IBF Term Report

8/2/2019 IBF Term Report

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2012

SILKBANK LIMITED

Prepared by:

Muhammad Haris Rafi

(2009-1-01-10797)


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INTRODUCTION TO BUSINESS FINANACE 2 | P a g e

TABLE OF CONTENTS

Letter of Transmittal........................................................................................................................................................... 3

SWOC ANALYSIS..................................................................................................................................................................... 4

Ratios of Silk Bank................................................................................................................................................................ 5ANALYSIS ................................................................................................................................................................................... 6INDUSTRY RATIO .................................................................................................................................................................. 8INDUSTRY ANALYSIS........................................................................................................................................................... 9BANKING SECTOR REVIEW ............................................................................................................................................ 10FUTURE OUTLOOK & RECOMMENDATIONS ........................................................................................... 11


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LETTER OF TRANSMITTAL

17th April, 2012

Mr. Kamran Rabbani

Permanent Faculty,

Institute of Business Management,

Korangi Creek,

Karachi.

Dear Sir!

Following is the Term Report that you have given to me as my final project. This report is about Ratio

Analysis of Silk Bank Pakistan. I have made my best possible efforts to meet the objective of learning

required out of the underlying study.

As an individual, I have found the task interesting and challenging. Though there were number of

limitations faced. I am sure that this analysis will come up to the expectations of the readers and

concerned people.

Cordially,

Muhammad Haris Rafi

(2009-1-01-10797)


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SWOC ANALYSIS

STRENGTHS:

Focus on export base structure

DIVERSE PRODUCT PLATTER Expansionary phase

Conversion of NPLs of Rs. 3.2 billion toperforming loans.

Relatively reputable & sound group.

OPPORTUNITIES:

Should focus on other local business

sectors (Power Sector) to generateadditional revenue.

ENHANCEMENT IN INTERNATIONALTRADE BUSINESS CAN BENEFIT THE

BANK

Merger with another bank

Increasing branch network can enhanceof customers and the bank.

WEAKNESSES:

Conservative policies and managementstyle

Lack of proper IT infrastructure CHANCES OF ADVANCES PORTFOLIO TO

CONVERT INTO BAD

Small Brach network

CHALLENGES:

Sluggish Economic Growth

Government policies.

High Deposit cost, hence increasing cost


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RATIOS OF SILK BANK

DATE 2008 2009 2010

Key FiguresGrowth -45.87% -164.65% -23.40%

No. of Shares outstanding 628,276,843 197,253,795 760,214,980

Operating Profit per share 0.26% 1.17% 0.00%

Key Ratios

Profitability

Gross yield on Earning Assets 11.84% 7.09% 6.35%

Gross Spread 8.05% 0.98% 12.53%

Expense to income 100.46% 116.51% 104.54%

Net Interest Margin 3.51% 4.00% 0.00%

Net Profit Before Tax to Total Income -85.48% -116.13% -16.70%

Net Profit After Tax to Total Income -60.75% -79.28% -15.29%Return on net worth -45.87% -164.65% -23.40%

Return on Deposits -4.91% -5.85% -2.03%

Return on Total Assets -3.62% -4.23% -1.56%

Balance Sheet

Capital Adequacy 16.28% 19.07% 22.07%

Equity to Assets 7.89% 2.57% 6.66%

Equity to Deposits 10.70% 3.55% 8.68%

Deposits to Assets 73.78% 72.25% 76.73%

Leverage Ratios

Liabilities / Net worth 11.67 37.95 14.02Interest Coverage 1.00 0.86 0.96

Solvency

ADR 79.84% 70.54% 82.62%

CASA 39.07% 42.37% 47.71%

Rate paid on Funds 9.02% 10.15% 9.49%

Dividend Profile

EPS 22.25 22.38 22.20

Dividend yield (based on cash dividend) 3.13% 2.95% 2.40%

Cash Dividend per Share 11.50 11.00 11.50


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ANALYSIS

Silk Bank's loss before tax increased by 50% to Rs 4.25 billion in FY09 as compared to Rs 2.83 billion in

FY08. The net interest income registered a decline of 84% as it reduced to Rs 57 million from Rs 369

million in FY08. The reason behind this decline was the increase in interest expense resulting from high

costs of deposits and increased borrowing from financial institutions. The non-mark-up income registereda sizable growth of 72% in FY09 (to Rs 662.187 million) with almost half of this income coming from

fee, commission and brokerage income. Non-interest expenses increased by 36.8% to Rs 2.66 billion with

administrative expenses increasing by 41.9% to Rs 2.74 billion. In FY08, Silk Bank declared a loss of Rs

2014 million with earnings per share of Rs 2.83, considerably lower (33.76%) than previous year's loss of

Rs 3041 million and loss per share of Rs 6.25. Due to losses, the bank did not pay any dividend. The net

interest income after provisions improved by 54.10%; from negative Rs 2.773 billion to negative Rs

1.273 billion. This was mainly because during FY08, the bank's provisioning against the NPLs and

advances declined significantly (47%) to Rs 1.663 billion. The non-mark-up income witnessed a decline

of 50.50% to Rs 384.5 million mainly on the back of declining fee commission and brokerage income,

which went down 49% to Rs 188.6 million. In FY09, net interest income after provisions declined by

76.9%, which can be attributed to a sharp surge in the interest expenses to Rs 5.855 billion (an increase of

38.7%). Impairment expenses for available for sale securities (Rs 138.276 million) drive up provisioningexpense. In FY09, investments grew by 67% from the previous year to stand at Rs 20.179 billion.

