n Adnan Dilawar

lvlr r\dnan Dila\\'af is associatcd s,ithPACtu\ nnd heids their Resc:rrch andAnrlr'li.s Dr\'rsron.

Rehan Raza

Rehan Raza \tofks in the lnvestlncntB:rnking rfea and is currentl! associaled\\,idr l!luB Bnnk Ll]nltcd

Mansoor Murad\'iansoor lllLrfad is a Chaftcredi\ccorLni:ul b)'qunlification, ar)d $orks inthe Retail Binl(ilrg funciion oia Lafge

locil biDk. In his sp.ife time. hc is.rIf eeL.rlrce contf ibutor lo lla\rlr.

Simon Thompson

Sinron I hoInpson is the Chje f E\ecutive of!he Chartef€d Bankef lnslrtLLte UIi

News and Views

4 Local News

6 SBP Updates

8 Global News

9 lnstitute News

Cover Story

10 Financial Performance of the Banks,..

Banking

lMobile Banking - Fad or 10 Stay

Compliance " New Areas of Foc!s

Once Bitten. Twice Shy-(o-' ^ " 8. ti g

The Right Way to Conduct Credit Analysis.

32 lnternal Audit - Pa(nef ng for Success

Global Perspective

Rebuilding Trust in Banking

Investment Bankers - The true gods. .

Who Pullthe Strings?

Management

Technology

44 lT Outsourcing - Praclices 10 Nl tigate R sks

Personal & Professional Development

46 Interestino Hobbies of Some Successful...

Humor & Quotes

FinancialPerformanceofthe Banks

Terence Mauri

Terer)ce irlaufiis a leading nranagemeDthiincr ind consulta|t \\'ilh DC Gardener!"rith oref L5 yenfs ot intefnalionalcripcficnce in thc lr!nking s€cior:

22

24

28

30

F.-lP''ru.. r

&aB

-Zahir Ali Quett:rwalaZahif Ali Quctlawala is associated\'vith F;rysal Bank Lirrite.L and lreadstheif Inforrnation TechnologySecllfity and Risk lllanaileDlentdivlsion.

Usman MaiidUsman Nlijid is associated \!rth llBl. rs a

Senior Nlan.rgef fof i\TMs an(l \'Veb

34

36

Keith Aitken

Kcith Aitken is an.rwafd w'nnrngjoLrrnalist, .rLrthor.rnd broa(lcaster He rs a

fretslancc $'fitef specializing in bus incss

aDd pohli13|atf.rirs.

42 Presenting to Win no.r Io o"r [ " Resoo-se

Shona MacdoDalds

Shona Nl.lcdonalds is as\ocin!{:d Nitlr IlditionsIin.lnciitl .rs n Scnir). PUL)lishrng Ilalr.lger:

Zulfikar CauserTultlkrr C.lusef is a Chaftcfcd AcfountaDln|d .r Prfhref at BDo Elrlirhlln & &,.Chnrl€red Accountants sprcraLiz'ng irr

.lssLrfanl:e .D(l fisk n(i!rsorv ser\ ices.

M A Khanili A Khan hrs bc( n i {:afe€r l)nnkef \1ithovcr 4l )cars ol e\l)cricr).e ilr Prl(ist.rn rndo\'€rsers He is cuffenth :rssorht€d \r,ithIBPrsnhirirer:

Mir Mohammad AlikhanUif Nlohanmad Alikharr hds bccf an rnlcstrrtntL..rnkr. srncr thc Iast 20 rfirfs, .unning an i|vestir)entLrankrfg lr n !t'ilh opcfatior)s irl 7 .ountfjes. Xlilfrr fcDtLl Ls :r c{)llsulLal]t.

A S.rad Hashmey

-i itlf S.ud Hishenry is Chief Econo|nist .1t

i i\llied Brnk. Said his beeD irsso.iit€d

3 \\'ith dittef€nt o'ganiz.rtions 0ocal.rn,l-. intefn.rtion:rll iirr ovef l1reirs ir fin:rnci:rlaD.i ei:o nor) r. feserr.i) ruLes.

*r*wry*

Investment BankersThe tnre 'gods' of banl<ingl

4B

llat

Practices to Mitigate Risks

The RightWay to ConductCredit Analysisof CorporatesA Rating Agency's ViewBy Adnan Dilawar

A lthough rating is an opinion,

f I it is the essence ofseveral

L Lqualitative a\d qulntitative

factors analyzed carefully. CRAs

conduct credit analysis with the aim

to capture all the risks that can affect

the financial strength of an entity

and, in turn, its ability to meet its

financial obligations. These risks

could be systemic, idiosyncratic,

stand alone or interconnected.

Another point to consider is that

ratings are prospective by nature.

This elicits that relevance of past

"Rating is an opinion that depicts therelative credit worthiness of an

entity".

