Bank: NIB Bank Limited - Analysis of Financial Statements December 2003 - September 2009
OVERVIEW (November 24 2009): NIB Bank Limited (formerly NDLC-IFIC Bank Limited) is a scheduled commercial bank and is principally engaged in banking business as defined in the Banking Companies Ordinance, 1962. It was incorporated in March 2003 as a public listed company.
It is listed on all the three stock exchanges of Pakistan. In June 2005, Temasek Holdings of Singapore, through its indirect subsidiary, Bugis Investments (Mauritius) Pte Limited, acquired over 70% shares in the capital of NIB Bank. Temasek, the investment arm of the government of Singapore, is a premier international investor in the process of establishing a pan-Asian banking presence.
The investment in NIB Bank is its first investment in Pakistan and in terms of amount it is the largest non-privatization investment by any foreign investor in a bank incorporated in Pakistan. This foreign investment also showcases the confidence of foreign interest in Pakistan's banking sector and will greatly improve not only the image and performance of NIB Bank but also Pakistan's investment profile.
The bank has a countrywide network of 244 branches (2007: 240 branches). Rated by PACRA "AA-" (Double A minus) in long-term and "A1+" (A one plus) in short-term with a positive outlook. On December 31st, following the approval from SBP, NIB successfully merged with Pakistan Industrial Credit and Investment Corporation Ltd (PICIC) and PICIC Commercial Bank Ltd (PCBL). With total assets swelling up to Rs 176.7 billion, advances to Rs 82.2 billion and deposits to an amount of Rs 116.7 billion the merger resulted in formation of the seventh largest commercial bank in the country in terms of distribution network.
The network will help bank access under-banked segments and also offer cross-sell products to half a million customers of the merged bank. The stable and lower cost deposit base of PICIC will allow NIB to grow its advances without raising deposits at a high marginal cost. The merger also resulted in making PICIC Asset Management Company managing almost Rs 20 billion, which is now a subsidiary of NIB. The bank is looking forward to merge this subsidiary with National Fullerton Asset Management Company (NAFA).
This will result in Pakistan's largest asset management company. NIB, pending regulatory approval, will also acquire 100% of Global Securities Pakistan Limited, which is one of Pakistan's leading corporate finance and stock broking firms. Post-acquisition, the investment banking and advisory business of Global, which is responsible for more than 50% of all privatizations in Pakistan, will be divested and merged into the Corporate and Investment Banking Group of NIB, creating a new area of growth for the bank. Furthermore, after the merger the bank also got 30% shares of PICIC insurance company, a 3 year old listed general insurance company.
RECENT RESULTS 3Q09
For the first nine months of 2009, NIB Bank has earned a profit before tax of Rs 1,328 million and a profit after tax of Rs 794 million. Mark-up earned in the first nine months of 2009 was Rs 2.4 billion (21%) higher than the same period in 2008 given the higher interest rate environment and a shift in the asset mix of the bank to higher yielding segments. Mark-up expense increased by Rs 2.0 billion, once again reflecting the higher rate environment and the presence of term loans in the deposit mixture.
Consequently, the net mark-up income grew by Rs 385 million (10%) over the same period last year. Non-mark-up income for the first nine months of 2009 reduced compared to the corresponding period of 2008 included dividends of Rs 827 million from PICIC Asset Management Company and its associated funds. However, rest of the heads under this category performed well. PAT was recorded at Rs 794 million as compared to Rs 287 million in the previous year's period. Investments have increased by 34.2%, while the advances have shown a slight decline. Deposits show a slight increase, however there has been a shift towards savings and non-remunerative current accounts from the high costing fixed accounts. This would help lowering of the interest costs in the times to come.
BANKING INDUSTRY IN FY08
In the last quarter, the banking system successfully weathered a liquidity stress. The stress emerged by withdrawals on the occasion of Eid-ul-Fitr and a number of global, domestic and industry-specific factors further aggravated the situation. Major dampening factors like global financial turmoil, economic slowdown and contractionary monetary policy were compounded by an unusual liquidity stress during October-November 2008. The current account deficit was quite high and the real exchange rate had significantly appreciated to unsustainable levels, which put pressure on rupee/dollar parity and led to capital outflows.