Government securities i.e. Market Treasury Bills and PIBs comprise 88% of the investments (Rs 17.788

billion). Advances show a modest gain of 3.2% from FY08 to stand at Rs 32.097 billion but still represent

the major chunk of earning assets at 60% of the earning asset during FY09. Lending to financial

institutions declined by 22% to Rs 1.067 billion mainly due to a decline in call money lending. However

the ADR has fallen to 64.7% in 2009 as compared to 75.72% in 2008, because the advances rose by 3.2%

(to Rs 32.097 billion) and deposits grew by 20% (to Rs 49.610 billion) in 2009.

Silk Bank's return on assets has declined to negative 4.2% in FY09 as compared to negative 3.6% in

FY08. In FY08 the bank had been able to reduce its loss before tax to Rs 2.83 billion. However it was

unable to sustain this performance as loss before tax increased by 50% to Rs 4.25 billion. Most of this

loss can be attributed to a decline of 84% in net interest income while the operating charges increased by

42%. Provisions against loans and advances also increased by 30% to Rs 2.17 billion as the bank suffered

from high NPLs and economic downturn. The return on equity declined to negative 164% in FY09 from

negative 45% in FY08. This has been mainly due to a decline of 60% in the bank's equity. Although the

bank was able to increase its assets by 23%; large increase in deposits and borrowings from financial

institutions raised the bank's liabilities to Rs 66 billion (an increase of more than 30%).

The ratio of earning assets to total assets shows a slight decline in FY09 i.e. 77.69% as compared to

79.93% in FY08. Although earning assets have been increasing but in less proportion to total assets. The

advance to deposit ratio has declined from 75% in FY08 to 69% in FY09. The bank has been able to

improve on its liquidity in compliance with SBP's notifications. With deposits mainly consisting of term

deposits the bank has been able to better match its advance with deposits. This was mainly due to the risein advances of 20.14% whereas the deposits fell by 3.11% because the bank had large amounts of fixed

deposits, which enabled them to extend advances, particularly in the long term advances, which stood at

Rs 17.923 billion, 31.20% higher than previous year's Rs 13.661 billion. Whereas short-term deposits for

FY08 stood at Rs 20.26 billion, which grew at a comparatively slower rate of 14.13%. Overall, the figures

indicated that the bank was striving to maintain a good ADR by making more and more advances, but the

issue of default and non-performance loans remained a challenge. There has been a slight increase in

yield on earning assets i.e. from 10.54% in FY08 to 10.74% in FY09 but the cost of funding these earning


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assets has increased with a larger amount. In FY09 the cost of funding these earning assets was 11.97% as

compared to 9.48% in the previous year. This was due to an increase of 38% in the interest expensed

which rose to Rs 5.8 billion as the bank increased its financing by increasing its deposits and borrowings

from financial institutions.

Silk Bank Limited reported earnings results for the third quarter and nine months ended September 30,

2011. For the quarter, the company reported net mark-up/interest income of PKR 500.3 million againstPKR 262.2 million a year ago. Profit before taxation was PKR 62.3 million against loss of PKR 852.4

million a year ago. Profit after taxation was PKR 48.2 million or PKR 0.02 per basic and diluted share

against loss of PKR 908.4 million or PKR 0.42 per basic and diluted share a year ago. For the nine

months, the company reported net mark-up/interest income of PKR 1,525.75 million against PKR 542.4

million a year ago. Profit before taxation was PKR 399 million against loss of PKR 830.9 million a year

ago. Profit after taxation was PKR 210.7 million or PKR 0.08 per basic and diluted share against loss of

PKR 700.34 million or PKR 0.32 per basic and diluted share a year ago. Net cash flow from operating

activities was PKR 3,217,494,000 against net cash out flow from operating activities of PKR

10,534,899,000 a year ago.


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INDUSTRY RATIO


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INDUSTRY ANALYSIS

The year 2010 remained fraught with challenges, which impacted the macroeconomic landscape of the

country. In the second half of the year, record floods inundated nearly 20% of the country and inflicted

significant damage to the fragile economy. Continuing severe shortages of power and gas have

exacerbated the situation and Large Scale Manufacturing (LSM), after exhibiting good growth of 5% inFY10, remained subdued during the first half of the current fiscal year. As a consequence, GDP growth

estimates for 2010-11 have been scaled down to 2.8% from pre-flood estimates of 4.3%.

