Analysis of Financial Statement Bank Alfalah Report

“The Caring Bank”

Analysis of Financial Statements

Bank Studied: Bank Alfalah Limited

Submitted to: Prof. Wasimullah

Submitted by:

Ijaz Hussain Bajwa 2065-FMS/BBA/F07

Department of Business Administration,

Faculty of Management Sciences,

International Islamic University, Islamabad.

Analysis of Financial Statement Page i


ContentsBrief Introduction..................................................................................................................................1

PEST Analysis.........................................................................................................................................2

Political Environment:.......................................................................................................................2

Economic Indicators:.........................................................................................................................2

Socio cultural environment:..............................................................................................................2

Technological Factors:.......................................................................................................................2

Liquidity Ratios:.....................................................................................................................................2

Advances to Deposit Ratio.................................................................................................................2

Earning Asset to total Assets.............................................................................................................3

Solvency Ratios......................................................................................................................................3

Equity to Assets.................................................................................................................................3

Equity to Deposit...............................................................................................................................3

Earning Assets to Deposit..................................................................................................................3

Credit Risk Ratios...................................................................................................................................4

Non-Performing Assets to Equity.......................................................................................................4

Total Loans to Total Deposits............................................................................................................4

Debt Management Ratios......................................................................................................................4

Debt to total Assets...........................................................................................................................4

Debt to Equity....................................................................................................................................4

Profitability Ratios.................................................................................................................................5

Non Interest Margin..........................................................................................................................5

Net Interest Margin...........................................................................................................................5

Return on Assets................................................................................................................................5

Return on Equity (ROE) by Do Pont Equation....................................................................................6

Exhibit 1: Bank Alfalah Ltd and Peer group comparison........................................................................7

Exhibit 2: ROE Break Down (Do Pont Equation).....................................................................................8

Exhibit 3: Peer Group Working..............................................................................................................8

Graphs 1: Liabilities comparison on Interest base.................................................................................9

Graphs 2: Asset Weights comparison..................................................................................................10

Graphs 3: Liabilities Weights comparison............................................................................................11

Graphs 4: Equity Weights comparison.................................................................................................12

Analysis of Financial Statement Page ii


Brief IntroductionBanks play an important role in the economy and are considered as the backbone of

an economy in every country and Pakistan is no exemption. Banks are custodian to the assets

of the general masses. The banking sector plays a significant role in a contemporary world of

money and economy. It influences and facilitates many different but integrated economic

activities like resources mobilization, poverty elimination, production and distribution of

public finance. In 2009, Pakistan economy has witnessed gradual improvement in a number

of economic indicators such as lower current account deficit, including the forex reserves and

declining inflation. Fiscal discipline has been difficult to maintain because of lower than

expected revenue collection and uncontrolled public spending.1

Pakistan real GDP growth was 2.7% in the year 2009.2 After a peak of 25.3% in

August 2008, headline inflation has been reached to 10.6% in December 2009 largely helped

by high base effect and decline in commodity prices. Fiscal expansion fueled by large outlays

to counter the ongoing terrorist activities augment the pressure on internal government

finance, thereby diluting the effect of monetary policy. In banking sector, the fundamental

outlook is changing from neutral to positive as banking sector remains to be resilient.3 The

baking sector has registered a decline in 2009. The decrease can be attributed primarily to the

drop in interest rates towards the end of the year. Going forward the industry spreads are

expected to contract because of excepted reduction in discount rate and lowering of KIBOR.

Bank Alfalah Limited was incorporated on June 21, 1997 as a Public Limited

Company under the Companies Ordinance 1984 & Banking Companies Ordinance, 1962.

Strengthened with the backing of the Abu Dhabi Group and driven by the strategic goals set

out by its board of management, the Bank has invested in innovative technology to have an

extensive range of products and services. PACRA, a premier rating agency of the country,

has rated the bank ‘AA’ (double A), Entity Rating for Long term and A1+ (A one plus) for

the short term. These rating donate very low expectations of credit risk, strong capacity for

timely payments of financial commitments in long term ad by highest capacity for timely

payments in the short term respectively. Further, the unsecured subordinated debt (Term

Finance Certificates) of the bank has been awarded a credit rating of AA- (double A minus).

