Bank: SONERI BANK PAKISTAN LIMITED - Analysis of Financial Statements Financial Year 2006 - 2003 Q 2009
OVERVIEW (January 27 2010): Incorporated on September 28, 1991 the first branch of Soneri Bank Limited formally opened doors for operations in Lahore on April 16, 1992 followed by Karachi branch on May 09, 1992. The bank now operates with 117 branches spread all over Pakistan including the Northern Areas of the country where no other private bank has ventured so far. Four of these branches are exclusively offering Shariah Compliant products to the customers.
The Fareesta Family, owners of Rupali Bank holds a controlling stake in the bank. The bank offers a range of Corporate, Treasury and Retail banking related products with emphasis on trade related services. SNBL's key focus is on encouraging exports and a major portion of advances portfolio nearly 40% is related to exports financing. Today the bank's equity stands at Rs 7.113 billion and the Total assets of Rs 80.977 million at the end of the year 2007.
SNBL's credit portfolio is characterized by low advance-to-deposit ratio over the years gradually improving till today. The lending practice of SNBL is prudent and conservative in terms of asset quality. SNBL has the paid-up capital enough to meet the revised reserve requirements from SBP. The credit rating of the bank assigned by PACRA is "AA-" for the long term, "A1+" for the short term with positive outlook and "A+" for the Term Finance Certificate.
Company symbol SNBL
Current Share Price Rs 11
Year end: Dec 2008 (mn) 2007 (mn) Change (%)
Net Interest Income 2944 1,937 52%
after provisions 1678 1,702 -1%
Non-interest Income 1226 1,067 15%
Profit before Tax 953 1,476 -35%
Profit after Tax 701 1,000 -30%
EPS 1.7 2.43 -30%
BANKING INDUSTRY IN FY08
The general slowdown in economic activities and associated deterioration in the business environment continued to reflect in slow growth of banking system and increase in non-performing loans (NPLs), as the overall macroeconomic outlook with a slight improvement on a few fronts remained tenuous. The NPLs of the system after showing some let up in last quarter, again increased at relatively fast pace during the quarter under review, while the asset base with shift in asset mix from advances to investments and decline in deposit base remained stable.
Due to growth in capital as well as further decline in risk-adjusted exposures, the base line indicators of solvency improved, though the risk to solvency from heightened credit risk and deteriorating asset quality increased further. The asset base of the banking system with marginal growth remained stable during the quarter under review. The deposits base, which grew significantly during the last quarter, contracted over the quarter under review. On the asset side, decline in advances took place in both public and private sector lending.
However, lending to private sector corporations in power & energy sector actually showed significant growth. As the funds realized from the retirements of loans and advances were mainly invested in federal government papers and the bonds of public sector utility corporations, the overall asset-mix further shifted from loans and advances to investments.
Accumulation of year to date earnings and equity injections raised the equity base of the system. This growth was also augmented by improvement in revaluation surpluses on equity investments, and the leverage of the system slightly came off. Moreover, improvement in eligible capital and reduction in Risk Weighted Assets (RWA) as the banks shifted their asset mix from private sector credit to investments in Federal Government papers, improved the risk based Capital Adequacy Ratio (CAR).
The reduction in deposit base during the quarter under review was accompanied by concomitant decline in advances and increase in short-term federal government papers, thus slightly improving the fund-based liquidity indicators of the system. However, reduction in deposit base and slow growth in monetary aggregates coupled with banks' increased investments in government papers kept the market liquidity under strain for most part of the quarter under review.
However, the market risk of the system remained subdued. A strong recovery by capital market not only covered the revaluation losses, which accumulated during later half of CY08, but also posted aggregate mark-to-market surplus. Interest rate risk with slight increase also remained low, as the slight inch up in interest rates by the end of quarter led to depreciation in the value of fixed income securities, while re-pricing mismatches remained within acceptable ranges.
The asset base of the banking system with marginal growth remained stable during the quarter under review. The deposits base, which grew significantly during the last quarter, contracted over the quarter under review. On the asset side, decline in advances took place in both public and private sector lending. However, lending to private sector corporations in power and energy sector actually showed significant growth. As the funds realized from the retirements of loans and advances were mainly invested in federal government papers and the bonds of public sector utility corporations, the overall asset-mix further shifted from loans and advances to investments.
Profitability of the system came under stress due to ongoing macro-economic environment, local security situation; slow down in credit demand and worsening credit quality. The banking system reported a pre-tax profit for the first nine months of CY09, which was lower by 14 percent compared to the corresponding period of last year.
Increased provisions, lower non-interest income and high administrative expense are the few straining factors As a result, the baseline indicators of profitability ie ROA and ROE also declined over the quarter under review. The earnings are mainly contributed by the PSCBs and LPBs, while the FBs year-to-date PAT turned negative during the quarter under review. In addition to provision charges, major dent in profitability of FBs came from increase in operating expenses. Though PBT of the SBs increased however, PAT of the group decreased due to substantial increase in tax charges.
