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JCR-VIS Credit Rating Company Limited Rating Report
Technical Partner – IIRA, Bahrain | JV Partner – CRISL, Bangladesh
Information herein was obtained from sources believed to be accurate and reliable; however, JCR-VIS Credit Rating Company Limited (JCR-VIS) does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. JCR-VIS is not an NRSRO and its ratings are not NRSRO credit ratings. JCR-VIS is paid a fee for most rating assignments. This rating is an opinion on credit quality only and is not a recommendation to buy or sell any securities. Copyright 2014 JCR-VIS Credit Rating Company Limited. All rights reserved. Contents may be used by news media with credit to JCR-VIS.
2011 2012 2013
Net Advances
(Rs. in b) 150.7 143.7 163.6
Deposits (Rs.in b)
291.5 306.9 335.2
Deposit Cost (%) 6.9 6.4 5.3
Profit / (Loss)
( Rs.in m) 1,628 1,263 (5,480)
Equity (Rs. in b) 17.7 19.6 18.7
CAR (%) 11.35 11.81 10.39
Liquid Assets % Deposits & Borrowings –adjusted for repo
52.4 58 54
Net Infection (%) 4.87 5.36 2.95
July 14, 2014
Analyst: Maimoon Rasheed Syed Adil Hussain
Askari Bank Limited
Chairman: Lt. Gen. (Retd.) Muhammad Mustafa Khan;
President and CEO: Syed Majeedullah Husaini
Rating Rationale The ratings of Askari Bank Limited (AKBL) take into account implicit support from its principal shareholder, Fauji Foundation Group (FFG). Since the bank’s acquisition, the group has demonstrated its capacity and willingness to support AKBL through equity injection. FFG is one of the largest business conglomerates in Pakistan with well diversified and strong presence in various sectors of the economy. Moreover, entities operating under the umbrella of FFG largely have robust financial profile.
Following the change in shareholding, there was a change at the top management position. Over the years, risk profile of the institution had witnessed deterioration. The bank’s relative positioning among peers had also weakened on a timeline basis. The incumbent President has taken various initiatives to strengthen financial profile of the bank. These include cleansing of balance sheet by making substantial provisions to cover prior losses and enhancement of recovery efforts by revitalizing Special Asset Management division. A well rounded strategy on the business front is also being rolled out which entails penetration in reputable corporate groups/entities with clean repayment history; to enhance bank’s fee based income, the management intends to tap commercial clientele in trade related activities. Meanwhile, the bank is also venturing into public infrastructural projects. In order to ensure that credit risk remains within the bank’s defined appetite, the risk management framework has also been strengthened, including revamp of the Obligor Risk Rating model. These initiatives while enhancing core profitability are expected to keep asset quality under check. Stability in top management and the new board of directors is considered pivotal in effective implementation of the bank’s long-term strategy.
With limited network expansion over the years, the bank’s market share in deposits has witnessed a declining trend. The new management plans to enhance the bank’s footprint, with 431 branches targeted by end 2016 relative to 281 at end FY13. Although deposit profile features relatively high concentration, deposits related to armed forces maintained with the bank have remained stable which somewhat mitigates concentration related risk. Recently, the management has shed some high cost deposits, which has enabled the bank to improve proportion of CASA in 1Q14. AKBL, in line with peers, has also been able to achieve reduction in cost of deposits in FY13.
The bank’s investment portfolio is mainly concentrated in T-bills. The PIBs portfolio is close to one fifth of aggregate investments that poses interest rate risk; decline in portfolio duration has reduced the bank’s exposure to interest rate risk on a timeline basis. Given the interest rate volatility in the market, this may be considered a prudent strategy. The management’s strategy regarding equity portfolio entails investment in high volume stocks using a target price selling discipline. The listed equity portfolio largely comprised dividend yielding scrips with strong fundamentals. Income from capital market operations has supported the bank’s bottom line.
Reported non-performing loans peaked at end June 2013; there has been some decline subsequently. As part of the balance sheet cleansing exercise, provisioning coverage was enhanced during the outgoing year, which resulted in a sizeable loss while core earnings also came under significant pressure. Despite a loss of Rs. 5.5b incurred in FY13, the erosion in equity was contained as the new sponsors injected fresh capital to the tune of Rs. 4.5b in the bank.
The strategic initiatives taken by the new management are likely to enable the bank to maintain current level of capital adequacy ratio (CAR) through internal capital generation while allowing the bank to undertake a measured pace of growth. However, further meaningful capital injection from the primary sponsor will help in realizing the growth targets laid down by the bank, providing impetus to earnings stream and enhancing the risk absorption capacity.
AKBL, a scheduled bank, was incorporated in October 1991 as a Public Limited Company and commenced operations in April 1992. The bank is listed on the Karachi, Lahore and Islamabad Stock Exchanges. The collective shareholding of FFG in the bank was 71.9% at end-Dec’13. Financial statements for FY13 were audited by KPMG Taseer Hadi & Co.