1 Bank Alfalah Limited; annual report 20092 www.cia.com3 www.brecorder.com

Analysis of Financial Statement Page 1

http://www.brecorder.com/


PEST Analysis

Political Environment: The present state of the government in Pakistan is directly

affecting the policies of banks. Continuous political changes have disrupted the policies and

objectives as each regime brings with it its own agenda. Organizations need time to adjust to

one regime and then work with it towards economic enhancement.

Economic Indicators: Pakistan’s economy has witnessed the most challenging period after

posting six consecutive years of healthy economic growth. However, the strong fundamentals

were compromised to prevailing global crises that’s shacked the confidence of global

investors and FDI flowing in the country. Soaring inflation hitting a 24% mark, huge fiscal

deficits and balance of payments issues coupled with plummeting forex reserves added to the

economy’s move to an unstable growth trajectory.

Socio cultural environment: A low saving culture has offset the huge population

advantage this is enjoyed by Pakistan. Also culture is dedicated by the religion, and in

Pakistan a significant segment of the population is reluctant to accept interest for their

deposits due to the negative religious implications of such an act and literacy rate of the

country is very much low, thus making it harder for banks to mobilize their deposits within

these regions.

Technological Factors: Banks in the developed world have been turning to heavy IT

investments, which differentiate their products, provide response times, enhance accessibility

and improve customer satisfaction.

Liquidity Ratios4:

Advances to Deposit Ratio there was a slight increase in this ratio in 2008 from

the previous year. In 2008, the value was 63.78% and in 2007, it was 62.67% this about 1%

fluctuation was caused by 12.54% increase in advances from 2007 and 10.08% increase in

Deposit portion. As the growths were along same axis so no major fluctuation noticed. While

in 2009 the value was 57.90% having a greater difference from previous year values. This

fluctuation was aid by a decrease in Advances by 1.95% and on the other hand 7.99%

increase in the Deposit portion. The decline in advances is noticed despite an increase in

loans, cash credit and running finance business and starting the Ijara (Islamic Term: Rent or

transfer of usufruct) but this was less than 0.5% of total advances. The decline was due to the

28.15% decrease in financing activities relative to previous year. The reason for this was the

general economy conditions and the saturation of auto financing portion and related

4 The relevant backing of these ratio analysis is in the Exhibits & Graphs on page 7-12



activities. The peer group value is 72.56%, which shows that bank performance is too low

and need special efforts to compete with market. Another disappointing thing is that this ratio

has decreasing trend. So, bank to make efforts to increase its current level of liquidity.

Earning Asset to total Assets the value of this ratio was 80.01% in 2007, 77.67%

in 2008 and 77.66% in 2009. Here again the decreasing trend is dangerous for liquidity. The

reason for decline in 2008 was total assets grown with a 6.11% rate and only 3.02% increase

in earning assets. So this indifferent growth caused the change of decline in ratio. In 2009 the

change is very insignificant as the value was 77.66%, the reason for this very minor change

was that earning assets increased by 11.46% and assets growth was similar and value was

11.49%. Therefore, ratio remained about same. The peer group value for 2009 was 87.51%

that shows that earning assets of Bank Alfalah are in low percentage as compared to other

bank and should be take care of, so the liquidity chances of bank to be increased.

Solvency Ratios

Equity to Assets the ratio of equity to asset was 4.19% in 2007 and 2008. In 2009,

its value was 5.08%, this increase seems good that now more parentage of assets are financed

from equity. But even now it is below the peer group average of 7.78%, which represent a

significant gap to be covered. The major reason for increase was increase in share capital of

68.75% in 2009 and increase in total equity of 35.33%. In 2008 this total equity increase was

6.11% and increase in assets nullified this change.

Equity to Deposit this ratio was 5.04% in 2007, 4.86% in 2008 and 5.08% in 2009.

The increase in 2009 from previous years was due to increase in Equity value and this

increase was 35.33% and increase was 7.99% while in 2008 the equity increase was 6.11% &

deposit increase was 10.08% which was cause of decline from 2007 value. In equity this

increase was due to increased share capital and a increase of 68.75%. This ratio for peer

group average was 11.34%, which shows that Bank Alfalah has greater chances of default

risk as compared to UBL, Faysal and HMB.