This, in varying forms and words,seems to bethe mantra ofcredit ratingagencies [CM] across the globe. Let'strv to demvstifv lhe Dhenomenon.

trends and ratio analysis is only valid

if they have a significant impact on

the future prospects ofthe entiq./.

Thus, credit analysis ofan entity

should incorporate all the broad

factors, which may transpire into

material risk going forward. Let's

follow a top down approach to look

at critical factors from thisperspective. Some of these factors

impact the long-term sustainability

ofthe entity, while others can have

immediate repercussions.

Ownership: Here it is impoftant to

distinguish between the "oltte,it " and

".sponsors " ofan entity. Owners refer

to the major shareholders ofthe entity.

This could be another group company,

small stakeholders or other entities

depending on the corporate slrucrure

Sponsor is an individual(s) in whom

the eventual ownership ofthe entity

teminates. S/he is the "person at the

/a.st r?lle" or where ultimately the buck

slops. fhe ability and willingness ofthe sponsols to suppofi the entity in

time ofduress is a critical factor while

assessing the creditworthiness of the

underlying entiry

30 lvlarch 2012

LD:t.r ltl:jrt:ri;rnd r!fi

Goyernancc: It is the medium wltel"ol'n el s/sp on s ors, m inor i tyshareholders, management and other,ralclr,'lJcr' rnrerlcr and manJgc lhcirrelationships. Gover-nance is thc

rnechanisrn through which companies

are controlled and monitored.Corporate govemallcc factors that

should be examined lrom a crcdit

analysis vierv include: composition ofthe Board of Directors (BoD),lndepcndcnce and eflectiveness of the

BoD, transparcncy of BoD practices,

and firally, BoD's ability tocomprchend and monitor inherent

risks. All thirgs bcing cqual, strong

corporate governance ensures long-

tenn sustainability and grou'th of the

c,'nrl'lirr). hence curlaili|lg rl. credil

nsk.

\lanagcment: These arc the people

u'ho actually run the show. It is a \','ell

documeoted fact that management

quality and perlbmancc of an entityare directly correlated. So it bccomes

crucial to gaugc the quality ofhumanresource of an entity while lbrming an

opinion oIits fi nrncial srrengrh In rhis

regard, properly defined organizationstructurc, background and trackrecord of key peruonnel, cohesion of

Journal ofThe Institute of Bankers Pakistan

GoY.llr nac

Bqsiness Ridi

FiDanchl Ri*

the managemeni teatn, stability in the

management structure and proper

sLLc ccs s ion planning can have

subslantidl hcalirr5 orr tlre pro.pects o t'

the entlty.

Busincss Risk: Business rish is the

probability of loss inherent in an

enlil) s L,perations and en! ir,,nnrcnl

that may inpair its ability to generate

protits. Each entity is expected to have

its own business risk protilecornpr i'ing Lrni(lJc clrJrJ( rcn.lr.'..Profit and Loss account statclncnt is a

microcosm of business lisk factors

and should bc sclutinized itcm by itern

to quantify iutemal as well as somc ofllrc cxtemal risk factors. Meanrvhile.

identification ol right industry. itscorrelaiion wrrh rlre oreralllnJCrOeCOllUlnlC in\lllrnlnenl dnd

relati\ c rumperiti\ e posrr ion lng, 'l lh(j

cnlirj \^ ithin llle Indu\try,ife cs5.ntialI0 lrul) crplurc rlre busrrres' ri.k lndresultant credit worlhincss ol tbe

entity.

Financial Risk: lhe,lrcaJed -F'word may be the most usedtcrminologl irr rhc finrncial scctor.

Yet. thcre is no univcrsal approach tocapture it. From a credit analysis

ShoL'. t:rrl]

perspective. financial risk prinarilye11]anatcs fron balance sheetsh'Lrctu ng (levelaging). Here, tl'te

most critical aspect is to identifu any

rnatulity lnismatches tltat nay arise.

The cash flow statcmcnt reflects the

coverage available against this risk.

Tlre rge old rn,intra o[ ( ,'/r /.. Kll/gstill holds truc today. Adequaic

intemal ca.lr generaliun rbilrI i'considered the best safeguafd against

lin.rncral n.l. fhu'. liee cash flu\ I

lirrr is the nrost meaningfuldcnomillator for any covcrage ratro

calculation.

Another aspect to detennine is tltecuncnt life cycle/business cycle ofthcentity. The above factors rvould have

r aq ing criticalitl li,r .aclr \lage

(initial. growing, mature. decline) ofan entity. Moreover, entities do notopcrate in isolation. They are aft'ected

by cxtcrnal environmenl, cspeciallycompctition. So the la\\' of rclativisn.r

applics and credit analysis cannot be

conlinedto standalone basis only.

It is fair to say credit analysis is not an

exact science. ln fact, it is as Duch anas science and an optimal balance ofthc two leads to best results.

F:ri;trj. F( srh.i rxi!:

i:rl:rrr Ec.linrd.

F,r:rne:. Lr f,. cgrir

3l