assets:
Return on Assets = Net profit after tax/ Total Assets * 100 2007 Bank Al Habib NIB bank Askari Bank 1.57% -0.20% 1.47% 2008 1.37% -4.18% 0.19% 2009 1.14% 0.33% 0.42% 2010 1.22% -5.90% 0.29% 2011 1.18% -1.34% 0.50%

2.00% 0.00% 2007 -2.00% -4.00% -6.00% -8.00% 2008 2009 2010 2011 Askari Bank Bank Al-Habib NIB

This ratio expresses the capacity of earning profit by a bank on its total assets employed in the business. It is calculated as percentage of net profit after tax to total assets. It is useful for whole financial sector. ROA of

Bank Al-Habib shows decreasing trend but does not mean that the bank fails to utilize its assets in proper way because net interest margin and operating margin are increasing in whereas non interest margin shows slight decrease in 2009, because non-interest income and non-interest expense is decreased and overall impact on total assets and EBIT is increasing which in turn 14 | P a g e

decreased ROA. NIB Bank initially had negative Return in asset because of negative net income of the bank, the loss initially decreased in 2008 indicating a decrease in the ratio by other banks in the peer group, however the bank showed a positive ROA in 2009 which again decreased with a large decrease in net loss in 2010-11. However ROA for Bank Al-Habib had a better value in comparison to the other banks in its peer group throughout 2007-11.

4. Return on Equity:
Return on Equity = Net profit after tax/ Total share holders equity *100 2007 Bank Al Habib NIB Bank Askari Bank 27.59% -1.55% 22.16% 2008 24.33% -25.77% 3.21% 2009 23.25% 9.66% 8.12% 2010 24.88% -122.99% 6.20% 2011 25.38% -3.40% 10.28%

This ratio expresses the return on shareholders

50.00% 0.00% 2007 -50.00% -100.00% -150.00% 2008 2009 2010 2011 Askari Bank Bank Al-Habib NIB

equity. ROE is a direct measure of returns to the shareholders. It is

calculated as a percentage of the net profit after tax to total shareholders equity.

It is also useful for whole financial sector. Return on equity of Bank Al-Habib went from 27.59% in 2007 to 25.38% in 2011 with a decrease of -8%. In 2007-08 the return on equity of NIB was negative indicative a negative return to shareholders however in the same period there was the shareholders of Bank Al-Habib were having a 27.59% and Askari Bank was returning 22.16% to its shareholders of their equity in 2007. The ratio of Bank Al-Habib declined slightly over the period of five years. However, the decrease was negligible in comparison to the other bank in the peer group. The decrease was due to both decreases in Net Income of the bank as well as due to the increase in shareholders equity.

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5. Non-interest Income to Total Asset Ratio:

Non-interest income to Total Asset Ratio = Total non-interest Income / Total Assets *100 2007 Bank Al Habib NIB Bank Askari Bank 1.51% 0.34% 2.51% 2008 1.36% 1.35% 1.31% 2009 0.74% 0.81% 1.03% 2010 0.72% 1.18% 0.71% 2011 0.68% 1.28% 0.88%

Ratio on incomes earned other than mark-up e.g. capital gains, commission, fee to total assets etc. This ratio expresses how much income is earned other than mark-up through other

3.00% 2.50% 2.00% Askari Bank 1.50% 1.00% 0.50% 0.00% 2007 2008 2009 2010 2011 Bank Al-Habib NIB

functions of the bank by employing total assets. Net

non-interest margin of bank Al-Habib shows a decreasing pattern because noninterest income is decreasing in numerator whereas noninterest expense in denominator is increasing with higher proportion. From 2009 to 2010 the ratio decreased by 2.7% however from 2010 to 2011 the ratio decreased by 5.55%. The ratio in the same period increased by 8.47% for NIB and 23% for Askari bank.