Chartered Accountants who have been reappointed as external auditors for FY14 .
JCR-VIS
JCR-VIS
Overview of the Institution
* based on recurring profit before provision and taxation
Key Financial Trends
Category Latest Previous
Entity AA/A-1+ - Jul 7,’14
Outlook Stable - Jul 7,’14
Outlook xxx Stable xxxxx Jun 28, ’11
-40.00%
-20.00%
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
2011 2012 2013
Basic ROAA* ROAE Efficiency (%)
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
2011 2012 2013
CAR Net Infection Net NPLs % Tier 1 Capital
JCR-VIS Credit Rating Company Limited
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2
Corporate Profile
Askari Bank Limited (AKBL) was incorporated in
October 1991 as a public limited company and
commenced operations in April 1992. The bank is
listed on the Karachi, Lahore and Islamabad Stock
Exchanges. AKBL is a schedule commercial bank and
is principally engaged in the business of banking as
defined in the Banking Companies Ordinance, 1962.
At end-FY13, the bank had 281 branches (end-FY12:
261 branches) including 40 (end-FY12: 34) Islamic
banking branches, 29 (end-FY12: 24) sub-branches
and a wholesale bank branch in the Kingdom of
Bahrain. During FY14, the bank plans to set up 40
new branches including 12 Islamic banking branches,
in addition to which 2 Islamic sub-branches will be
converted into full-fledged branches.
In June‟13, Fauji Foundation Group (FFG) acquired
majority stake in the bank from Army Welfare Trust
(AWT). Subsequently, FFG also injected equity against
issue of shares. The collective shareholding of FFG in
the bank was 71.9% at end-Dec‟13. The group
includes Fauji Foundation (FF), Fauji Fertilizer
Company Limited (FFCL) and Fauji Fertilizer Bin
Qasim Limited (FFBL).
Resultantly, shareholding pattern of the bank changed
during the outgoing year which is depicted in the table
below:
All figures are in percentages end-Dec'12 end-Dec'13
Associated Companies 55.8 71.9
Individuals 21.0 14.2
FIs, NIT & others 23.2 13.9
Board of Directors
The Board of Directors (BoD) comprises 11 members
including the Chairman and CEO. FF is represented
on the board by three directors while FFCL, FFBL
and NIT are represented by a single director each. The
rest of the four are independent directors.
Nominee directors of FF include Lt. Gen. (Retd.)
Muhammad Mustafa Khan, Mr. Qaiser Javed and Mr.
Nadeem Inayat. While Lt. Gen. (Retd.) Naeem Khalid
Lodhi represents FFCL, Lt. Gen. (Retd.) Muhammad
Haroon Aslam represents FFBL and Mr. Manzoor
Ahmed represents NIT on the board. A brief profile
of the directors is attached as Annexure 1 to the
report.
With regards to the number of independent directors
on the board, the bank is in compliance with the best
practices as laid down in the Code of Corporate
Governance (CCG), 2012.
Name Status
Muhammad Mustafa Khan Non-Executive Director
Qaiser Javed Non-Executive Director
Nadeem Inayat Non-Executive Director
Naeem Khalid Lodhi Non-Executive Director
Muhammad Haroon Aslam Non-Executive Director
Manzoor Ahmed Non-Executive Director
Asif Reza Sana Independent Director
Zaffar Ahmad Khan Independent Director
Tariq Hafeez Malik Independent Director
Muhammad Arif Habib Independent Director
Syed M. Husaini President & CEO
There are 5 committees functioning at the board level.
These are Audit and Compliance Committee (AC),
Human Resource and Remuneration Committee
(HRC), Board Risk Management Committee (BRMC),
IT Committee (IT) and Executive Committee (EC).
Composition of the board committees is attached as
Annexure 2 to the report.
Participation by board members during the board
meetings is considered satisfactory. The board met 10
times during the outgoing year. In accordance with
CCG, the board audit committee is headed by an
independent board member.
Some major points under discussions at the board
level pertained to disinvestment of a subsidiary
company, MIS and delivery programs hindering
operations and exposing the bank to certain types of
risks, issues with partial implementation of core
banking software and restructuring & rationalization
of staff.
JCR-VIS Credit Rating Company Limited
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Financial accounts of AKBL for FY13 were audited by
KPMG Taseer Hadi & Co. Chartered Accountants
who have been reappointed as external auditors for
FY14.
Sponsors Profiles
Fauji Foundation (FF)
FF was established in 1954 as a charitable trust and is
one of the largest business conglomerates in Pakistan
having presence in 18 industries including fertilizer,
cement, food, power generation, gas exploration, etc.
At-end FY12, FF had net worth of Rs. 76b (FY11: Rs.
65b) and reported net profit of Rs. 27b (FY11: Rs.
21b).
Fauji Fertilizer Company Limited (FFCL)
FFCL is the largest chemical fertilizer producer in
Pakistan. At end-FY13, FFCL had a net worth of Rs.