On top of it, breakdown of capital market in Pakistan and the series of news of financial meltdown in advanced markets raised the general public doubts about the financial strength of some Pakistani banks. By this time, due to relatively higher growth in advances, the liquidity profiles of the banks had already been burdened. In this backdrop, the usual post-Eid liquidity pressure on the interbank market led to rumour mongering about the banks. The impact was severe in some banks, especially the small banks with the constrained liquidity profile in terms of ADR.
The reduction in Cash Reserve Requirements (CRR) and Statutory Liquidity Requirements (SLR) requirements in early weeks of October 2008 to manage the liquidity stress resulted in a significant decline in cash and treasury bank balances by the end of Dec-08 quarter thus releasing funds for financing the growth of advances. However, strong capacity developed by the banks and regulators over the years and the offsetting measures taken by the State Bank of Pakistan (SBP) enabled the system to avert this transitory stress from converting into a financial crisis.
The investments, especially the government papers, which declined in both absolute rupee terms as well as a proportion of total assets during the first nine months of CY08, registered a slight increase during the last quarter. Actually, the heightened credit risk on account of deterioration in macroeconomic fundamentals and already constrained liquidity profile induced the banks to shift their preference towards risk-free Market Treasury Bills (MTBs). The banking system is marked with a high concentration as a small number of banks hold a major share of the system's total assets and deposits.
This concentration has been following an overall declining trend as the medium sized banks gradually gained market share. However, due to unusual liquidity stress that affected mainly the small and medium sized banks, the market share of five large banks inched up to 52.4 percent (51.3 percent in Sep-08). Deposits The deposit component, which used to witness a strong growth in last quarter, registered a slow growth of Rs 153 billion (3.8 percent) this year. Incidentally, foreign remittances, a key factor behind the recent year's strong growth in deposits, maintained the momentum and grew by 17 percent over the CY08.
The industry has been witnessing a gradual shift in deposits from savings to term deposits for quite some time. This trend emerged largely in response to SBP's policy incentives to encourage the mobilization of longer-terms deposits so as to reduce the maturity mismatches. Consequently, fixed deposits gained a significant share of savings deposits since 2004. However, SBP's decision to increase the CRR and SLR in last week of Jun-08 and exemption of long-term deposits from SLR requirements during the last quarter also seem to have considerably invigorated this trend. (Other factors like general rise in interest rates and innovative deposits scheme have also augmented the depositors' preference for term deposits).
During the quarter under review, advances witnessed a significant slowdown in sharp contrast to industry's established patterns for the last quarter. The worsening business and economic environment somewhat increased the credit risk, which compelled the banks to adopt cautious lending strategy, particularly in consumer sector where the advances have been decreasing since the start of CY08. Some new loans have been issued of which a significant portion of these was disbursed to public sector enterprises (PSEs).
CY08 however observed a deviation in the growth pattern of advances. Slackness in the demand for bank credit during CY07 coupled with slowdown in economic activities and tightening of monetary regime, forced the banks to reposition their lending strategy and asset profile. The asset mix of the banking system gradually shifted from lending to investments during the first three quarters of CY07.
Currently, the cumulative profit of 22 listed commercial banks has declined by 21% to Rs 50.3bn in 2008, as compared to Rs 63.6 billion earned in the same period in 2007, mainly due to higher provisions for non-performing loans (NPLs) and impairment loss. The full year profits of CY08 were however lower than profits for the last couple of years but still it remained profitable. The overall profitability was neutralizing due to more than proportionate increase in operating expenses and provisioning for loan losses.
In absolute terms, expenses increased by 33.4 percent to Rs 235.8 billion in CY08, which affected the overall profitability of the system. In addition to higher provisions, enhanced branch network with increased human resource base has soared the expense of the system during the last quarter under review. Moreover, stock market crash in the second half of 2008 resulted in bank recognizing impairment loss of Rs 12 billion as against only Rs 287 million recognized in 2007.
