KASB BANK LIMITED - Analysis of Financial Statements Financial Year 2005-3Q'09
OVERVIEW (January 02 2010): KASB Bank Limited was incorporated on October 13, 1994 as Platinum Commercial Bank Limited. The name of the bank was subsequently changed to KASB Bank Limited on February 21, 2003, when the majority shareholding was acquired by the KASB Group.
The merger of Khadim Ali Shah Bukhari & Co and KASB Leasing Limited into the bank increased the paid-up capital of the bank to Rs 1.293 billion as on December 31, 2003 complying with the regulatory requirements. Bank also has a 100% stake in KASB Securities (Pvt) Limited and KASB Technology Services Limited.
Currently, the KASB Bank operates through its network of 73 branches in 21 major cities of Pakistan and seeks to deliver unique and innovative financial solutions to a large portfolio of investment, corporate and consumer banking customers. Its shares are listed on the Karachi, Lahore and Islamabad stock exchanges.
BANKING SECTOR OUTLOOK FY05-3Q09
Pakistan has a progressive and dynamic financial sector, which has grown rapidly particularly in the last few years, in response to the mounting financing needs of the economy. In response to financial liberalization reforms initiated in the early 1990s to develop a sound and competitive banking system, a number of private banks appeared in the banking arena.
Till CY06, the burgeoning economy served as a cause and a consequent to the development of the banking sector. The demand for loans was on peak and repayment capacity of borrowers was strong. The size of the banking sector stood at Rs 4.3 trillion at CY06 end. NPLs to loans ratio for the sector registered a decreasing pattern over the last few years.
Resilience of the banking sector underwent a testing phase during CY07 when the benign macroeconomic environment of the previous four years started to show considerable signs of strain. The current macroeconomic environment is characterized by a decline in GDP growth, growing macroeconomic imbalances, relentless upsurge in inflation, depreciating domestic currency, and monetary tightening by the central bank.
Despite the heavy provisioning on account of incremental NPLs during CY07 and H1-CY08, withdrawal of the benefit of the Forced Sale value (FSV) of collateral against non-performing loans during CY07, the banking sector in Pakistan showed a strong resilience to early headwinds on the back of a robust capital base and healthy profitability. Key performance indicators present a healthy picture of the sector during CY07.
The bottom line continued to remain in a comfortable zone, with after tax return on assets (ROA) of 1.5 percent for the year: a more sustainable level of profitability compared with the peak level of 2.1 percent in CY06. The overall net profit of the banking sector for CY07 was Rs 73.3 billion. This was shared across a large number of banks, as 23 out of 39 banks, with a cumulative asset share of 87.2 percent, have their respective ROA at more than 1.0 percent at end CY07.
During the period Jul-December of 2008, the private sector credit off-take from the schedule 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 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 the loan losses. 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.
Domestic financial markets, particularly the banking sector continued to operate in one of the most challenging times in 2009 in Pakistan's whole economic history. Similarly, the KASB Bank had also faced these tough times. The tight liquidity conditions, distressed corporate performance and an overall weak macro economic situation were few of the elements that contributed to the current financial performance of the bank.
Pressure from the first half of the year 2009 continued to exist on the third quarter. With signs of limited improvement in the global economic markets, it is anticipated that the domestic financial market would also start registering improvement. However, this needs to be analyzed in the presence of the prevailing internal and external challenges Pakistan's economy is facing.
KASB Bank during the third quarter continued to focus on its core banking activities. With the recent reorganization of the commercial, consumer, and corporate banking units and introduction of new business initiatives, the business is now geared up to operate in the defined market segments and achieved the desired results.
The plan for opening new branches is being followed as chalked out and the bank is now operating with a network of 83 branches located it 28 cities of Pakistan. In 2009, KASB successfully launched Home Remittances Business- a joint effort led by the PRI initiative (supported by the State Bank). KASB Bank is now amongst a few banks, which are presently offering this business to a wide clientele base of local beneficiaries of inward home remittances.
FINANCIAL PERFORMANCE FY05-3Q09
KASB Bank posted a loss of Rs 0.97 billion for the period. In 2005 it incurred a loss of Rs 273 million. In 2006, in compliance with the minimum capital requirements prescribed by the State Bank of Pakistan (SBP), the bank has decided to merge with International Housing Finance Limited (IHFL), a company in which Nasir Ali Shah Bukhari, sponsor/director of the bank holds 64.33 percent shares. The year 2006 brought about significant changes for the bank.
