Bank: SILKBANK LTD - Analysis of Financial Statements Financial Year 2009-9M'09
OVERVIEW (December 26 2009): Silk Bank (formerly Saudi Pak Commercial Bank) came into existence when a consortium of investors, comprising of Bank Muscat SAOG, Nomura European Investments Limited and International Finance Corporation signed a share purchase agreement with the Saudi Pak Investment Group.
On March 31, 2008 the consortium acquired 86.55% of the bank for around 260 million dollars or $0.47 per share (Rs 29.3 equivalent per share). Under the new leadership, the bank will continue to focus on SME and consumer financing to increase profitability.
Half yearly Income Statement H1'09
interest earned 2,881,262 2,141,283
interest expensed 2,789,625 1,902,976
Provisions against NPL & Advances 279,026 433,792
Provision/reversal against (4,060) (6,489)
(Reversal) / provision for diminution
in the value of investments - net 1,598 (4,827)
Impairments of available for sale assets -
Bad debts written of directly 101,893 1,011
Net markup interest
income after provisions (286,820) (185,180)
Non markup/interest income
Fee commission and brokerage income 179,367 76,567
Dividend income 18,942 14,127
Income from dealing in
foreign currencies 71,572 28,866
Gain on sale of securities-net 67,045 16,202
unrealized loss on revaluation
on investments held for trading (2,041) -
Other income 60,586 43,217
Total non markup non interest income 395,471 178,979
Non markup interest expense
Administrative expense 1,196,726 798,353
Other(reversals) provisions write off -
Unrealized loss on revaluation
of investmentas held for trading -
Other charges 15,911 317
Total non markup interest expense 1,212,637 798,670
Amortization of deferrd costs -
Extraordinary items -
Loss before income tax expense (1,103,986) (804,871)
Recent performance 9M09:
Silk Bank's loss after tax stands at Rs 1.33 billion for the 9-month period ending September 2009. The net mark-up income registered a marginal decline of 4.35%, however, the interest expense rose by 1.97% for the same period, resulting in the net mark-up interest to decline. The non-mark-up income registered a sizable growth of 38% (Rs 538.164 million). Dealing in foreign currencies favourably impacted the bank's revenues, so did brokerage charges and sale of securities.
The bank displays a prudent behaviour in its expenses, as strong signs of cost saving and minimizing operational expenses have been seen. Therefore, the loss for the 9-month period ending September 2009 shows a decline of 33%. The sharp rise in total net interest/mark-up income can be attributed to collection of previously declared non-performing loans, which had been offset with sizeable provisioning charges.
Therefore, the reversal of these provisions to the tune of Rs 407.2 million (negative growth of 124%) has effectively transformed the net interest income after provisioning. The impairment expenses of available-for-sale securities (Rs 131.38 million) fails to impact the net negative provisioning on the back of collection of doubtful accounts. The non-interest income also shows a healthy growth of 36% to Rs 538.16 million, mainly due to gains on dealing in foreign currencies (growth of 67.03%) in the wake of declining rupee and from gains on sales of securities, which stood at Rs 82.3 million, almost 3 times higher than FY08. Administrative expenses showed a decline in the wake of company's policy to cut costs and achieve operational efficiency, resulting in a net decline of 2.67%.
Non-performing loans for the period show a decline of 6% and stood at Rs 12.13 billion.
Investments, as a component of earning assets have shown a growth of 33% from the previous year to stand at Rs 19.72 billion. Government securities ie Market Treasury Bills and PIBs comprise 90% of the investments. Advances show a modest gain of 6.90% to stand at Rs 33.121 billion but still represent the major chunk of earning assets at 62% of the earning asset during 9M09. Lending to financial institutions declined by a good 40% to stand at Rs 816.65 million representing 2% of the total earning assets. However, the ADR has fallen to 70% for the 9-month period of FY09 as compared to 75.72% in 2008, because the advances rose by 4.90% (to Rs 323.21 billion) and deposits grew by 16.29% (to Rs 47.729 billion) in 9m period of 2009.
Financial performance (FY06-FY08)
In FY08, Silk Bank declared a loss of Rs 2014 million with an 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 the losses, the bank did not pay any dividend.
The net interest income of the bank improved by 54.10%, from a loss of Rs 2.773 billion to Rs 1.273 billion. This is 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. Other non-mark-up earning items also did not yield any impressive returns in FY08.
Composition of earning assets:
The losses for the past 2 years can partially be explained by the dwindling size of the earning assets, which have shown a decline consistently over the period FY07-FY08. During FY07, the bank's overall earning asset base declined by 10.13% to stand at Rs 44.57 billion, which further slipped modestly by 0.22% to stand at Rs 44.476 billion in FY08. During the same period, lending to financial institutions increased by 63.90% (F08 Rs 1.376 billion), investments registered a decline of 32% to stand at Rs 12.012 billion and advances grew by 20.14% to Rs 31.09 billion.