High spreads of 7.29% in 2008 and strong advances growth of 19% supported the net interest income, while non-interest income increased by 11% on the back of surge in exchange gain as rupee remained volatile against the dollar. The annual audited results of the top five banks for the year 2008 show that their profitability on average has remained at the previous year's level. The assets distribution on the basis of ROA shows that 16 banks, holding 67.9 percent market share, have ROA of one percent and below.
The banking sector in Pakistan has remained somewhat insulated from the global financial turmoil and has maintained its profitability albeit the slower growth. The prevailing global economic downturn nevertheless has the potential to impair corporate and business profitability that may ultimately heighten the credit risk and may affect the earnings of the banking sector in the quarters ahead.
This rise in NPLs observed across all the banking groups except specialized banks, where NPLs have actually decreased. NPLs have been on the rise mainly due to poor economic performance of the economy and the FSV benefit therefore resulting in worsening of asset quality ratios. Total provisions for NPLs surged to Rs 53 billion in 2008 as against Rs 42 billion in 2007, an astounding growth of 27% largely due to slowdown in economic growth. The composition of segment-wise NPLs of the banking system shows that infection ratio of all the segments except agriculture have increased. The infection ratio of consumer finance portfolio increased in CY08 (2.3 percent over the year).
Rising inflation and contained disposable incomes coupled with increasing lending rate have reduced consumers' appetite for credit as well as their repayment capacity, resulting in increasing defaults rate in the consumer finance. Interestingly, in the wake of economic slowdown, banks seem to facilitate the businesses through rescheduling/restructuring of loans; the textile sector being the major beneficiary. Latest banking industry numbers show an effort to keep balance sheets clear of NPLs by recognizing and providing for NPLs on criteria that are more stringent. This approach might look costly in the meantime but in the long run it'll definitely benefit banks by providing a cushion to withstand losses.
BANKING INDUSTRY IN FY07
In FY07, the banks experienced a lot of changes from both the regulator and the market. The profits in the first two quarters of the banking industry as a whole was on a smooth upward path but this did not last long. The SBP took a turn in its policy of calculating provisions against Non-performing loans. The benefit of FSV was now removed resulting in a hard hit on banks' profitability. Although this was implemented in order to carry on the BASEL II procedure which helps make the banking structure to become more resilient to credit crunches and losses.
So after this the spreads were reduced due to an increase of 50 basis points in discount rates coming up to 10.5%. In response to this the interest rates rose while banks maintained the same deposit rates. Furthermore, the banks had another regulation to fulfil and that was to maintain a CRR of Rs 4 billion by the end of FY07. Banks, with strong capital base, were least affected by this, but the smaller ones were either taken over or merged with others in order to survive. To further intensify the competition Barclays Bank also decided to step into local lucrative financial market.
FINANCIAL PERFORMANCE (FY03-FY08)
In a row for two years the bank recognized losses after tax in FY08 was Rs 7.474 billion following a loss of Rs 489 million in FY07 mainly due to provisioning against non-performing loans. In FY08 alone the provisioning stood at Rs 9.65 billion (FY07: Rs 1.4 billion). These heavy provisions were in compliance with SBP requirement. On a deeper analysis, it is witnessed that interest income rose by 117% in FY08 mainly due to increases up to as high as 15% in KIBOR rates. The mobilized deposits were returned on a flat rate of 5% while the advances made were on KIBOR plus the margin therefore doubling the interest income. Similarly, minimum deposit rate in favor of customers has pushed the borrowing cost twice as high.
Non-interest income rose by 3 folds on the backing of dividend income and gain on sale of securities including government securities and ordinary shares of listed companies. We see a greater growth in non-interest income as compared to Interest income even then interest income has more contribution to total income. To match non-interest income, non-interest expenses have also shot up by almost 3 folds mainly contributed by administrative expenses and goodwill impairment.
NIB Bank's total assets size grew from Rs 46.4 billion in December 2006 to Rs 178 billion in December 2008 mainly attributed to the successful acquisition of PICIC. To finance this merger in FY07, one of the biggest rights offerings were made in history totaling to Rs 18.2 billion accompanied by some 641 million shares to the shareholders of PICIC and PCBL. Through this acquisition, the bank acquired control of PICIC, PICB and PICIC Asset Management Company. At the date, this 28.4 billion was the second highest paid-up capital amount among all banks in Pakistan.