Earning Assets to Deposit the values are as 96.3% in 2007, 90% in 2008 and 93%

in 2009. The increase in earning assets is less than increase deposit and also deposit are a

little bigger in value term as compared to earning assets so there is a decline. The peer group

average is 129%. This shows that Bank Alfalah has lower earning chances as compared to

peer group.



Credit Risk Ratios

Non-Performing Assets to Equity the ratio for 2007 was 4.78, for 2008 was 5.33

and for 2009 was 4.40. The non-performing assets are a heavy portion of its balance sheet

and are about 18.57% of total asset in 2009. In 2009, this value decreased due to increase in

equity, which caused the change as a result risk is reduced. The peer group average is 1.64

shows the below level performance of Bank Alfalah.

Total Loans to Total Deposits this ratio amounted 1.14 in 2007, 1.10 in 2008 and

1.13 in 2009. This reason for not changing greatly this value is that increase in total loans or

debt is 6.16% in 2008 and 10.54 in 2009. While increases in deposits is 10.08% and 8%

respectively and most important thing is weight of deposit in total loans as this totaled the

87.37% in 2007, 90.6% in 2008 and 88.5% in 2009. So a major change in this ratio is noticed.

The peer group average is 1.34, which shows that in peer group the percentage of deposits as

compared to loans is not as high as of Bank Alfalah.

Debt Management Ratios

Debt to total Assets this ratio was 95.07% in 2007, 95.12% in 2008 and 94.31% in

2009. This shows that how much of bank assets have been financed with debt. There is a

slight decreasing trend in ratio. It is due the reason that growth in debt in 2008 was 6.163%

and total asset increase with 6.11% so a slight increase occurred and in 2009, the decrease in

2009 was due to 11.49% increase in assets and only 10.54% increase in debt. The slight

changes are because values of both the two factor don’t have great difference. The peer

group average is 91.5%, which shows that Bank Alfalah is more financed from debt as

compared to peer group and thus more risky.

Debt to Equity in 2007 this value was 22.71, in 2008 this was 22.72 and in 2009 it

was 18.56. The reason for not change in ratios in 2007 and 2008 was due to the reason that

increases in debt and equity was correlated. In 2008, growth in debt was 6.16% and in equity

was 6.11%. In 2009, the increase in debt was 10.54% while equity growth was 35.33% this

was the reason why ratio decreased in 2009. The peer group average is 12.08; shows that

Bank Alfalah is using too much debt for financing even though an affecting change noticed in

last year. So Bank Alfalah is more risky as compared to the peer group. Also usually banks

are highly leveraged institutions but this ratio is near about 15, but Bank Alfalah ratio is too

high. So management should pay attention towards this that a little adverse condition may

harm badly.



Profitability Ratios

Non Interest Margin value for the year 2007 was -0.86%, -1.89% in 2008 and -

1.92% in 2009. Although most banks have this ratio in negative but have to compare with

market how much deficit other banks are facing. The peer group average is -0.81%, which is

more than half of Bank Alfalah ratio. The reason for decline in 2008 was that fee and

commission decreased by 12.76% and gain on sale of securities although there was 349.98%

growth in dividend income but it was not too significant. The expenses raise was due to

18.53% increase in administration expenses other values are not significant as total non-mark

up expenses growth was 20.12%. In 2009 the value increased due to further decrease of

9.63% from fee and commission and non interest expense grown due to 11.39% increase in

administration expense which causes a total increase of 10.49% in total non-mark up

expenses. The peer group has the value of -0.81%, which shows that administration expenses

of Bank Alfalah are too high.

Net Interest Margin this ratio was 3.48% in 2007, 3.86% in 2008 and 3.61% in

2009. The reason for increase in 2008 was the growth in interest earned during the year it was

20.41% and expenses were increased by 22.32% though this increase is great but in real value

terms increase in interest income was greater as a result the net mark-up or interest income

increased by 16.43%. While earning assets growth was only 3.02%, which helped the ratio to

rise. In 2009 increase in interest earnings was 14.84% and expenses grown much greatly with

20.3% which caused the decline in ratio. Also the increases in earning assets were 11.46%

much greater than previous year so in 2009 this value declined. The main reason for expenses

growth was 131.1% rise in short term borrowing expenses and not up to mark, growth due to

decline in 48% revenues from financial institutions and 82.34% decline o purchase and sale

of securities; this is not efficient management or it may be due to general economic

conditions and poor stock market.