It is worth noticing that the advances grew by a significant amount although the deposits fell by 3.11% during the same period to stand at Rs 41.056 billion against previous year's Rs 42.374 billion. As of 2008, the bank has deposits of Rs 41.056 billion; 3.22% lower than the previous year. The remunerative, interest expense bearing deposits of 2008 are Rs 34.419 billion, representing almost 84% of the total deposit base. This is mainly due to the fact that Pakistani banks are attracting more fixed and term deposits due to banks eagerness for raising longer term deposits to match their assets maturity profiles whereas due to decline in consumer financing, the demand for consumer short to medium term financing has been wary.
Silk Bank's Return on Assets has shown an improvement, from a loss of 3.63% in FY08 to 2% for the 9m FY09. This decrease in loss can be attributed to a significant reduction (33%) of loss after tax for the same period. The total assets of the bank registered a declined of 24% in 9m FY09. This has also impacted the Return on Assets. The return on equity recovered to -40% in 9m FY09 from 45.87% in FY08, due to a decline of about 22% in net equity. This can be attributed to the constant accumulated loss carried forward by the bank for some time.
Asset quality: The bank faced non-performing loans of Rs 12.113 billion during the 9m FY09, 6% down against FY08. Provisioning for NPLs, however, declined 47% from previous year to stand at Rs 1,663,314,000. The provisions to NPLs ratio was -3% in the year FY08 as compared to 51% in FY07. The drop in provisioning ratio is attributed to the sharp rise in the net markup income after provisioning for FY09.
The issue of rising NPLs can be attributed to the economic downturn, the power crisis and the subsequent industrial crisis, which has rendered many borrowers incapable to meet their financial obligations. However the company is putting in considerable efforts to alleviate the issue of NPLs and has made significant recovery.
Liquidity: The ratio of earning assets to total assets shows a slight improvement in the 9m FY09, ie, 81% as compared to 79.83% in FY08. The trend towards earning assets displays a shift from investments and more towards advances. The decline in earning assets is mainly attributed to the 13% decline in investments. As mentioned earlier, this is due to the shift towards consolidating the advances component of the earning assets.
The advance to deposit ratio shows a decline over the period 9m FY09 to 70% as compared to 75.72% in FY08. This is mainly because the advances have risen by 20.14% whereas the deposits have fallen by 3.11% because the bank has large amounts of fixed deposits, which enables them to extend advances, particularly in the long term advances, which stood at Rs 17.923 billion, 31.20% higher than previous year's Ra 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 indicate that the bank is striving to maintain a good ADR by making more and more advances, but the issue of default and non-performing loans remains a challenge.
SOLVENCY RATIOS: The solvency position of the bank has improved considerably in 9m FY09 from FY08. The equity to assets ratio stood at 7.89% against 4.06% of FY07. Similarly the equity to deposits ratio improved from FY07's 5.15% to 10.70% in FY07. The improvement in solvency position can be attributed to the improvement in share capital of 80% as a result of new injections in the equity. However it should be noted that the new injections have still not enabled the bank to maintain the Minimum capital requirement of Rs 5 billion and it faces a shortfall of Rs 2.128 billion.
The earning asset to deposit ratio has increased marginally to 1.083 in FY08 from 1.05 in FY08. This is because of the un-proportionate variations in the earnings assets and deposits. Also, the shortfall in meeting the MCR has resulted in the bank to make efforts improving its capital adequacy through improving the equity side of its balance sheet.
FUTURE OUTLOOK: Economic growth of the country is still under stress due to severe power shortages, rising electricity rates, high prices of petroleum products, terrorism and a volatile law and order situation. These factors have affected the economy at both micro and macro-level and had a negative impact on the profitability and growth of almost all businesses. However, there are also signs of gradual economic recovery. The rate of inflation is under control and is expected to continue the downward trend during the remaining part of 2009, with a single digit inflation forecast for 2010.
Foreign currency reserves are at a high of US $14.7 billion with remittances from Pakistanis living abroad showing a healthy and rising trend depicting the confidence they have in the future of the economy of Pakistan. The bank has continued to implement its strategy in the third quarter of 2009 of recovering non-performing loans. Total cash recovery from NPL parties stood at Rs 1.017 billion by the end of the nine-month period that ended on September 30, 2009.
The bank has been assigned a long-term entity rating "A-" (A Minus) and short-term rating of "A-3" (A-Three) by JCR-VIS Credit Rating Agency. The rating has been put under "Rating Watch - Developing" status on account of capital plan to be met by December end 2009, as allowed by the SBP.
COURTESY: Economics and Finance Department, Institute of Business Administration,