Over the years, assets have shown a positive growth with a landmark increase of 281% in FY07 to Rs 176.65 billion and subsequently an increase of Rs 2 billion in FY08. Total assets growth in FY07 is backed by investments, advances and operating fixed assets. Investments rose to 40.5 billion showing an increase of 517% during the year. Major investments of Rs 19 billion took place in market T-bills accompanied by ordinary shares, Modaraba certificates and TFCs.
Net advances stood at Rs 80.344 billion which is 2% lesser than FY07 (Rs 81.93 billion) but it has to be observed that in reality the Total Advances surged by Rs 5 billion and the decrease in Net Advances owes to higher NPL provisions this year of Rs 16.978 billion. The bank gained through currency fluctuations on advances made in non-rupee denomination amounting to Rs 79 million. Both long and short-term advances recorded equivalent growth in FY08 but the composition was more inclined towards textile and wholesale while withdrawn from individuals and sugar industry.
Total advances increased by 165% in the period 2007 to an amount of Rs 82.16 billion. The advances compose of 70% high yielding commercial and consumer loans as well as SME loans. It is important to note that in FY07 the advances to textile reduced to 28% from 35% (FY06) this is due to unsatisfactory performance of textile sector. On the other hand, advances to sugar industry and wholesale and retailers increased to 5% (1.21% FY06) and 9% (4.7% FY 06) respectively. This trend reflects the bank's stated strategy to grow and generate higher returns from diversified assets utilization. Operating fixed assets augmented by almost 50 folds to Rs 30.8 billion.
This exceptional growth is due to newly created intangible asset (goodwill) of Rs 26.77 billion. Similarly, property and equipment rose by Rs 2.8 billion thus adding to total amount of operating assets. Deposits shrunk by 10% in FY08 mainly from savings deposits reason being the higher rates offered by NSS near the end of FY08 causing huge drains from banking system. Along with reductions in volume the composition of deposits also changed from "others" to "non-profit organizations" and "individuals".
In FY07, deposits have continued to grow impressively to Rs 116.67 billion, almost 281% magnification over Rs 30.55 billion in FY06. Through focused marketing efforts in selected segments, NIB is increasing its proportion of current and savings accounts to total deposits 21% and 31% respectively in FY07 as compared to 11.5% and 20.6% in FY06. In FY07 fixed deposits were 43% whereas they were 60% in FY06 this resulted in less reliance on fixed deposits, as they are an expensive source of finance. Moreover, the bank is reducing its average deposit size, thereby developing a more low cost and stable deposit base. This positive change has so far improved the liquidity profile of the bank.
ADR has improved significantly over the years with exception of last few years where regulator has made mandatory to meet a certain criteria. In FY07, ADR was 77% signifying substantial room to increase advances without taking on expensive deposits. This might be helpful for bank if wants to expand into different markets. The industry ADR was 68% which means that NIB was in a better position to lend money than the competing banks in industry. The cost of funding earning assets was high in FY06 as the bank depended upon fixed deposits (60% of total deposits) but later this cost reduced as the share of fixed assets reduced to 43% of total deposits in FY07.
Earning assets to total assets reduced to 25% in FY07 because the operating assets took a quantum leap thus contributed more to the total assets. In order to maximize its post-merger capital structure, the bank financed the acquisition through a combination of rights issue and commercial debt. The bank also had to borrow to bridge finance the funding gap limiting up to Rs 7.1 billion for the period ended December 2007. This funding cost added to the borrowings from financial institutions and hence to the total liabilities. The total loss of the bank was reported to Rs (7.474) billion followed by Rs (350) million in FY07.
The losses are clearly due to higher provisioning against NPLs shown in the figure. The growth of NPLs have been 12 folds in FY07 while still it's close to 70% in FY08 appearing as the only reason for the consistent loss because for both years, FY07 and FY08, the Mark up income has grown doubled. In October 2007, according to the SBP's regulation, the banks were deprived of the benefit of deducting the value of collateral thus the provisions against non-performing loans swelled up to multiple times as the FSV benefit was missing. Consequently, the banking industry at large suffered losses in the last quarter of FY07. If the FSV benefit had been intact the profit after tax would have been soared up to Rs 217 million.