The entity adopted a new logo and signage, which was in alignment with re-branding endeavor of the bank. 2006 also saw the witness of introduction of several consumer products. The progressive movement of the bank along with the conducive economic environment helped the bank improve its bottom line factor immensely that it was able to emerge out of post-tax loss in 2005 and earn a post tax profit of Rs 137 million in the same year.
Even though net interest earned registered a fall of 11% during 2005 and 2006, the bank was able to earn good returns of non-interest sources like sale of securities and dividend earned. This was in line with overall healthy economic activity. The reversals of previously recorded provisions registered a 2596% contributing positively towards profits. Operating expenses registered an increased but only moderately and hence didn't dampen the profits.
This situation improved with year on, as evident by the higher profit earned in 2007, marking an increase of 44%. This year witnessed the development of proper control mechanisms (ie risk management, internal control and internal audit), and heavy investment in the core banking system. Net interest income registered an incredible increase of 74%.
The acquired business of IHFL contributed Rs 7.106 million to the operating income and Rs 4.245 million to the profit after taxation of the bank for the year ended December 31, 2007 as the bank has obtained the control of IHFL as at the commencement of November 22, 2007. Profit after tax increased by 44%. Accumulated loss brought forward from CY05 dampened the high earnings, but a turnaround was experienced as even after the loss adjustment, some profit was left over and hence added to the retained earnings.
The year 2008 started as a year of intrinsic and fast growth. However, the market situation and the economic scenario changed drastically towards the middle of the year. As the global economic meltdown started shedding its affect on the banking sector, State Bank of Pakistan tightened its monetary policy and altered banking regulations to stricter standards.
To meet the new requirement of a higher minimum capital requirement, schemes of amalgamation for merging KASB Capital Limited and Network Leasing Corporation Limited with and into KASB Bank Limited were initiated and subsequently sanctioned. The negative economic sentiments, the heavy impairment charges and associated rise in provisioning eroded the bank's profitably considerably, as evident by the drastic dip in its profitability for the CY08.
The bank netted an after-tax loss of Rs 972 million, plummeting from a positive return of Rs 197 million in CY07. Impairment cost shoot up 847% relative to 215% increase in the former year. Non-mark-up expenses also recorded an increase of 56% relative to 37% in CY07.
The bank's third quarter results registered improvement as compared to the second quarter results whereby its loss before taxation declined from Rs 1,616 million to Rs 119 million, registering a decline of 92.6% in the third quarter. This is mainly due to the net interest income turning positive and the recoveries and reversals of provisions that were made in the third quarter (both as a result of regular recoveries and due to reversals in line with the relaxations made in the provision requirements by the State Bank).
In addition, reduction in administrative expenses as a result of aggressive cost rationalization also contributed positively in closing a relative better third quarter result. Considering the implementation of planned capacity-building and expansion initiatives that are in pipeline, it is anticipated that these administrative expenses would register an increase in the last quarter of FY2009.
This view of profitability may not be as positive when viewed for the combined three quarters. The Net Interest Income after provisions stood at negative Rs 673 million against a positive Rs 391 million for the three-quarter in FY08. The Interest Income earned increased by a small 6.39%; the Interest Income expense increased by a relatively larger 36.9%. Much of this is attributed to the high cost of deposits incurred by the bank.
The bank posted negative bottom line of Rs 1.0bn (EPS Rs 2.01) during 9M09 as against profit of Rs 19m (EPS Rs 0.04) in the similar period of last year. The bank was largely impacted by domestic economic slowdown with 83% decline in its total income. Soaring cost of funds significantly impaired the bank's net interest income, which remained negative at Rs 267m as compared to Rs 614m in 9M08.
In addition to this, non-interest income also dropped 23% to Rs 470m. Moreover, expense side also portrays an unfavourable performance with 75% increase in the operating expenses to Rs 1.7bn while provisions and write-offs also increased by 83% to Rs 407m. The 3Q09 brought some improvement on sequential quarter basis in the bank's core performance with positive net interest income of Rs 20m as against negative number of Rs 340m in the preceding quarter.
However, comparing on Y-o-Y, this depicted a decline of 90% over Rs 198m in 3Q08. During the quarter, non-interest income stood at Rs 152m - up 73% on Y-o-Y but down 24% on Q-o-Q basis. Interestingly, in 3Q09, the bank booked reverse credit provisions of Rs 293m as the bank's gross NPLs decline by Rs 258m to Rs 6.2bn as against Rs 6.4bn in the quarter earlier.
The bank has availed the additional relaxation if prudential regulation by the State Bank of Pakistan (SBP) with respect to FSV benefit and loan rescheduling and restructuring. SBP has allowed the banks to avail 40% FSV benefit on pledge stocks, commercial and residential properties (30% previously).