25.1b (FY12: Rs. 25.8b) and reported net profit of Rs.
20.1b for the year (FY12: Rs. 20.9b).
Fauji Fertilizer Bin Qasim (FFBL)
FFBL is the only fertilizer complex in Pakistan
producing Di-Ammonium Phosphate (DAP) fertilizer.
At end-FY13, FFBL had a net worth of Rs. 13.8b
(FY12: Rs. 12.6b) and reported net profit of Rs. 5.6b
for the year (FY12: Rs. 4.3b).
Strategic Investments
Askari General Insurance Company Limited
(AGICO)
The bank held an equity stake of 27.2% in AGICO at
end-FY13. AGICO is engaged in non-life insurance
business comprising fire, marine, motor, accident,
health and miscellaneous insurance coverage. AGICO
has an outstanding Insurer Financial Strength rating of
„A+‟, which denotes high capacity to meet
policyholder and contract obligations. Market value of
investment in AGICO at end-FY13 stood at Rs.
205.8m (FY12: Rs. 118.7m).
Askari Investment Management Limited (AIML)
AIML is a wholly owned subsidiary of the bank and is
engaged in asset management and investment advisory
services. At end-Dec13, AIML was managing assets of
Rs. 10.3b with seven funds under management.
Askari Securities Limited (ASL)
ASL is a partly owned subsidiary of the bank and is
engaged in the business of share brokerage, investment
advisory and consultancy services. ASL had a paid-up
capital of Rs. 114.8m and a break-up value of Rs.
89.2m at end-Dec‟13. Going forward, the bank plans
to divest its stake in ASL.
Risk Management
Risk Management Department (RMD) at AKBL is
headed by Ms. Zehra Khalikdina. Ms. Khalikdina has
previously worked at leading financial institutions in
the country and is a graduate of Institute of Business
Administration, Karachi. RMD is divided into four
units: Credit Risk Management, Market Risk
Management, Operational Risk Management and Risk
Architecture & Analytics. BRMC sets the bank‟s risk
policies and risk appetite. A risk management function
within the bank ensures the implementation of these
policies.
The bank has built and maintains a well defined Credit
Policy and Credit Risk Policy approved by the BoD.
In order to manage credit risk, the bank takes
measures including monitoring credit exposures,
limiting transactions with specific counter parties with
increased likelihood of default and continually
assessing the creditworthiness of counter parties.
Market risk is monitored by the same division. Market
risk policy and risk measurement/monitoring
methodology for review and reporting of market risk
have been developed and implemented by RMD. The
bank uses Value-at-Risk (VaR) methodology to
measure market risk. In addition, sensitivity analysis
and stress tests are carried out to gauge the impact of
extreme market movements.
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The bank‟s liquidity position is managed by the Asset
and Liability Management Committee (ALCO). ALCO
monitors balance sheet position, liquidity ratios,
depositor concentration both in terms of the overall
funding mix and avoidance of undue reliance on large
individual deposits. Moreover, liquidity contingency
plans are also in place.
The bank also regularly monitors the interest rate
sensitivity profile based on the re-pricing of assets and
liabilities. Periodic gap analysis, sensitivity analysis and
stress testing is performed to monitor and manage
interest rate risk. A notable interest rate sensitivity gap
can be witnessed in up to one month asset/liability
buckets, mainly on account of classification of some of
the savings deposits in this bracket as these do not
have a contractual maturity.
Operational Risk Management Framework has been
reinvigorated and resultantly methodology for RCSA
and KRI has been revised. The implementation of
revised framework is under implementation.
Loan Approval Process
Currently, all loan proposals with the exception of
proposals approved by Branch Credit Committee
(only authorized to approve cash collateralized
exposures) are pre assessed by RMD. RMD reviews
consumer and agriculture loans falling with the
discretionary powers of Head Office Credit
Committee (HOCC). Most of AKBL‟s Credit
portfolio is approved by HOCC. Proposals are sent via
hard copy or scanned documents to RMD. RMD
evaluates loan proposals by using an internally
developed Pre Assessment Risk Evaluation Model.
Obligor Risk Rating (ORR) model has recently been
updated; the revised version was in test phase. The risk
rating model used by the bank relies on a combination
of qualitative and quantitative factors while
incorporating inter-period linkages. RMD also assists
in pricing of loan products by incorporating input
from various ORR, Facility Risk Rating (FRR) and
Probability of Default (PD) models. RMD is not
involved in the approval of a proposal.
The bank is in the process of establishing credit hubs
in three regions; Central, South and North. Loan
requests of the branches/customers that fall under the
Hubs‟ system shall be prepared / initiated in their
respective credit hubs and would then be approved in
their respective Credit Committees.