Therefore, the losses do not reflect any inherent weakness in profit generating capability of the bank. The asset quality is not pleasing with NPLs/advances rising from 3.3% to 27.95%. Provisioning expense is higher than the same period last year due to a growth in volumes of loans and advances as well as FSV removal and slower collections in some products. Collections are expected to come back on target in subsequent months. The bank is continuing to invest heavily in understanding, designing and delivering customer-centric business models for each of the commercial, SME and consumer segments.
Total non-interest income in FY07 stood at Rs 598 million, which is 21% higher than last year's. But this increase is offset by a 64% increase in non-interest expenses. Non-interest expenses rose more than proportionate due to the administrative costs of take over and conversion of branches. But conversion effort costs have a positive future outlook so it is not much of a problem. Taking a look at earnings ratios, all of them have shown a falling trend mainly due to the fact that the growth in equity and assets is not matched by profitability.
Over the years the ROE has not been satisfactory, as they are merely around 3% while the industry observed a ROE of 23%. This is not favorable to an investor. Other ratio like ROA of the industry was 2%. This shows that NIB needs to better utilize its assets. A significant increase in investments as a share of earning assets can be seen in FY07 while this share reduced in FY08. Advances have increased by 165% over the same period but it was less than proportionate while the investments increased by 517%, which contributed more to the total of earning assets.
NIB Bank continued its strong growth momentum in 2006 both in terms of volumes as well as top line revenue. Total assets increased by Rs 14,410 million to Rs 46,429 million in December 2006 and total revenues increased by 82% reaching Rs 1,515 million in 2006. Gross mark-up earned doubled from Rs 1,717 million to Rs 3,499 million between 2005 and 2006 and net mark-up earned grew 75% in the same period. The addition of new customers and incremental business from existing customers allowed non-mark-up income to increase 98% from Rs 236 million to Rs 468 million.
By effectively cross-selling trade related products, foreign exchange volumes at USD 1,012 million in 2006 showed a 59% increase over 2005 as well as better profitability per unit of foreign currency. The strong revenue growth highlighted above was supported by expanding its fully on-line branch network from 27 to 41 in December 2006 in 14 cities and by installing 23 ATMs during the year. This rapid expansion of their franchise supported revenue growth as well as strengthened its risk management and other support functions.
As a result of this expansion, operating costs increased to Rs 1,224 million in 2006 from Rs 713 million in 2005. Despite the substantial increase in operating costs, the cost to revenue ratio reduced to 81% in 2006 from 85% in 2005. The cost to revenue is consistent with its business plan and reasonable for a bank, which is in its development stage. In mid 2006, the bank launched a very successful Personal Installment Loan product. The monthly disbursals of this product were higher than the other banks that have been selling this product for some years. The collection experience to date on such loans has also been better than the expectations.
The prudential regulations require a 5% general provisioning against the total outstanding balance on such loans at the year-end. This being the first year, the regulatory requirement has generated a non-tax deductible provision charge of Rs 194 million in 2006 profit and loss account of the bank. It is important to highlight that this charge acts as a reserve and is not an actual provision, related to specific loans going bad. Despite the general provisioning explained above, the profit after tax showed an increase in 2006, primarily as a result of tax credits related to the acquisition of Credit Agricole Pakistan. Operating profit, before provisions, increased by 154% over 2005 to reach Rs 300 million in 2006.
For NIB, the return on assets trend is increasing up till 2004, but fell in 2005 and recovered in 2006. The reason for this can be attributed to the declining profit after tax mainly due a high provision for NPLs. ROD of NIB, indicating the return that the bank is receiving from its deposits, is higher than the ROA but follows a trend similar it, solely due to the smaller amount of deposits that the bank has compared to its assets base as the numerator is same for both the ratios. It has been increasing till 2005. This rise is due to the bank's better profitability, as it becomes a major player in the financial market. However, like ROA it nose-dived in 2005 for owing to declining profit after tax but recovered in 2006 due to increase in 2006 PAT.