The increased macroeconomic vulnerabilities and constrained repayment capacity of borrowers have resulted in significant increase in NPLs of the banking system during the last three quarters, or so. The quarter under review witnessed an inch up in infection rate as the NPLs accumulated at relatively faster rate of 6.0 percent to Rs 422 billion. Due to a reduction in loans and advances, the infection ratio deteriorated. The inflow of fresh NPLs occurred mainly in OAEM (for agriculture) and Loss categories.
Due to zero provisioning requirements for former category as well as the Forced Sale Value (FSV) benefit in provisioning requirements, the provisioning coverage of NPLs slightly receded to 69.7 percent and capital impairment ratio inched up to 19.9 percent for the banking system (17.6 percent for commercial banks). The significant increase in loans loss provisioning moderated the earnings of the system; year to date profits grew at slightly slower than the proportionate rate and their level remained lower than the corresponding quarter of the last year.
The baseline indicators of Return on Asset (ROA) and Return on Equity (ROE) with slight contraction over the quarter were also lower than the corresponding period of year, though still higher than entire year results of CY08. The overall profitability of the system has remained fair, however, the earnings were largely skewed towards large and medium-sized banks as the bottom line of most of small sized banks was low or in negatives.
For the 3rd quarter ended September 09, the bank realized a Profit after Tax of Rs 116.59 million, which is a staggering 83.7% lower than the same period in 2008 (3Q08: Rs 716.81 million). The Net interest income grew by 25% during the period in question, standing at Rs 6.94 billion. The interest expense registered a grown of 37% at Rs 4.91 billion. The provisions against non-performing loans for the period stood at Rs 2.97 billion against Rs 1.86 billion for the previous year, a growth of over 60%, which subsequently eroded the profit margins.
Non-interest income declined by 10% on the back of sharp decline in growth of dividend income and sale of securities at 57% and 81% respectively. Non-interest expenses rose by 23% with major contribution from administrative expenses (37%) and provisioning against other expenses. Total assets rose by 10% for the period ending September 2009. The balances with other banks and lending to financial institutions declined sharply by 59% and 75% respectively.
However the Investments rose by an impressive 92%, indicating that the bank is moving towards investments for its assets in wake of high NPLs faced by the banking industry. 85% of the total investments held during the period (PKR 23.13 bn) are in forms of Government securities, which pose a very limited risk, if any. Advances registered modest decline of 1% to stand at Rs 47.21 billion. Traditionally, advances have formed a major chunk of the Bank's earning assets however, the issue of NPLs has caused the bank to revise its strategy and to play rather safely by moving to an alternate asset ie government investments.
The Ratio of Earning Assets to assets for the period stood at 85% against the 81% of the previous year. This is mainly on the back of higher earning assets mainly deposits that grew at quiet a high rate in the current period and a relatively modest growth in total assets of 10% as mentioned earlier. During this period non-performing loans have been the highest ever recorded (Rs 5.018 billion, thus making NPLs to Advances to 10.63%).
The NPLS registered a growth of almost 57% from previous years all time high figure of Rs 3.19 billion. Under the revised guidelines issued by SBP, banks have been allowed to avail the benefit of 30% of forced sales value of pledged stocks and mortgaged commercial and residential properties held as collateral with effect from 31st December 2008. Deposits stood at Rs 6.42 billion, up by 11% at the period ending September 2009. Customer's deposits continue to be the major contributors.
During the period, the bank witnessed a 12% increase in its remunerative accounts, which posses an interest cost associated with it. Non-remunerative accounts grew by a modest 6% for the period. However it is worth noting that financial institutions remunerative accounts fell by 44% and the non-remunerative accounts remained constant. Overall the percentage of remunerative accounts to the total deposit base is 81%.
Deposits Growth 2009 2008
Customers - Remunerative 12% 55,098,872 48,979,441
Cutomers Non-Remunerative 6% 13,122,193 12,329,604
Fin.Ins - remunerative -44% 181096 325,168
Fin.Ins - Non-remunerative 0% 278 278
Total 11% 68,402,439 61,634,491
Economic growth, overall, has been badly affected by increased power and political crises. This has negatively affected the export targets especially that of Textile sector, which happens to be the largest borrower and defaulter of bank loans. Due to further tightening of Monetary Policy, interest rates have increased. This, in addition to increasing inflation, has adversely hit the borrower's repayment capacity, which has increased the NPLs. The NPLs to advances ratio was 2.16%, which is in line with industry. The banking industry suffered by the change in policies therefore, the profitability fell marginally.
The period under review was an immensely trying one since there was an imminent economic slowdown and the issue of NPLs posed great pressure of the Earning potential s of the bank. However the bank managed to earn a simple profit. This indicates that the bank has the potential to remain profitable. The bank has also displayed flexibility in choosing its earning asset base. The bank also maintains a respectable credit rating of AA- (long term) and A1+ (short term) plus an A+ rating for the TFC category.
The bank is striving to expand its services and products base to accommodate more customers. Their innovative products such as the Generator financing scheme has the potential for growth in times of worsening power crisis specially the in the upper Pakistan. The bank is adamant about its strategy and hopes to aggressively compete with the market forces to remain profitable. Soneri Bank is also expanding its branch network on 123 existing branches for a greater outreach.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi