SAMBA BANK LIMITED - Analysis of Financial Statements CY'06-H1CY'09
OVERVIEW (November 26 2009): Crescent Commercial Bank Limited, was a scheduled commercial bank, licensed by the State Bank of Pakistan under Section 27 of the Banking Companies Ordinance 1962. CresBank was formed as a result of an agreement between Crescent Investment Bank Limited (CIBL) and Mashreqbank psc (Mashreqbank) for the amalgamation of CIBL and Mashreqbank's Pakistan operations into a new banking company.
On March 30, 2007 Samba Financial Group acquired 68.4% shares of CresBank by subscribing to 600 million new ordinary shares for a consideration of Rs 6.0 billion. The Crescent Bank acquisition had come after its liabilities had exceeded its assets.
CresBank's Board has been reconstituted to appropriately reflect the change in the bank's ownership. Following this investment by Samba, CresBank has emerged as one of the highest capitalized banks in the country with a paid-up capital of Rs 8.769 billion. Subsequent to State Bank of Pakistan's approval, the name of the bank has been changed from Crescent Commercial Bank Limited to Samba Bank Limited effective from October 20, 2008. The re-branded bank is a subsidiary of Samba Financial Group, Saudi Arabia and incorporated in Pakistan.
Samba is Saudi Arabia's premier financial institution with total assets of approximately US $48 billion and shareholders' equity of US $4.8 billion in early 2008. Samba enjoys one of the highest credit ratings by the Standard & Poors, Fitch and by Capital Intelligence. The Saudi banking group offers varied banking and investment services with a commitment to providing innovative financial solutions of the highest quality and delivering superior returns to its investors.
RECENT PERFORMANCE 1H09
Samba Bank posted a loss after tax of Rs 431 million as compared to a loss of Rs 128 million in 1H08. The loss was huge because of higher operating expenses, higher cost of funds, and higher provisioning against the NPLs. Most of these factors are legacy for the organization and are expected to improve as the management makes the necessary adjustments. Interest earned increased by 13%, however, a faster growth in the interest expensed pushed the net interest income growth in the red by 9.5%. The provisions increased by 42.2% to push the profits further down. Non-interest income also showed a decline of 28.5% because of a nil balance in dividend income and a massive decline in other income.
LPS for 1H09 is Rs. 0.49 as compared to Rs 0.15 in 1H08. Advances showed an increase of 13.1%, while investments showed an increase of 5.2%. This trend is against the industry trend of massive increases in investment in the government paper. Deposits increased only by 2%. However what was significant was the fact that the higher cost term deposits were replaced to some extent by the savings accounts. Fixed deposits declined by 25%, while the savings deposits increased by 69%. This would mean slower increase in the cost of funds in the coming time. Borrowing from financial institutions swelled by more than 400%, indicating lower capacity to mobilize resources from the retail customers.
BANKING SECTOR PERFORMANCE DURING CY08
During the period July-December of 2008, the private sector credit off-take from the scheduled banks declined by 26 percent due to tight liquidity approach of the banks, slowdown in economic activity, hike in lending rates and frequent demand stresses. The private sector credit declined by Rs 51.8 billion from July to December 2008. Private sector growth decelerated after recording after recording an average growth of 19 percent during 2006 to 2007.
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 has been 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 September-2008).
The deposit component 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-term deposits so as to reduce the maturity mismatches.
Consequently, fixed deposits gained a significant share of savings deposits since 2004. However, SBP's policy drive 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).
Advances witnessed a significant slowdown during CY08. 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
The cumulative profit of 22 listed commercial banks has declined by 21% to Rs 50.3bn in the year 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.
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.
FINANCIAL PERFORMANCE CY06-CY08
Samba Bank has posted a loss after tax during the period under review. In CY06, the bank registered a loss of Rs 588 million. The performance of the company further deteriorated during CY07 when the bank's loss increased to Rs 1,323 million. In CY08, the bank managed to put up 26% lower losses as compared to CY07 by registering a loss of Rs 742 million. The reason for lower losses during CY08 was 49% higher interest earned while the interest expenses increased by 28%.
A higher than proportionate increase in interest earned resulted in 99% increase in net interest income. The interest earned increased as the advances portfolio of the bank increased by 31% to Rs 6,163 million as the bank's management consolidated good quality corporate loans. The spread of the bank also increased 2.11% due to improved yield on corporate loans. On the other, the deposit base of the bank narrowed to Rs 9,860 million, decreasing by 22% amidst the tough competition for deposits in the sector and liquidity crunch in the market during CY08. Samba Bank kept its deposit pricing the same as in CY07, and focused on increasing low cost CASA deposits and reducing high cost fixed deposits.