Internal Audit
The Internal Audit (IA) division at AKBL is headed by
Mr. Shahid Abbasi, a qualified Chartered Accountant,
with over 17 years experience in audit, accounts and
finance. The division has approved staff strength of 63
personnel, including 25 at the head office. In addition
to performing internal audit of the bank, the division
also performs audit of the bank‟s subsidiaries, if
required. The scope of the IA division comprises the
following:
Branch audits
Shariah audits
Management audit
IT audit
Spot risk review
For strengthening of internal controls, the bank has
instituted a “Risk Assets Review department” under
umbrella of IA division. This department shall conduct
periodic reviews of bank‟s credit portfolio to provide
independent assessment especially with respect to its
quality and risk profiles.
Ratings of branches are based on a variety of factors
including an evaluation of credit and operations. As
per the IA plan for FY14, large sized branches,
regardless of rating are to be audited once a year. The
audit of branches ranked good or very good are done
every alternate year while below average branches are
audited semi annually.
The IA division carries out IT audit which comprises
an overall evaluation of branch IT environment, a
review of core banking application, alternative delivery
channels and branchless banking.
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Information Technology
The Information Technology (IT) Group is headed by
Mr. Syed M. Mujeeb as CIO. Mr. Mujeeb holds a
Masters degree in Information Systems and carries
over 20 years of experience in the field of information
technology. Headcount of IT department stands at
around 100 personnel including support staff deployed
at branches. The IT department at AKBL is primarily
divided into six teams, which are further divided into
software developers, system administrators, network
operations, infrastructure management and IT support
staff.
Core banking system (CBS) deployed at AKBL is
Oracle based Flexcube system to support banking and
branch operations. Other software deployed includes
ADAMS – for managing treasury operations, Oracle
Financials, and Oracle People Soft – for management
of the HR function, Oracle Mantas for Anti Money
Laundering, Card Pro - for Credit Card and iNET -
Internet banking Application. All software are
integrated with one another on a real time basis.
Certain CBS related issues have been affecting
operations; according to management, these issues
have largely been settled.
The Primary Recovery (PR) site is located at E11
Islamabad while a Disaster Recovery (DR) site has
been setup G8 Islamabad. DR site is planned to be
built at a distant location.
In order to cope with data backup needs, AKBL has
implemented IBM Tivoli Solution with DS Storage
Systems and Tape Libraries. Two separate enterprise
Storage Area Network (SAN) storages are available
with AKBL. One is installed at PR site while the other
is installed at the DR site. Both storage systems have
43 TB Raw / useable 30 TB capacities. The bank has
also deployed a robotic tape subsystem located at both
the PR Data Center and the DR Site. The selected data
backup can be copied on magnetic tape
manually/automatically.
Financial Analysis
Asset Mix
During the last 3 years, the bank witnessed a
compound annual growth rate of 7.9% in asset base
with growth largely manifested in investment
portfolio. From FY10 till 3Q13, gross loan portfolio
actually shrunk by 3.2% as against 9.6% increase in
gross advances of the banking sector during this
period. With the new top management settling down,
growth in advances portfolio was witnessed in the last
quarter of FY13.
Asset base of the bank increased by 11.9% to Rs. 395b
(FY12: Rs. 353b) in FY13. Overall, growth in the
lending portfolio was largely in line with growth in
investment portfolio at 14%. The bank also carries
non-banking assets acquired in satisfaction of claims
amounting to Rs. 3.9b with a market value of Rs. 4.9b
at end-FY13.
Asset base declined to Rs. 389b (FY13: Rs. 395b) at
end-1Q14. In absolute terms, investments declined to
Rs. 154b (FY13: Rs. 166b) while advances were higher
at Rs. 170b (FY13: Rs. 164b).
Islamic Banking
Total assets of Islamic Banking Business (IBB)
increased to Rs. 18.7b (FY12: Rs. 15.8b) with the
growth manifested in placement with other banks and
advances portfolio. At end-FY13, investments and
advances comprised 35% (FY12: 65%) and 28%
(FY12: 20%) of total assets, respectively. In absolute
terms, investments were lower at Rs. 6.5b (FY12: Rs.
10.2b) while advances were higher at Rs. 5.3b (FY12:
Rs. 3.1b) at end-FY13. At end-1Q14 asset base stood
at Rs. 19.7b with the increase largely manifested in the
advances portfolio.
The bank generates deposits on the basis of Qard and
Mudaraba modes. Deposits mobilized on Qard basis
are classified as current accounts while deposits
generated under Mudaraba basis are classified as either
savings or fixed deposit accounts.
Cost of deposits of IBB declined to 4.9% (FY12:
6.5%) on account of a downward revision in the
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discount rate along with a more favorable deposit mix.
By end-FY13, CASA increased to Rs. 11b (end-FY12:
Rs. 6.7b) depicting a growth rate of 65%. Deposit mix
of IBB is presented in the table below:
2012 2013
CASA 48.2% 63.1% Term 43.4% 31.5% Others 8.4% 5.4%
Despite higher profit bearing earning assets, net profit
income of IBB declined to Rs. 528m (FY12: Rs. 633m)
during FY13 on account of lower average benchmark
rates while non-markup income increased to Rs. 54.4m
(FY12: Rs. 41.3m). In line with the bank‟s strategy of
cleansing the balance sheet, provisioning against NPLs
and investments increased to Rs. 443.6m (FY12:
Rs.46.2). IBB reported a loss of Rs. 434.6m (FY12:
profit of Rs. 75.8m) during FY13.
