STRATEGIC AUDIT FOR BANK OF PUNJAB (BOP) 2007

I. CURRENT SITUATION
A. Current Performance
Poor financials showing losses on gross spread, profit before & after tax, &
return on investment since 2006.
B. Strategic Posture
1. Mission
a. “To exceed the expectations of our stakeholders by leveraging our relationship
with the Government of Punjab and delivering a complete range of professional
solutions with a focus on program driven products & services in the Agriculture
and Middle Tier Markets through a motivated team.” (Mission, n.d.).
2. Objectives
(Personal Communication, October 10, 2008.)
• To be a diversified bank by offering all basic consumer products along with
specialized agricultural finance products for farmers
• To provide solutions for multiple requirements of clients of diverse
financial nature.
• To grow in banking sector by asset expansion
• To manage with the changing trends of the modern day financial market.

3. Strategies
(Personal Communication, October 10, 2008.)
• The bank approaches organizations and then seeks to become the exclusive
consumer in terms of consumer financing
• Targeting main sector of Pakistan i.e. Agriculture sector by offering
“Kissan schemes”
• Making financial management easy through differentiated products
• Operations through strong network of branches, backed by advanced
computerized and control system
• Strengthening of capital base to meet requirements of State Bank
4. Policies
(Personal Communication, October 10, 2008.)
• BOP is an “equal opportunity provider” so no hiring on gender basis
• Hiring of educated people & compensating them accordingly
• Promotion from within the company
• Decentralized decision making

5. Review of Current Mission, Objectives & Strategies

BOP’s current mission is well-focused towards its customers who are the first
priority for it. Objectives are based on customers’ needs as well as they also
necessitate that changing trends of modern financial markets should be improvised.
They are associated with each other hence plays a vital role in step by step
achievement of goals & objectives. BOP’s strategy for consumer lending is a bit
unique as it continues to follow a more focused strategy. The bank approaches
organizations and then seeks to become the exclusive consumer loans provider for
its employees. This strategy has the potential to work well.

II. STRATEGIC MANAGERS

(Please see annexure 1) Board of Directors & Top
Management
A. Board of Directors (BOD) & Top Management
There are 5 BOD members – all internal. They have no international background or
experience, serving in the board since last July after ex-BOD members were
arrested by National Accountability Bureau. Entire top management is newly hired
in BOP. Country heads and chief executives are highly professional & experienced
people. They are developing new policies for bank & are introducing participative
management by developing proper internal controls. But to come out of current
situation BOP should have hired internationally experienced or foreign members to
meet the upcoming challenges.
III. External Environment
A. Societal Environment
(Please see annexure 2) Societal Environment
1. Economic
• It appears that the economy will face tremendous challenges and some
difficult decisions in 2008-09, as inflationary risks persist. The uptrend
witnessed in CPI inflation during the last few months is largely a result of
continued rising food prices.
• Energy crisis is looming in the country, because of an increase in demand
and a rather slow improvement in supply.
• Economic instability prevailing in worldwide financial markets & investors
are loosing their confidence in banks
2. Technological
• Advanced computerized and control system
• Growing network of online branches throughout the country
• Strategic plan 2005-10 of SBP for all Pakistani banks ensures technological
advancements in the whole banking sector
3. Political-Legal
• Agriculture contributes to poverty reduction for vast majority of the poor
live in rural areas. Government has taken initiatives in agriculture and rural
development.
• Government of Pakistan through SBP has provided backing to the banking
industry by decreasing cash reserve requirements (CRR) to 6% from 8%. This has
provided liquidity to banks worth Rs. 180 Billion
• Improvement in law and order and elimination of political unrest are very
much imperative for the Government in order to provide investment conducive
environment to both local and foreign investors.
4. Sociocultural
• Visible chaos in society is prompting people to take out their investments &
valuables from banks as there are huge chances of banks’ liquidation
• The huge culture of opening bank accounts, investment making, credit & debit
cards now seems to moving towards declining phase