The destructive floods in the second half of 2010 derailed the economy further with total losses of USD 9-

10 billion, of which USD 3-4 billion were in the agricultural sector. This together with acute electricity

and gas shortage has taken a toll on the growth of economic activity which is now widely expected to be

around 2-3% for FY11 from an initial target of 4.5%. Meanwhile, global outlook continues to remain

fragile and uneven as the weaknesses in major developed economies continue to drag the global recovery

despite exceptional performance of emerging markets.

Inflationary pressures remained active throughout the year, with CPI at 15.5% year-on-year in December

2010 and averaging 13.9% for the year. Supply chain interruptions caused by crop damage resulted involatile food prices and remained a key driver behind surging price pressures. Escalating power tariffs

remained a regular feature throughout 2010, further fueling inflation.

The fiscal position remained fragile as revenue generation remained weak whilst expenditures escalated.

FY 2010 fiscal deficit stood at 6.3% of GDP, far exceeding the IMF target. Furthermore, taxation reforms

including the Reformed General Sales Tax (RGST) have not yet been implemented due to severe

opposition by political parties. Recognizing the risks to the economy caused by high inflation that was

being exacerbated by a structural fiscal deficit, the State Bank of Pakistan resorted to three successive

50bps hikes in the policy rate in FY11. Despite an increase in the policy rate and its transmission to

market interest rates, the growth in key monetary aggregates remained substantial as M2 grew by 15.1%

during the 1H-FY11 due to sharp growth in credit to the Government from the banking system. In

addition, the outstanding stock of credit extended to the public sector for procurement of commodities andPublic Sector Enterprises (PSEs) remained at an elevated level. Meanwhile, the credit to the private sector

depicted a modest growth of 4.8% as against a contraction of 1.8% a year earlier. The credit to private

sector was primarily for working capital financing whereas credit for fixed investment showed a

consistent declining trend.

The external account position remained a key positive as the current account deficit for FY 2010 was

better than the expectations at 2% of GDP due to higher remittances and aid inflows, services inflows and

increased exports. This trend has continued in FY 2011 as the country posted its first half-yearly current

account surplus since 2003. Pakistans equity markets also performed well and continued to attract

foreign investment, with KSE-100 index gaining approximately 26% during 2010.


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BANKING SECTOR REVIEW

The banking sector of Pakistan has been in a consolidation phase since the beginning of 2009 due to thecountrys economic vulnerabilities. The sector has remained focused on deposits, which grew by nearly16% in 2010, with aggressive solicitation of current and savings accounts (CASA). Credit lending has

remained subdued and gross advances increased by only around 5% during 2010. Despite adequate

liquidity, the banking sector largely remained cautious in extending credit to the private sector mainly due

to prevalent circumstances in the country; which partly also fueled the growth in Non-Performing Loans

(NPLs), rising close to Rs. 500 billion by the end of Q1-FY11. At the same time, governments growingfinancing needs provided banks the opportunity to invest in risk free government securities. Investments

too continue to generate increased interest, especially amid better yields, post the discount rate hikes and

enhanced returns at the local equity markets. The 6% rise in 4Q Investments has taken the calendar year

growth to 17.3%, compared to an avg. growth of 27.8% in 2006-09.


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FUTURE OUTLOOK & RECOMMENDATIONS

2010 results have validated the view of higher NII and lower loan losses driving the bottom line growth.

However, we flag concerns over provisioning to come forth again in 2011, as NPLs are likely to continue

ascending as loans are re-priced at higher rates. Further, meeting capital requirements will pose achallenge for smaller banks.

Though it is expected that advances growth would remain lower at 5% in 2011 amid higher interest rate

scenario and lower appetite for credit, better spread will keep NII on the higher side. Moreover, we expect

provisioning against non performing loans and continuous growth in operating cost will slightly dilute the

top line growth. Thus, it is expected that overall banking sector earnings to grow by 16% in 2011. The

banking sectors increased preference for risk free investment in government papers (supported by the

GOPs demand for such funds to finance the rehabilitation of the flood struck areas) is no doubt expectedto put a limit to the flood related NPLs.

Year over year, Silk Bank Limited has been able to grow revenues from 489.8M to 1.1B. Most

impressively, the company has been able to reduce the percentage of sales devoted to selling, general and

administrative costs from 551.52% to 280.18%. This was a driver that led to an improvement in the

bottom line from a loss of 2.9B to a smaller loss of 1.1B.

Silk Bank needs to cater its non-performing loans to enhance the efficiency and profitability of cash flow.

It also needs to increase its branches to reach out customers; good product is of no use until it is not

available.


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APPENDIX

Documents

IBF Term Report