Credit Risk
After two years of stagnancy, the loan portfolio
depicting healthy growth in 2013, that was primarily
realized in the last quarter of the year. Post acquisition,
the new management followed a strategy of selective
disbursements towards high credit quality clients while
providing more prudently against inherited non-
performing loans.
Gross advances increased to Rs. 192.2b (end-FY12:
162.8b) depicting a growth rate of 18%, surpassing
industry growth of 5.6% during FY13. By end-1Q14,
gross advances increased further to Rs. 198.2b.
The corporate sector constitutes around two thirds of
the lending portfolio followed by commodity
financing (19%), consumer (5%), SME (5%), staff
loans (3%) and agriculture (2%). The table below
depicts the portion of advances and gross infection for
each sector for the period FY13 and 1Q14.
2013 1Q14
%age of gross advances
Gross Infection
%age of gross advances
Gross Infection
Corporate 66% 20% 67% 19%
Commodity 19% 0% 19% 0%
Consumer 5% 26% 5% 27%
SMEs 5% 29% 5% 31%
Staff Loans 3% 2% 2% 2%
Agriculture 2% 44% 2% 40%
The corporate sector comprises exposure towards
corporate entities, government entities and armed
forces having outstanding loan amount of Rs. 300m
and above. Gross infection continues to remain high
in the corporate loan book. As per management, asset
quality in the corporate loan book will continue to
improve as increased efforts are being made towards
recoveries. Going forward, the bank intends to
increase overall exposure in corporate sector with a
focus towards groups with clean repayment history.
Commodity financing remained the second largest
segment in the bank‟s loan book. Gross infection
under this category has remained nil; commodity
financing is being availed by the public sector.
During the last few years, the consumer banking
business has been slowed down owing to high level of
delinquencies. Share of consumer sector remained
largely unchanged at 5% during the outgoing year with
emphasis on recovery of outstanding NPLs. Going
forward, the bank will continue to follow cautious
strategy in clean lending while undertaking selective
growth in secured business e.g. mortgages and auto
finance. Overall share of the consumer sector is
expected to remain around the same level while
portfolio mix is targeted at 70:30 of
secured/unsecured loans that is currently around
58:42.
SME segment has also witnessed high delinquencies in
prior years. The management now intends to focus on
improving service quality while targeting trade related
businesses which will generate ancillary business as
well. This strategy will help in increasing non-fund
based income for the bank.
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Agriculture financing constitutes the smallest portion
of the gross lending portfolio (2%). Infection levels in
this segment have remained high; gross infection stood
at 40% (FY12: 44%) at end-1Q14. As per
management, high infection in agriculture segment was
on account on inadequate post disbursement follow
ups. Going forward, the focus will be on recoveries
while improving loan disbursement process and
recovery mechanisms.
Bifurcating advances by segments, the largest portfolio
concentration continues to be in the public sector. In
local context, credit risk arising from the same is
considered minimal. In line with industry dynamics,
the textile sector contains the largest NPLs followed
by Fuel/Energy. The table below depicts the share of
advances and gross infection within a few major
sectors.
2012 2013
% share
Gross Infection
%share Gross Infection
Public sector 24% 0% 33% 0%
Textile 14% 51% 14% 48%
Fuel/Energy 11% 8% 10% 18%
Transport and communication
6% 3% 3% 5%
Agriculture finances
4% 13% 2% 44%
In recent years, asset quality indicators have continued
to depict weakening, with a sharp increase in reported
NPLs in 2013 to Rs. 33.1b (FY12: Rs. 26.5b); NPLs
were recorded at the highest level of Rs. 35.1b at end-
June 2013. At end 1Q14, NPLs were lower at Rs.
32.2b. Gross infection stood at 16.3% at end-1QFY14
(FY13: 17.2%; FY12: 16.3%). As part of the new
management‟s balance sheet cleansing exercise,
provisioning coverage has been enhanced to 86.4%
(FY12: 72.1%) by end-FY13. Resultantly, net infection
improved to 2.95% (FY12: 5.36%) at end-FY13.
Cumulative FSV benefit availed by the bank at end-
1Q14 decreased to Rs. 3b (FY13: Rs. 3.4b).
Recovery against NPLs was made to the tune of Rs.
1.8b (FY12: Rs. 2.1b) during FY13. NPLs in litigation
increased to Rs. 17.3b (FY12: Rs. 10.8b) which could
delay future recoveries. Amount rescheduled increased
to Rs. 788.6m (FY12: Rs. 651.3m) during FY13. The
management is confident of further recoveries while
disposal of non-banking assets acquired in satisfaction
of claims is also expected to help in improving the
bottom line.