B. Task Environment
Bank of Punjab. (2007) Pakistan’s banking industry is at declining stage due to
which it has become slow growing.
a. New entrants have been reduced significantly because mushroom growth of banks
has been recently controlled by SBP
b. Bargaining Power of Buyers has been medium to high because usually the cost of
switching bank is not too significant.
c. Threat of Substitute Product or Service is minimized as the whole world’s
banking sector is facing drastic slump
d. Bargaining Power of Suppliers is high incase of Pakistan because SBP is
liquidity & credit supplier to the whole sector. It possesses all the authority
e. Rivalry among competing firms is increasing consequently due to mergers of
small & medium banks to form bigger ones.
C. Overview on the Major Players of Bank Industry
Strengths & Weaknesses of Major Competitors of BOP
Following are the strengths of major competitors
• Strong balance sheet showing strong position of company with less deferred
costs, enough retained earnings & equity & large asset base.
• Sales revenues increasing every year & there is simultaneous increase in
profits after taxes
• Relatively larger market share of all equivalent banks
• Stable financial position & increasing return on assets
Following are the weaknesses of major competitors:
• In some of the government banks corporate culture is invisible i.e. they
have poor infrastructure
• Charging very high rates which are a burden in consumers e.g. HBL charging
19%

2. Key factors currently affecting the corporation are customers (as they are
taking out their investments), competitors (asking for mergers), suppliers
(government &SBP) & shareholders (asking for refunding of their shares)
IV. Internal Environment
A. Corporate Structure
Divisional structure; so decision making is decentralized throughout the bank. BOP
is structured on the basis of functions performed by different departments so
there is a well-defined hierarchy of organizational structure.
B. Corporate Culture
(Please see Annexure 3) Core Values &
Culture
BOP’s corporate culture is based on values defined by BOP’s management; focusing
on concern for quality customer services, satisfactory employee compensation,
concern for innovation, diversity & most important, performance. Results of the
survey conducted show that there is a professional culture at BOP however flaw of
punctuality lies here as only 45% of employees are punctual due to numerous
reasons. (Please See Survey Annexure) Employee Survey
C. Corporate Resources
1. Marketing
(Please see Annexure 5)
Marketing Analysis
Marketing department of BOP is weak in terms of “promotional activities”. However,
now print media advertising has been started but if it becomes more active it will
increase customer base & help developing BOP’s credibility.

b) Marketing Mix
i) Product
(Products, n.d.).
Product

Consumer Finance Agricultural

ii) Price
(Personal Communication, October 02, 2008.).
“Price charged is higher due to prevailing economic crisis & lending rate is 18-
19% as compared to 8% few months ago.”
Hence price factor is important as the whole banking sector is under its
influence.

iii) Promotion
Selling Expenses 2006
1,751,970 2007
2,250,777
Selling Expenses as % to Revenue 15.13% 12.83%

(Annual Report, 2007)

The analysis shows that during year 2007, BOP cut down its advertising
expenditures which mean that it is cutting cost through cutting off its
promotional expenditures.
iv) Place
2003 2004 2005 2006 2007
No. of branches 241 253 266 266 272
(Annual Report, 2007)
Bank of Punjab sells its products & services through a number of branches across
the country so it doesnot involve middlemen or sellers.
c) Markets Served
(Bank of Punjab, 2008) BOP serves the following markets:
• Agriculture Market
• Household Consumers from middle to low income group
• Commercial Consumers from middle to low income group
• Corporate Customers
As it is already serving all the Pakistani markets it doesnot need to extend its
operations to other markets as well.
2. Finance
(Please see Annexure 6 ) Finance
Analysis
• Net income down to 19% from 26%
• Gross spread ratio down to 21% from 35%
• Market value per share down to Rs. 97 from Rs. 101