LIQUIDITY
Liquidity risk threats the solvency of Financial Institutions. In the case of commercial banks, first type of liquidity risk arises when depositors of commercial banks seek to withdraw their money and the second type does when commitment holders want to exercise the commitments recorded off the balance sheet. Commercial banks have to borrow the additional funds or sell the assets at fire sale price to pay off the deposit liabilities. They become insolvent if sale price of the assets are not enough to meet the liability withdrawals. The second type of liquidity risk arises when demand for unexpected loans cannot be met due to the lack of the funds. Commercial banks can 16 | P a g e

raise the funds by running down their cash assets, borrowing additional funds in the money markets and selling off other assets at distressed price. Both liability side liquidity risk and asset side liquidity risk affect the health of commercial banks adversely. But maintaining the high liquidity position to minimize such risks also adversely affects the profitability of Financial Institutions. Return on highly liquid assets is almost zero. Therefore, Financial Institutions should strike the tradeoff between liquidity position and profitability so that they could maintain their health sound. Commercial bank's liquidity exposure can be measured by analyzing the sources and uses of liquidity. In this approach, total net liquidity is worked out by deducting the total of uses of liquidity from the total of sources of liquidity. In addition, different liquidity exposure ratios such as borrowed funds to total assets, core deposit to total assets, loans to deposits, and commitments to lend to total assets are used to measure the liquidity position of a commercial bank.

LIQUIDITY RATIOS IN BANK AL-HABIB

1. Cash and Balances with Banks to Total Assets:

Cash and Balances with Banks to Total Assets = Cash and Balances/Total Assets *100 2007 Bank Al Habib NIB Bank Askari Bank 10.18% 6.63% 9.25% 2008 8.77% 5.67% 9.69%
12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 2007 2008 2009 2010 2011 Askari Bank Bank Al-Habib NIB

2009 7.61% 6.01% 10.91%

2010 7% 7.16% 8.37%

2011 7.72% 6.11% 9.42%

The ratio can be used both internally by the companys

analysts, and by potential and current investors. This ratio

expresses the percentage of total assets available in the form of highly liquid assets. A ratio used 17 | P a g e

to compare a businesss performance among other industry members. The ratio of Bank AlHabib is decreasing over time because of less proportionate increase in the company liquid assets in comparison to its total assets. There is a decrease of 13.85% in 2008 than 2007 but the ratio again increased back in 2011. Between 2007-09 the ratio was declining for Bank Al-Habib however increasing for Askari Bank in the same period. In 2011 Askari bank has the highest ratio indicating the banks liquidity.

2. Total Deposit and other Accounts to Total assets:

Total Deposit and other Accounts to Total assets = Total Deposit and other Accounts/Total Assets *100 2007 Bank Al Habib NIB Bank Askari Bank 81.30% 66.05% 78.52% 2008 81.43% 58.46% 91.32% 2009 75.77% 45.13% 80.96% 2010 82.76% 60.23% 81.30% 2011 78.56% 55.21% 84.77%

The ratio shows what percentage

100.00% 80.00% 60.00% 40.00% 20.00% 0.00% 2007 2008 2009 2010 2011 Askari Bank Bank Al-Habib NIB

of total assets comprises total deposits and other accounts. The higher the total deposit ratio, the lower is the perceived liquidity risk because contrary to purchased funds, retail deposits are less sensitive to a change in interest rates or a minor deterioration in

business performance. The ratio was 81.30% in 2007 and 78.56% in 2011. This value indicates Bank Al-Habib is lower perceived liquidity risk because the bank mobilizes savings. Savings mobilization is becoming important, because there are simply not enough donor resources available to cover the funding needs of the growing micro-finance sector. The ratio has a decreasing trend initially for NIB during 2007-09 however it increased in 2010 with a value of 60.23% but still the risk of liquidity was less in comparison to the other banks in its peer group.

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3. Investment to Total Assets:

Investment to Total Assets = Total investments / Total Assets *100 2007 Bank Al Habib NIB Bank Askari Bank 24.98% 22.93% 21.64% 2008 27.02% 19.66% 17.03% 2009 44.44% 30.00% 26.03% 2010 45.47% 30.51% 32.44% 2011 58.02% 30.86% 38.87%

The ratio between Investment and total assets shows investment activity with reference to its total assets. It indicates the portion of total assets used for investment in various venues. This ratio is useful for banks, DFIs and insurance companies. Total investments to total assets

70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 2007 2008 2009 2010 2011 Askari Bank Bank Al-Habib NIB

indicate the extent of deployment of assets in investments. The higher level of investment indicates the lack of credit off-take in the market. Bank Al-Habib has higher investments in risk free securities as compared to NIB and Askari Bank which shows the lack of credit off-take and further confirms the aggressive strategy of the bank in the disbursal of advances.