Total non-funded exposure increased to Rs. 319.6b
(FY12: Rs. 192.6b) at end-FY13. Public sector
exposure represented 40.2% (FY12: 23.2%) of the
total non-funded credit-related exposure.
Investment portfolio
Government securities constituted 94% (FY12: 92%)
of the investment portfolio, at market value. Credit
risk arising from the same is considered minimal in the
local context. Market value of investment in corporate
TFCs and Sukuks decreased to Rs. 3.9b (FY12: Rs.
6.2b) during FY13. Classified TFCs remained largely
unchanged at Rs. 1.43b while provisioning coverage
against these TFCs was enhanced to 58% (FY12:
17%).
Market Risk
In line with the industry, investment portfolio of the
bank continued to be dominated by government
securities. With treasury bills constituting around
three-fourths of total investment in government
securities at end-FY13, market risk arising from these
instruments is considered minimal. The overall PIBs
portfolio is close to one fifth of aggregate investments
that continues to pose interest rate risk. The decline in
portfolio duration to 2.2 (FY12: 2.86) has reduced
interest rate risk on a timeline basis; given the interest
rate volatility in our market, this may be considered a
prudent strategy.
The bank‟s strategy regarding equity portfolio has been
on investing in high volume stocks using a target price
selling discipline. The listed equity portfolio largely
comprised dividend yielding scrips with strong
fundamentals. At end-FY13, the listed equity portfolio
comprised 2% (FY12: 1.8%) of total investments at
market value. Aggregate equity market exposure, both
directly and by way of mutual funds, represented 24%
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of the bank‟s own equity and is considered slightly on
the higher side.
Investment in mutual funds remained largely
unchanged at Rs. 1.8b during the outgoing year and
primarily constitutes funds of a related party. Most
mutual funds comprise fixed income instruments and
pertained to funds rated above investment grade.
Investment in TFCs/corporate Sukuk certificates
decreased to Rs. 3.9b (FY12: Rs. 6.1b). Interest rate
risk emanating from these instruments is considered
minimal as return on most TFCs/Sukuk instruments
are linked to market benchmark rates. As per
management, no fresh exposure is to be taken against
TFCs in the ongoing year.
The table below presents the investment portfolio at
market value:
2012 2013
Amount %share Amount
%share
Federal Government securities
133.76 92.0% 155.36 93.7%
TFCs/Sukuks 6.20 4.3% 3.95 2.4%
Equity - Listed 2.56 1.8% 3.30 2.0%
Mutual funds 1.80 1.2% 2.04 1.2%
Others 0.64 0.4% 0.64 0.4%
Preference shares 0.21 0.1% 0.31 0.2%
Equity - Unlisted 0.21 0.2% 0.26 0.1%
All figures are in Rs. bil
Liquidity Risk
With limited increase in advances portfolio over the
years, liquid assets have increased at a healthy rate,
recording a cumulative annual growth rate (CAGR) of
13.5% during the period FY10 to FY13. Since the last
quarter of 2013, lending activities have picked pace;
accordingly, liquid assets in relation to deposits &
borrowings declined slightly to 54% (FY12: 58%).
Gross advances to deposits ratio (ADR) was recorded
higher at 57% (FY12: 53%) at end-FY13, increasing
further to 64% by end 1Q14; this is significantly higher
than the industry ADR of 54%. As per projections, the
bank is targeting to maintain ADR in the range of 50%
over the next three years, on the back of a much
higher pace of increase in deposits vis-à-vis advances.
Liquidity levels are likely to remain comfortable if the
bank is able to achieve broad based growth in
deposits, in line with its projections.
Funding mix comprises borrowings, deposits and
subordinated loans. Deposits constituted the largest
portion of total funding at 92% (FY12: 95%) at end-
FY13. Composition of the funding mix is shown in
the table below:
2012 2013
Deposits 95.3% 92.2%
Borrowings 2.6% 6.7%
Sub-ordinated loans 2.1% 1.1%
Total deposits stood at Rs. 335.2b (FY12: Rs. 306.9b)
at end-FY13 depicting year-on-year growth of 9.2%.
Growth in deposit base was lower than the banking
sector deposit growth of 12.6%; with market share of
AKBL (in terms of deposits) declining slightly to
4.45% (FY12: 4.59%) by end-FY13. At end-1Q14,
deposit base declined to Rs. 307.4b. According to
management, the bank shed-off some of the high cost
deposits during this period.
The bank utilizes borrowings under various financing
schemes provided by SBP along with short term
borrowings from FIs. Year-end 2013 balance of
borrowings was higher at Rs. 24.5b (end-FY12: Rs.
8.4b) with the increase manifested in repo borrowings,
which amounted to Rs. 15.2b (FY12: nil).
Composition of deposit mix remained largely
unchanged during FY13 while improving in 1Q14.