Return on Assets the ROA in 2007 was 0.95%, 0.37% in 2008 and 0.23% in 2009.

There is a huge decrease in 2008 and 2009 in this ratio from previous year. The peer group

average value is 1.17%. The reason for great decline if ratio in 2008 was due to the only 2.1%

increase in net mark up after provision and non-interest income declined by 20.13% in 2008

aided by 20.12% of non interest expenses raise. Due to these main three factors a decline of

58.43% in Profit after taxation. On the other hand, asset growth was 6.11, which was reason

for great low ratio. In 2009 growth in interest income was 1.34% and a good increase in non-

interest income to 7.45% while non-interest expense growth of 10.49% greatly nullified the



effect so a total decrease of 43.37% in Profit before taxation and 31.06% of decline after

taxation profit this relative decrease was due to deferred taxes. The raise in assets was

11.49% so relative huge increase in assets caused the ratio to depreciate. The peer group

average shows that profitability of bank Alfalah is too much low so attention should be paid

to change the scenario.

Return on Equity (ROE) by Do Pont Equation5 the value of ROE for Bank

Alfalah was 22.74% in 2007, 8.91% in 2008 and 4.53% in 2009. The decline in the value of

ROE is too much concerning and it shows that there are some mistakes in last 2 years

especially. The ROE was very good in 2007. In 2008 the decline was due to rapid decrease in

Net Profit Margin and value declined from 9.83% in 2007 to 3.63% in 2008. The reasons for

decline of NPM are only 2.1% increase in net mark up after provision and also non-interest

income declined by 20.13% in 2008 aided by 20.12% increase in non interest expenses, so a

decline of 58.43% in Profit after taxation. So, value of ROE was just 8.91% with so high

equity multiplier or high risk is of real concern for management to take care of profitability

and risk associated with higher equity multiplier. The other ratio of Asset Utilization is of not

great concern as it is near to the average of peer group so other ratio are cause of worry. In

2009 the ROE was just 4.53% which is completely not acceptable at any term. This future

decline in ROE was due to adverse affects of profitability the bank is facing, as NPM was just

2.2% in 2009. Asset Utilization was of not great worry as it was 10.47% and average of peer

group has this value of 11.01% in 2009. Some good in all this worst figures is that equity

multiplier value decreased in 2009 was 19.68; which was previously 23.89. That shows that

riskiness of Bank Alfalah has decreased to some extent. But even than its Riskiness is much

more than any of peer group member and group average was 12.75. Therefore it looks that

bank is in severe crisis with high risk level along with very poor profitability ratios.

United Bank Limited, Faysal Bank and Habib Metropolitan Bank Limited were taken

as peer group members for benchmarking and relative analysis and there averages were used

for comparison so that some comparison can be made in reality.

Due to space and time limitations, we were not able to do some market surveys and

meet the banking analysts. Therefore, the future prediction was not possible. In result of this

working we can say that, “ Bank Alfalah is performing very low as compared to major

market player and management should pay attention towards this and avoid the bankruptcy in

these bad circumstance”

5 Break Down of ROE on Exhibits 2



Exhibit 1: Bank Alfalah Ltd and Peer group comparisonPeer Group 2009 2008 2007

Liquidity RatiosAdvances To Deposit Ratio = Advances / Deposits

72.56% 57.90% 63.78% 62.67%

Earning Assets To Assets = Earning Assets / Total Assets

87.51% 77.66% 77.67% 80.01%

Solvency RatiosEquity To Assets = Equity / Assets 7.78% 5.08% 4.19% 4.19%Equity TO Deposits = Equity / Deposits 11.34% 6.09% 4.86% 5.04%Earning Assets To Deposits = Earning Assets / Deposits

129% 93% 90% 96.3%

Cash & Govt. Securities To Total Assets = Cash & Govt. Securities / Total Assets

6.34% 9.01% 9.37% 8.95%

Debt Management RatiosDebt To Assets = Debt / Total Assets 91.5% 94.31% 95.12% 95.07%Debt To Equity = Debt / Equity 12.08 18.56 22.72 22.71Capital Adequacy Ratio = Capital or Total eligible regulatory capital held / Risk Weighted Assets