4. Advances to Total Assets:

Advances To Total Assets = Total advances / Total Assets *100 2007 Bank Al Habib NIB Bank Askari Bank 56.09% 46.51% 55.32% 2008 56.51% 44.91% 62.46% 2009 42.43% 40.37% 53.09% 2010 41.67% 45.32% 48.54% 2011 29.87% 39.31% 43.83%

This ratio expresses the relationship of advances (net) to total assets. This ratio is useful for banks and DFIs. The ratio indicates the utilization of deposits in the core business of a bank. If 19 | P a g e

70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 2007 2008 2009 2010 2011 Askari Bank Bank Al-Habib NIB

the ratio is too high, it means that banks might not have enough liquidity to cover any unforeseen fund requirements; if the ratio is too low, banks may not be earning as much as they could be. Loan to deposit ratio of Bank Al-Habib is

increasing initially in 2008 as compared to 2007 then it start decreasing gradually over time from 2008-11, it shows that bank is managing to keep more liquid assets with it in order to meet the demands of depositors. NIB bank has initially lower ratio than bank Al-Habib and Askari during 2007-09; then the ratio started increasing so that shows NIB giving out more cash as loans than the deposits it has. It can create liquidity problems for NIB Bank. Likewise Askari Bank has also high ratio of Loans to deposits and with the high earnings of interest they can get into the problem of liquidity.

SENSITIVITY TO MARKET RISK

Commercial banks are increasingly involved in diversified operations such as lending and borrowing, transaction in foreign exchange, selling off assets pledged for securities and so on. All these are subject to market risk like interest rate risk, foreign exchange rate risk, and financial asset and commodity price risk. The health of a Financial Institution more sensitive to market risk is more hazardous than that of less sensitive. Foreign exchange risk, interest rate risk, equity price risk, and commodity price risk are the indicators of sensitivity to market risk.

SENSITIVITY TO MARKET RISK IN BANK AL-HABIB 1. Credit Risk:

Pakistan Credit Rating Agency Limited (PACRA) has maintained the Bank's long term and short term entity ratings at AA+ (Double A plus) and A1+ (A One plus), respectively. The ratings of unsecured, subordinated TFCs have also been maintained at AA (Double A). These ratings 20 | P a g e

denote a very low expectation of credit risk emanating from a very strong capacity for timely payment of financial commitments.

Credit risk is managed through the credit policies approved by the Board; a well-defined credit approval mechanism; use of internal risk ratings; prescribed documentation requirements; postdisbursement administration, review, and monitoring of credit facilities; and continuous assessment of credit worthiness of counterparties. The Bank has also established a mechanism for independent, post-disbursement review of large credit risk exposures. Decisions regarding the credit portfolio are taken mainly by the Central Credit Committee. Credit Risk Management Committee of the Board provides overall guidance in managing the Bank's credit risk.

2. Market Risk:
Market risk is managed through the market risk policy approved by the Board; approval of counterparty limits and dealer limits; specific senior management approval for each investment; and regular review and monitoring of the investment portfolio by the Bank's Asset Liability Management Committee (ALCO). In addition, the liquidity risk policy provides guidance in managing the liquidity position of the Bank, which is monitored on daily basis by the Treasury and the Middle Office. Risk Management Committee of the Board provides overall guidance in managing the Bank's market and liquidity risks.

3. Operational Risk:
Operational risk is managed through the audit policy and the operational risk policy approved by the Board, along with the policy on prevention of frauds and forgeries; operational manuals and procedures issued from time to time; a system of internal controls and dual authorization for important transactions and safe-keeping; a Business Continuity Plan, including a Disaster Recovery Plan for I. T.; and regular audit of the branches. Audit Committee of the Board provides overall guidance in managing the Bank's operational risk.

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RECOMMENDATIONS
1. Bank Al-Habib has high capital ratio and it is highly recommended to reduce the leverage otherwise it has to face high liquidity risks in case of any uncertainty. 2. Bank has kept lower provisions for non-performing loans and that can also be a threat if more loans default and bank will not be available with liquid cash to compensate the loss. 3. Spread shows the major earnings of any Bank and reduction in this ratio should be monitored effectively s it is cutting down the profits for Bank. Any way can be adopted for instance; giving attractive investment opportunities and giving out favorable loans. They also need to keep check on the interest rates they are charging on deposits and loans. 4. Bank is not utilizing its assets in effective way. They are unable to generate maximum return out of their assets comprising of advances and loans. 5. Liquidity is reducing over the period of 5 years and to manage cushion for uncertainties, Bank has to arrange enough liquid for that. 6. Bank is inviting more and more deposits and they are increasing with proportion to total assets. It shows that bank can face more liquidity risk in future. To reduce this risk, Bank has to provide better investment opportunities and provide more loans to the customers.

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ANNEXURES: WORKSHEETS

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