The main reasons for reduction in the profitability were additional provision
against Non Performing Loans due to the elimination of benefit of future sales
value and downturn in consumer and individual banking. Enlargement in the Bank’s
network, & adoption of latest available technological tools also increased
expenses. During the year 2007, administrative expenses increased to Rs.2,251
Million showing a rise of 28% over previous year’s administrative expenses.
Forecasted Net Income for 5 years for BOP (Please see Annexure 6.1) Revenue
Forecasting
2008 2009 2010 2011 2012
- 6,164,210 -7,087,868 - 9,082,416 -11,579,729 -14,699,053

Poor revenues of BOP could be seen due to huge losses faced as a result of credit
scam on the part of directors & Presidents at BOP.

3. Human Resource Management (HRM)

(Personal Communication, October 02, 2008.).
• HRM is an active department having good relations with employees
• 85% employees are satisfied with their salary package
• 45% employees are punctual only so HRM could initiate flex-time for
employees

HRM objectives are fully consistent with mission & values of BOP. However if
employees are allowed flex time they will feel more satisfied. According to In
flex time employees are allowed to work in a time frame of flexible hours for work
i.e. relaxation at slow hours but ensuring to be at workplace during peak hours.
It will not only increase their productivity but will ensure a better culture in
the organization. It is beneficial for both, the organization & workers in every
aspect & as such no con appear for anyone.

V. Analysis of Strategic Factors (SWOT)

1. Strengths
• BOP is majority owned (51%) by the government of Punjab. It has an asset
base of PKR165 billion & total deposits of PKR138 billion
• The bank’s management realizes the necessity of existence of effective
internal controls to ensure smooth operations in current technical and swift
business environment.
• The bank has been proactive in adopting measures to monitor and mitigate
risks associated with banking industry. Bank has been meticulously following
requirements necessitated under Institutional Risk Assessment Framework (IRAF)
questionnaire.
• Bank is fully committed to follow the timelines specified by the SBP in its
Roadmap for implementation of recommendations of Basel-II committee for Risk
Measurement and Management
• The financial statements, prepared by the management of the bank present
fairly the state of affairs, the results of its operations, cash flows and changes
in equity

2. Weaknesses
• Loosing profit indictor “Bank’s spread” & having negative profitability
every year but is mainly because the directors & President of BOP played scam with
the bank by involving in a fraud of billions of Rupees.
• Lack of proper internal controls came up when the credit scam was unleashed.
The recipients of the huge loans include owners of some companies that do not
exist at all. In other cases, fake identity cards were used and over-evaluated
properties were pledged as collateral.
• Advertisement on electronic media has not been seen
• The State Bank of Pakistan (SBP) has expressed its great concern over the
Bank’s “system and controls”, terming them “quite weak”
3. Opportunities
• The year 2009 will prove to be another demanding year for the bank with
scattered opportunities and tough competition. Diversification, innovation and
mission driven approach are the key to success which BOP should adopt
• Progressive but cautious business expansion with strategic branch network
extension and introduction of innovative products in all areas of business.
• BOP should emphasize much on e-banking
• Commencement of new schemes there can even be a greater increase in its
deposits

4. Threats
• Economic growth is likely to be slow, as agricultural growth may slowdown
due to lower harvests of cotton and rice crop
• Adverse impact of “Credit Crisis ” can adversely effect BOP
• Facing a strong competition by its competitors
• Deposit growth can slowdown due to lack of customer trust in BOP
a)Constraints
Following are the constraints for BOP;
External
• Presently, SBP has constrained all the commercial banks of Pakistan to
increase their statutory legal reserve to $13 billion. This is a major constraint
for smaller & medium banks.
• Global liquidity crisis has constrained banks to stop lending
• High inflation rates have increased interest rates charged by banks
considerably
Internal
• Current financial crisis has limited many options for BOP. That’s why it
cannot reward its employees properly
• Recent credit scam by President of BOP has suspended many new policies that
the bank was going to announce for its valuable customers & is trying to regain
its position in market.