12.81% 12.46% 8.03% 9.85%

Profitability RatiosNet interest Margin = (Interest Income – Interest Expense) / Earning Assets

4.20% 3.61% 3.86% 3.48%

Non-Interest Margin = (Non-Interest Income – Non Interest Expense) / Earning Assets

-0.81% -1.92% -1.89% -0.86%

Assets Utilization = Operating Revenue/ Total Assets

11.01% 10.47% 10.25% 9.67%

Equity Multiplier = Total Assets / Total Equity 12.75 19.68 23.89 23.89ROE=(N.I/Sales)(Sales/Assets)(Assets/Equity)

14.23% 4.53% 8.91% 22.74%

ROA = Net Income After Taxes / Total Assets 1.17% 0.23% 0.37% 0.95%Earnings Per Share 4.73 0.71 1.41 3.92

Credit Risk RatiosNon-Performing Assets To Equity = Non-Performing Assets / Equity

1.64 4.40 5.33 4.78

Non-Performing Loans to Total Assets = Non-Performing Loans / Total Assets

3.74% 3.59% 4.28% 4.58%

Total Loans to Total Deposits = Total Loans / Total Deposits

1.34 1.13 1.10 1.14



Exhibit 2: ROE Break Down (Do Pont Equation) Years NPM Asset Utilization Equity Multiplier Return on Equity

2009 2.2% 10.47% 19.68 4.53%

2008 3.63% 10.25% 23.89 8.91%

2007 9.83% 9.67% 23.89 22.74%

Exhibit 3: Peer Group WorkingHMB Faysal UBL Peer Group

Liquidity Ratios

Advances To Deposit Ratio = Advances / Deposits

71.94% 73.87% 71.87% 72.56%

Earning Assets To Assets = Earning Assets / Total Assets

90.16% 90.7% 81.66% 87.51%

Solvency Ratios

Equity To Assets = Equity / Assets 7.96% 6.3% 9.09% 7.78%

Equity To Deposits = Equity / Deposits 13.29% 9.17% 11.55% 11.34%

Earning Assets To Deposits = Earning Assets / Deposits

150% 132% 104% 129%

Cash & Govt. Securities To Total Assets = Cash & Govt. Securities / Total Assets

4.71% 4.7% 9.6% 6.34%

Debt Management Ratios

Debt To Assets = Debt / Total Assets 92.09% 92.93% 89.49% 91.5%

Debt To Equity = Debt / Equity 11.55 14.83 9.85 12.08

Capital Adequacy Ratio = Capital or Total eligible regulatory capital held / Risk Weighted Assets

12.03% 12.36% 14.03% 12.81%

Profitability Ratios

Net interest Margin = (Interest Income – Interest Expense) / Earning Assets

3.15% 3.1% 6.34% 4.20%

Non-Interest Margin = (Non-Interest Income – Non Interest Expense) / Earning Assets

-0.240% -0.92% -1.26% -0.81%

Assets Utilization = Net Income / Total Assets 10.58% 10.93% 11.53% 11.01%

Equity Multiplier = Total Assets / Total Equity 11.31 15.95 11 12.75

ROE=(N.I/Sales)(Sales/Assets)(Assets/Equity) 14.53% 11.18% 16.97% 14.23%

ROA = Net Income After Taxes / Total Assets 1.28% 0.75% 1.48% 1.17%

Earnings Per Share 3.67 1.97 8.56 4.73

Credit Risk Ratios

Non-Performing Assets To Equity = Non-Performing Assets / Equity

1.23 1.59 2.1 1.64

Non-Performing Loans to Total Assets = Non-Performing Loans / Total Assets

3.38% 4.7% 3.14% 3.74%

Total Loans to Total Deposits = Total Loans / Total Deposits

1.53 1.36 1.13 1.34



Graphs 1: Liabilities comparison on Interest base



Graphs 2: Asset Weights comparison



Graphs 3: Liabilities Weights comparison



Graphs 4: Equity Weights comparison


Documents

Analysis of Financial Statement Bank Alfalah Report