CASA increased to 79% (FY13: 72%) of total deposits
by end-1Q14. Following the acquisition of AKBL in
the outgoing year, the FC transferred salary accounts
of the group companies to the bank. These accounts
are largely current accounts and also allow cross selling
opportunities to the bank. As a result of these efforts
and with a decline in term deposits, deposit mix has
improved during 1Q14 as depicted in the table below:
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2012 2013 1Q14
CASA 71% 72% 79%
Term 25% 25% 20%
Others 4% 3% 1%
Deposit profile features concentration with top 20
deposits representing 28% (end-FY12: 24%) of total
deposits at end-FY13. These largely pertain to saving
accounts and TDRs with high markup rates.
Moreover, deposits included Rs. 13.5b (FY12: Rs.
18.6b) due to related parties. Deposit related to armed
forces maintained with the bank have remained stable
which somewhat mitigates risk associated with
concentration. Aggregate deposits from the public
sector / government represented almost 35% of the
bank‟s total deposits, and remains a key distinguishing
feature vis-à-vis most peers.
AKBL has issued sub-ordinate debt in the past.
Outstanding balance of the same amounted to Rs. 4b
(end-FY12: Rs. 7b) at end-FY13. Sub-ordinate debt
consists of two TFCs maturing in Nov‟19 and Dec‟21.
These TFCs are not redeemable before maturity
without prior approval from SBP.
Profitability
Since 2011, the bank‟s core earnings have experienced
a downward trajectory primarily on account of
stagnant business volumes and rising trend in non-
performing assets. While lending activities picked up
pace in the last quarter of the out-going year, core
earnings came under significant pressure (FY13: Rs.
0.9b; FY12: Rs. 2.6b) as the bank recognized
significant additional non-performing loans, having an
adverse impact on mark-up earnings thereon in
addition to compression in spreads, faced in line with
the sector at large. As NPLs peaked at end-June 2013,
the bank recognized a loss from core operations to the
tune of Rs. 0.4m in the second quarter of 2013; results
from core operations have remained positive in the
remaining quarters of the year, as reflected in the chart
below. Earnings from core operations have however
depicted an inconsistent trend.
Return on markup bearing assets was recorded lower
at 8.8% (FY12: 11.1%) during FY13. The decrease was
on account of lower return on performing advances
and markup bearing investments that stood at 10.37%
(FY12: 12.23%) and 8.7% (FY12: 10.8%) respectively.
Mark-up income was lower at Rs. 28b (FY12: Rs. 32b)
for the year.
Cost of funds was lower at 5.6% (FY12: 7.1%), also in
line with the decrease in discount rate during the
outgoing year. Average cost of deposits stood lower at
5.3% (FY12: 6.4%) during FY13 that is largely at par
with peers. Spreads of the bank at 3.2% (FY12: 3.9%)
have been trending downwards and are presently
lower than some peer banks.
Fee based income amounted to Rs. 1.2b, representing
14% of net mark-up income. The current level of fee
based income reflects room to deepen non-fund based
relationships with existing clientele. Total non-markup
income amounted to Rs. 3.6b (FY12: Rs. 4.1b),
comprising sizeable proportion from investment
activities.
During FY13, growth in administrative expenses was
largely contained at 4.1% against CPI inflation of 9.2%
while increase in administrative expenses of the
banking sector was around 6%. Employee related
costs remained largely stagnant at Rs. 4.1b (FY12: Rs.
4b) and comprised 43.7% (FY12: 45%) of total
administrative expenses. Staff strength reduced
modestly to 5,531 employees (FY12: 5,597). Owing to
a decline in core income, efficiency of the bank
deteriorated to 91% (FY12: 78%) and compares
unfavorably to most of peer banks.
-600-400-200
0200400600
1Q13 2Q13 3Q13 4Q13 1Q14
Core Earnings
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Fresh provisions booked against non-performing loans
and advances were higher at Rs. 9.8b (FY12: Rs. 2.3b)
during FY13. Resultantly, the bank booked a net loss
of Rs. 5.5b during FY13 compared to a profit of Rs.
1.3b in FY12.
During 1Q14, profit after tax stood higher at Rs. 1.02b
(1Q13: Rs. 276m). While core earnings in this period
are actually lower vis-à-vis corresponding quarter of
last year (1Q14: Rs. 216.7m; 1Q13: Rs. 327.8m),
bottom line received impetus from the sizeable capital
gains of Rs. 680.0m booked during the quarter.
Going forward, AKBL aims to become a traditional
trade finance bank while also engaging in investment
and corporate banking activities. Moreover, the bank
plans to focus on infrastructure financing while
increasing its share Islamic banking within the country.
Success will depend on keeping asset quality intact
while improving its liquidity position.
Capitalization
Despite a loss of Rs. 5.5b incurred in FY13, the
erosion in equity was contained as the new sponsors
injected fresh capital to the tune of Rs. 4.5b in the
bank. Accordingly, core equity of the bank declined
from Rs. 17.6b to Rs. 16.6b in FY13. Net worth was
reported at Rs. 18.7b (FY12: Rs. 19.6b), which takes
into account surplus on revaluation of assets (net of
tax).