Around 99% deposits are from the customers while the remaining 1% is from the financial institutions. Also 92% is in local currency while 8% is in foreign currency. The sectoral analysis of deposits further revealed that 40% deposits are held by individuals and 11% and 10% by the financial and non-profit organizations (trusts) respectively. The share of other sectors is very minimal ranging from 6% (transport, storage and communication) to 0.03% (sugar).
The trend for ROE is similar to that of ROA with a rapid increase from 2001 to 2002, as bank was relatively new in 2001 but by 2002 it started solidifying its customer base, thus leading to a rise in revenues and profits, becoming a boon to investors. This is proven by the calculation of the percentage increase in profits by 72.07% in this one-year timeframe. Whilst the bank was not issuing a great number of shares, hence the ratio kept rising till 2004 after which it fell in 2005. This is explained by a rise in profits being less than the rise in equity. The ratio recovered again in 2006 on the account of improved profit after tax in 2006.
The asset quality of the bank has declined 2003 onwards as the NPLs and provisions rose sharply as a percentage of the total advances and NPLs respectively. The bank's NPLs, as a percentage of gross advances reduced slightly from 3.46% in 2005 to 3.21% in 2006. Improved collection efforts led to provision reversals of Rs 74 million, plus recoveries against written-off loans of Rs 12.5 million in 2006. However, mainly due to regulatory requirements, provisioning against loans and advances increased by Rs 179 million.
The overall asset quality is considered acceptable in the light of the current competitive scenario. Collections are expected to come back on target in subsequent months. The bank is continuing to invest heavily in understanding, designing and delivering customer-centric business models for each of the commercial, SME and consumer segments. These unique business models will provide superior service, faster turnaround time and above all, will help it in building lasting relationships with its customers.
The sector-wise analysis of advances revealed that around 35% of loans were given to the textiles sector, 6% for export/import purposes and 20% to the individuals. The share of other sectors is lower. However, as some doubtful loans have the tendency to stay under cover for sometime due to different reasons, a prudent policy for NIB Bank would be that the management remains extra vigilant in the appraisal and monitoring of all loans. Recently, SBP proposed 100% cash provisioning for non-performing loans (NPLs). This is likely to decrease banks' profitability by 40%. Like all other banks, PICB's asset quality is also likely to further deteriorate, if it doesn't increase its advances considerably.
Trend for Advances to Deposits Ratio (ADR), a key indicator of how liquid the bank's assets are, show that it has been fluctuating. While the ratio fell after 2003, it recovered in 2004, thus slightly rising till FY06. The reason for its initial decline was the rise in deposits not being offset by an equal or greater rise in advances. The slight growth in average advances (62%) in 2005 was much higher than the growth in average deposits 60% in the same period, leading to a rise in the ADR then onwards.
In 2006 as well, average advances rose by 23% which was not matched by deposits that rose by a lower 15%, thus setting the stage for another increase in the ratio. Although the loan to deposit ratio appears to be high from the B/S figures it is at an acceptable level when export refinance and lease key money adjustments are made. Earning assets to assets simply calculates that what proportion of the assets held by the bank is actually helping to generate revenue for it. The earning assets of NIB are lending to financial institutions, investments, and advances. These three assets help generate income for the bank.
The trend as shown by the graph is similar to ADR trend that shows a comparatively higher ratio in 2003, and there was a decline then onwards which can be explained by an increase in the total assets which are not offset by an equal or greater increase in the earning assets. Therefore that particular increase in assets can be explained by an increase in bank's cash balances, balances with other banks, again liquid, and the increase in operating fixed and other assets.
This is not a good sign for NIB as it means that it has money tied up in assets which are more or less "idle" as they are not helping it in generating income which is the ultimate motive of any profit driven enterprise. However, it remained stagnant in 2004 onwards as well as in FY06 due to same proportionate increase in assets and earning assets, thereby maintaining the same ratio as in the same period last year. The tend lines for both the yield on earning assets and cost of funding them, depict a rising trend till and continued to rise sharply after 2005 till 2006. The reason for this trend can certainly be the fact that the interest rates were comparatively low till 2004, but show a sharp rise 2005 onwards after the tight monetary stance by SBP.