6. Strategic Alternatives & recommended Strategy

a. Strategic Alternatives
(Wheelen & Hunger, 2002, p.147)
1. Profit Strategy is a decision to not altering any operation by doing something
new & hence carrying on existing operations & policies for probable future. It
also includes reducing investment & discretionary expenditures. However it will
have to raise its equity to come out of financial crisis & vulnerability.
a. Pros: As bank is highly leveraged, it will be able to generate revenue through
this
b. Cons: Bank’s operational growth could be temporarily stopped through it

(ibid, p.169)
2. Pull Strategy in which advertising pulls the product through distribution
channels. BOP will have to spend heavily on advertisement to create banker’s
product awareness
Pros: Customer base will be enlarged & investor confidence will be build-up
Cons: Fund requirement may be enlarged for advertisement

b. Recommended Strategy
Profit strategy is the recommended strategy as BOP is currently loosing its
financial stability, margins & net profit. So stability in operations & cutting in
expenditures would definitely work to enhance financial performance of BOP.
However as the situation becomes better, BOP can restart its expansion & growth.
But it will have to issue Term Finance Certificates i.e. “bonds” to raise bank’s
capital & generate liquidity. Or it can get additional financing from Government
of Punjab as it backs up the bank through financing.
VII. Implementation
To cut optional expenditures, top management should set limits for staff e.g.
cancellation of Bank’s sponsored vocational trips for senior executives, reducing
bank’s sponsored international & national traveling (by air). These programs
should be developed by those who are involved in strategic decision making i.e.
top level management & branch managers should be in charge for executing them.
The recommended programs are 100% financially feasible & expenditure cutting limit
should be set say 25% of total expenditures. No new Standard operating procedures
will be required.

VIII. Evaluation & Control

If the bank works on profit strategy it can rest for a while by suspending its
operational growth however it can generate liquidity to run its future operations
but as the recommended strategy donot require any extensive change in policies or
strategies, so the control measures are perfectly conducive with the recommended
strategy.

Summary of Key Problems &Opportunities

Key problems of BOP according to situational analysis are as follows;

Constrain in operating region

BOP’s focus has been Punjab as that is the bank’s key responsibility, since it is
owned by the Punjab government. Most of its 266 branches lie in Punjab. Unless the
bank spreads out its operational presence and expands its branch network, future
growth opportunities may be limited.
Late entrant in consumer lending
Being a late entrant, BOP will have to fight aggressively for market share. The
well established banks in consumer lending, such as UBL and Bank Al-Falah & the
foreign banks Standard Chartered, ABN AMRO, and Citibank, are likely to be tough
competitors. Industry focus on unsecured consumer lending is also an area of
concern. Unsecured consumer lending such as credit cards and personal loans
account for 52% of its total consumer loans disbursed.
High deposit Cost
BOP’s cost of deposits has significantly increased over the past three years as
the bank has aggressively raised its deposit base. The bank’s cost on average
interest bearing liabilities has risen to 6.3% in 2007, from 1.5% in 2005. This is
a result of the increase in its fixed deposit base, as demand deposits have been
hard to come by.BOP is loosing revenues, profits & return on investment every
year. Similarly it is loosing customer base because of current global financial
crisis & chances that Pakistani banks would also default. Credit scam by the
President of BOP has worsened its credibility & bank is currently facing worse
situation both financially & in terms of its market position. No long term policy
is made for the long run operational development of BOP.
Opportunities for BOP are as follows;
BOP should start its operation in credit card. These cards are very helpful for
the ordinary customer in general and the business people in particular. They lack
the necessary training to do the job efficiently and properly. Employees of the
bank should be given a task and authority and they should be asked for their
responsibility. Performance appraisal are done annually only they could be made at
regularly after every three or six month to ensure more effectiveness of
employees.