With decline in eligible regulatory capital held along
with higher credit risk weighted assets, capital
adequacy ratio (CAR) of the bank decreased to 10.39%
(FY12: 11.81%) by end-FY13. While operational risk
weighted assets remained largely unchanged, market
risk weighted assets witnessed a slight decline. A
greater cushion in CAR would provide the bank with
additional risk absorption capacity.
Given the bank‟s expansion plans, the current level of
CAR does not provide adequate room for growth;
keeping eligible capital constant, the bank has room to
grow risk weighted assets by Rs. 6.8b before CAR
drops to 10%. Moreover, cushion available in the
current capital structure to absorb fresh accretion of
NPLs is also considered low. Although net non-
performing exposures as a percentage of Tier-1 capital
have declined to 29.1% (FY12: 44%) by end-FY13,
these are still considered high in relation to peers.
Various initiatives taken by the management are likely
to help in maintaining the current level of CAR
through internal capital generation while allowing the
bank to undertake a measured pace of growth. Further
meaningful capital injection from the primary sponsor
will help in realizing the growth targets laid down by
the bank, providing impetus to earnings stream and
enhancing risk absorption capacity
JCR-VIS
11
Annexure 1: Profile of Board Members
Muhammad Mustafa Khan (Chairman)
Lt. Gen. (Retd.) Khan joined the BoD in June‟13. He is the Managing Director of Fauji Foundation and Chairman on the board of various group companies. He is a graduate of Command and Staff College Quetta and Command & Staff College Fort Leavenworth, USA.
Qaiser Javed Mr. Qaiser Javed has long been associated with FF and presently is working as Director Finance at FF. He is a Member of Institute of Chartered Accountants of Pakistan and a Fellow Member of Institute of Taxation Management of Pakistan
Nadeem Inayat Dr. Inayat also joined the BoD in June‟13 and is currently the Director Investment at FF. He is also serving on the boards of various group entities. He holds a Doctorate in Economics.
Naeem Khalid Lodhi Lt. Gen. (Retd.) Lodhi is the Chief Executive & Managing Director of the FFCL. He is a graduate of Command and Staff College Quetta. He holds bachelor in Civil Engineering and Master degrees in Defense Studies and International Relations.
Muhammad Haroon Aslam
Lt. Gen. (Retd.) Aslam is the Chief Executive and Managing Director of FFBL. He has 40 years of military experience and is a graduate of Command and Staff College Quetta.
Manzoor Ahmed Mr. Ahmed is Chief Operating Officer at NIT which is the largest Asset Management Company of Pakistan. He is an MBA and also holds D.A.I.B.P
Asif Reza Sana Mr. Reza is a consultant by profession and has previously worked with multinationals in the fields of Finance, General Management and Marketing. He holds an MBA degree and has been trained at the Institute of Management Development in Lausanne, Switzerland and INSEAD, France.
Zaffar Ahmad Khan
Mr. Zaffar Khan is a retired corporate executive. Previously he had worked in Hong Kong, USA & Singapore with Exxon in the field of petrochemicals. He is associated with the boards of various private, public & civil society organizations
Tariq Hafeez Malik Mr. Hafeez Malik joined the BoD in Oct‟13. He carries over 26 years of experience in global IT industry. He holds a bachelors degree in Applied and Information Science from Edith Cowan University, Western Australia
Muhammad Arif Habib
Mr. Arif Habib is currently the Chief Executive of Arif Habib Corporation Limited. He also serves on the board of various companies including Fatima Fertilizer Co. Ltd. and Sui Northern Gas Pipelines Ltd.
Syed Majeedullah Husaini (President and CEO)
Mr. Husaini joined the bank as President in June‟13. Mr. Husaini has a Masters degree in Economics from Karachi University and carries over 30 years of banking experience. He has previously served as the President of KASB Bank Ltd., and as Head of Corporate Banking Group at MCB Bank Ltd. and National Bank of Pakistan Ltd.
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Annexure 2: Composition of Board Committees
Committee Composition
AC Mr. Asif Reza Sana (C) Mr. Qaiser Javed (M) Mr. Nadeem Inayat (M) HRC Mr. Naeem Khalid Lodhi (C) Mr. Qaiser Javed (M) Mr. Zaffar Ahmad Khan (M) Syed M. Husaini (M) BRMC Dr. Nadeem Inayat (C) Mr. Qaiser Javed (M) Mr. Asif Reza Sana (M) Syed M. Husaini (M) IT Mr. Tariq Hafeez Malik (C) Mr. Naeem Khalid Lodhi (M) Brig. (Retd.) Mukhtar Hussain (co-
opted member) Syed M. Husaini (M) EC Muhammad Mustafa Khan (C) Mr. Qaiser Javed (M) Mr. Nadeem Inayat (M) Syed M. Husaini (M)
C: Chairman
M: Member