Also NIB was investing in low interest bearing options initially but later changed its stance. Given its relatively young age, the Bank initially did not have access to a large pool of low cost deposits. Consequently, the advances growth was financed through new deposits which, under tight monetary conditions and intense market competition, came at a premium, thereby increasing the cost of funds. Despite this, it managed to improve its net interest spread by 53 basis points between 2005 and 2006 by improving the yield on advances and increasing the proportion of current accounts in the deposit portfolio.
By improving the lending composition towards higher yielding products sold to commercial and consumer customer segments, the yield on interest earning assets improved by 198 basis points between 2005 and 2006. Through focused marketing efforts in selected segments, NIB is increasing its proportion of current/savings accounts to total deposits as well as reducing its average deposit size, thereby developing a more low cost and stable deposit base. This positive change has so far improved the liquidity profile of the bank.
The solvency ratios are even stricter measure of the liquidity of a bank's assets. Equity to assets indicates the use of equity in financing the bank's assets. This ratio has seen an overall decline 2003 onwards. A slight decline in the ratio in FY06 can be attributed to a higher increase in NIB's assets base than its equity base reflecting its rapid growth strategy. The increase in Total Assets has been managed largely through additional Deposits. Growth in Total Assets has not been achieved through corresponding increase in Equity, which as a percentage of Total Assets has reduced to 9.4% (December 31, 2005: 11%).
Of the total, NIB Bank has 78% investments in Available-for-Sale Securities while 23% are in Held-to-Maturity Securities.
Equity to deposits ratio further contrasts two modes of financing. While equity is an entire category, deposits are a very important section of liabilities for a bank since the finance for a bank's operations as well as investing activities comes primarily from deposits. The trend is similar to that of Equity to assets. The ratio fell 2003 onwards. This depicts that the use of equity for financing is tapering compared to the use of borrowings, deposits and other funds like NAFA funds. This is a good sign for the bank as it may mean less volatile earning payments. However, it may increase bank's borrowing costs.
The declining trend on the account of higher proportionate increase in deposits than in equity base, shows that like all the other banks, NIB is also attracting larger deposits from its customers. Earning Assets to Deposits Ratio shows a contrast between the bank's reliance on earning assets over deposits with respect to revenue generation. As we can observe in the graph, this ratio has declined after 2003 but has been been on a slight rise after that. The initial decline may be explained through the fact that as the bank grows in size and operations, it attracts a greater deposit base; hence the rise in deposits is much greater than average earnings assets.
In later years (after 2004) average earning assets and deposits both are increasing however, the rise in deposits is being offset by a slightly higher increase in earning assets (mainly due to higher investments and advances). This trend is further confirm by the Deposit times capital ratio showing that increase in debts is mainly due to a rise in deposits of NIB. According to the notes to the financial statements, Capital Adequacy Ratio of the bank works out to 11.61% as on December 31, 2006 (2005: 17.42%) as against prescribed minimum equivalent to 8% of the risk weighted assets of the banking company.
Among the market value ratios of NIB, the market to book ratio continued to show an erratic trend on the account of fluctuating market prices compared with very modest increases in BV. However, this ratio declined in '06 owing to the rise in BV/share (mainly due to a rise in unappropriated profits) coupled with the decline in market price from 29.7 to 24. The P/E multiple of NIB, that also shows an erratic trend remained flat in '06 despite the fall in market price. This is due to a much lower EPS in 2006. No dividend payments are made by NIB as its pursuing a rapid growth policy and its retaining all of its profits for its expansion programme.
NSS rates up by 2%: NSS rates have been increased by 2% and will be reviewed every three months. This will intensify the competition for banks, as they will have to offer better deposit rates in order to get hands on contracting liquidity. This will not directly affect the banks as the given government paper and saving schemes are not marketed.
0.1% increase in withholding tax: Withholding tax (WHT) on cash withdrawal has been increased by 0.1% to 0.3% on cash withdrawals of over Rs 25,000. The change is insignificant in a sense that it'll be passed on to the customers and hence the profitability of banks is safe. FED on banking services has been increased to 10% and will be passed on to consumers. With demand being inelastic, profitability should remain unaffected.