Moreover, SBP also extended 40% FSV benefit to industrial properties, land and building only (0% previously). This change in regulation enabled the bank to reduce NPLs provisions by Rs 208m. In addition to this, the bank also restructured some loans as per the new regulations by SBP, which has positive impact of Rs 127m in provisions.
The earnings ratios project a dismissal picture of the bank's operations during FY05 to FY08. The bank managed to pick up from a negative 15% return to its equity in CY05 to a positive 6% in CY06 as it posted a positive after-tax profit after a negative one in the former year. However, it was unable to uphold the upward trend and ROE declined to 5% in CY07.
The ROE managed the same position in CY07. As the equity of the bank steadily increased from Rs 1.7 billion in CY05 to Rs 9.3 billion in CY08 in line with the prudential regulation of higher MCR, an associated rise in return was lacking. The earnings ratios illustrated the same negative for the 3Q09. The ROE further went down in the nine-month period 2009 going down to negative 12.12% from a negative 10.53% in FY08.
The equity of the bank reduced by 8.71%, owing largely to the 50.7% increase in accumulated losses. The ROA ratio hovers around 0% for the period under consideration. Despite an upward trend of earning assets (lending to financial institutes, advances and investments), the bank was unable to earn a significant net interest income. Low yielding earning assets and contained business volumes and corresponding high provisioning inhibits the bank to earn high returns. The ROA ratio for the nine-month period remained almost the same at negative 1.73% as compared to FY08.
The Earning Assets (investments, lending to other financial institutes and advances) has registered an increase of 11.2% but the returns arising from these has been wiped off by the high cost of deposits. During 3Q09, the bank's cost of funds dropped to 10.5% as against 11.7% and 13% in 2Q09 and 1Q09, respectively.
Despite annual increases in the deposit base, the bank managed to control NPLs around Rs 1 billion between CY05-CY07. However this drastically shot up to Rs 6 billion in CY08. This has been in line with the industry trends. But the mushrooming figure poses a serious risk to the bank.
The bank prudently provided for all required non-performing loans mostly in the first half of the year 2009. Currently the bank is strengthening its strategy to consolidate the overall loan portfolio and extending support to its accountholders. As a result the overall advances portfolio has registered no significant movement however as a result of prevailing restructuring and recovery exercise, some of the provision on infected accounts have been reversed in the third quarter.
NPLs to advances ratio declined consistently between CY05 to CY07, showing that the bank employed a prudent credit policy to control its NPLs and higher level of advances relative to NPLs. However the situation reversed in CY08 as higher interest rates (owing to higher KIBOR rates) caused a huge number of defaulters resulting in a jump in the ratio, as NPLs accounted for around 20% of advances.
In the three quarters ending in September 2009, the NPL to Advances ratio slightly increased to 20% from 19.4% in FY08. The Provisions to NPL has reduced considerably at the back of new regulation issued by State Bank.
Bank's earning assets to total assets have grown at more than industry averages. It shows are comfortable trend, indicating that its earning assets are maintained at a consistent level during the period under consideration. However advances constitute a major chunk of these advances rising to 76% of total assets in CY08 from 69% in CY05. This indicates increasing volume of business but may prove to be risky given the recent tendency of defaulting in the economy.
It's important that the advances are cushioned against deposits to ensure that bank has liquidity available. But the increasing trend of advances to deposits, topping to 92% doesn't bode well for the bank's liquidity position. Financials reveal that the advances of the bank have grown at a faster rate than the deposits and hence the high ADR ratio. Both liquidity ratios have registered a decline; Earning Assets to Assets and Advances to Deposits decreasing to 80% and 73% in 3Q09 respectively against 82% and 93% in FY08 respectively.
KASB Bank has not announced any dividends between CY05-CY08, mainly due to its inability to wipe out its accumulated losses. Price for share managed to be contained between Rs 10 to Rs 20. Earnings per share though positive, is insufficient to attract potential investors.
Going forward, the bank is poised to respond to the challenges faced on macro and micro front. Operating with the clear objective of concentrating on its niche clientele with swift expansion of its branch network in the target market, tangible growth is anticipated to be registered in the core earnings of the bank in the months to come. In the year 2010 the bank is looking forward to attain growth by broadening its middle market, small and medium businesses as the bank continues to take new customer financing and agriculture credit exposure.
The management is working on a strategy whereby its business units are strategically reorganized keeping in view the optimization of their relevant businesses and are now geared towards efficient and result oriented business operations. With the overall economic landscape getting better, it is anticipated that the investment banking and financial advisory business would also have to offer Bank significant results.
COURTESY: Economics and Finance Department, Institute of Business Administration.