The bank's non-interest income fell by 2.3% to Rs 3 million in CY08, despite 118% increase in fee and commission income. The fee, commission and brokerage income amounted to Rs 51.9 million during CY08 as against Rs 23.8 million in CY07. The increase in fee, commission and brokerage income was mainly due to expansion of the bank's branch network and increased business activity. The dividend income earned dropped by 62% during CY08 due to turmoil in the equity market in the country. Likewise, the gain on sale of securities also decreased. Although State Bank has allowed banks to record impairment of equity investment over four quarters in 2009, the bank has prudently recorded the impairment in 2008 based on December 31, 2008 market value.
Along with higher interest income earned, lower provisioning charged was another reason for better performance by the bank in CY08. Provisions against non-performing loans and bad debts written off were 74% and 100% lower. However, the positive impact of this was limited due to higher expenses. The bank re-branded, integrated, and expanded its business operations and thus incurred higher expenses. The administrative expenses increased by 64%. However, Penalties imposed by State Bank of Pakistan amounting to Rs 49 million squeezed the earnings of the bank, resulting in a loss after taxation of Rs 742 million.
The advances to deposit ratio of the bank improved in CY08 after declining in CY07. The advances of the bank had increased by 96% in CY07 while the deposits surged by 127% during the same time period. In CY07, however, the advances increased (by 31%) more in proportion to deposits (increased by 22%). In CY08, the bank's fixed deposits constituted 74% of total customer deposits increasing from 59% in CY07. The percentage contribution of both current account and saving accounts reduced. The bank is aiming to replace its high cost deposits with low cost CASA accounts in order to limit its cost of funds.
The earning assets to assets ratio of the bank dipped in CY08 after having improved in CY07. The banks total earning asset decreased by 28.5% in CY08 as lending to financial institutions and investments decreased. The lending to financial institutions decreased substantially by 73% while investments dropped marginally by 3%. The bank's lending in the form of call money lending and repurchase agreement lending by fell by 70% and 75% in CY08 as compared to CY07.
Non-performing loans of the bank amounted to Rs 1,961 million in CY08. The NPLs increased by 5% in CY08 after having declined by 6% in CY07. Samba Bank's consumer portfolio quality worsened during CY08 as tough economic like high inflation and tight monetary policy deteriorated the debt servicing ability of the borrowers. All banks suffered from high NPLs during the year. However, the NPLs to Advances ratio of the bank has been steadily declining from FY06 to FY08. This is because the advances of the bank increased in CY07 while the NPLs declined. In CY08, although the NPLs increased but it was at a less than proportionate rate than the increase in advances (31%).
During the last quarter of CY07, SBP withdrew the benefit of Forced Sales Value (FSV) which resulted in higher provisioning against non-performing advances for the entire banking sector. Similarly, in CY07, Samba Bank's provisions against non-performing advances increased to Rs Rs 835 million as compared to Rs 81.6 million in CY08. Thus, the provisions to NPLs ratio plummeted during CY07 but declined again in CY08 due to lower provisioning charges during the period.
The SBP further loosened its monetary policy as it slashed the discount rate by 50 bps to 12.5%. The policy rate cut has been lower than expected. However, a lower discount rate is expected to reduce the banking spread and affect the interest income earned by banks. Easing monetary policy and favorable liquidity position has reduced KIBOR and six months repo rate since April 2009. The demand for private sector credit has been declining sharply and a decline in the policy rate of 100 bps to 13% earlier in CY09 could not boost this dwindling demand.
This was because slow economic activity country hampered credit off-take and the banks also took a stance of risk aversion in the face of increasing NPLs (which rose by Rs 19 billion during 2Q CY09 and has reached Rs 398 billion by the end of June 2009. Banks were more attracted towards government paper. The demand that was emanating was from the PSE mostly. FSV benefit up to 40% has been allowed by SBP. This would give benefit to the banks in terms of lowering the provisioning requirements and thus bolstering the bottom line.
SBP has also introduced a reverse repo rate at 9.5 percent to manage liquidity and stabilise the interest rate in the overnight money market. The SBP policy rate will act as a 'ceiling' while the repo rate on the new overnight deposit facility (300 bps below the SBP policy rate) will provide a binding 'floor'. This new framework will improve liquidity management and make money market operations more transparent. Liquidity position in the market has been favorable and thus the total deposits with the banks expanded by Rs 295.3 billion during the 2Q CY09. The Budget 2009-10 is expected to have a neutral impact on the banking sector.
COURTESY: Economics and Finance Department, Institute of Business Administration