Chapter 9

Financial Statements

9. Financial Statements 9.1 Balance Sheet

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Chapter 9 9.2 Profit And Loss Account

Financial Statements

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Chapter 9 9.3 Cash Flow Statement

Financial Statements

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Chapter 9 CHAPTER - 5 FINANCIAL ANALYSIS

Financial Statements

5.1 INTRODUCTION The efforts have been made to cover all relevant aspects of the financial performance of UBL. Common Size analysis are carried out with the view to extract concrete conclusion to describe financial standing and performance of the bank. 5.2 BASIS OF PRESENTATION The purchase and sales of UBL are restricted to the amount of facility actually utilized and the appropriate portion of mark up there on. They strictly observe the rules and regulations as applicable and promulgated by the GOP and or SBP. 5.3 SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition

Returns on advances and investments are recorded on accrual basis. Debts securities purchased at premium or discount are amortized over their maturity periods. Dividend income is recognized on accrual basis of declaration of dividend up to the yearend. Returns on classified assets are recorded on receipt basis, rescheduled and restructured loans are treated in accordance to SBP regulations. Fees/commissions etc. on Letter of Credit and others are recorded on accrual basis. Investments

UBL classify its investments as stated below; a) Held for trading b) Held to maturity c) Available for sale-other than the above two types In the light SBP regulations quoted securities are shown at market values and any changes arising are taken to profit and loss account only upon actual realization. Unquoted securities are valued at the lower of cost and break up value and difference is charged to income. Provisions for diminution in the values are made after permanent impairment, if any. Lending/Borrowing from Financial Institutions

a) Sales under Purchase Obligation: These are reflected as liabilities and the charges against these are recorded as an expense on pro rata basis. b) Purchase under Resale Obligation: The differential of the contracted price and resale price is amortized over the period of their contract and recorded as income.

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Chapter 9 a. Owned Fixed Assets and Depreciation

Financial Statements

Such assets are showed at their cost or revalued amount less accumulated depreciation and impairment loss, if any. No depreciation is charged on freehold land. During the year, amendment related to section 235 of the Companies Ordinance 1984, surplus on revaluation can now be reversed to the extent of incremental depreciation charged. As a result such differentials are now transferred to retained earnings/accumulated losses as per the Securities and Exchange Commission of Pakistans (SECP) clarifications. Gains and losses on sale of fixed assets are included in income currently, except that the related surplus on revaluation of fixed assets is transferred directly to retained earnings/accumulated losses. b. Leased Assets under financial leases are stated at cost. The outstanding obligations are shown as a liability. The finance charges are allocated to accounting periods in a manner so as to provide a constant periodic rate of charge on the outstanding liability. Taxation

A) CURRENT Provision is based on the taxable income for the year or minimum tax computed on the basis of turnover, whichever is higher. B) DEFERRED The bank accounts for deferred taxation on major timing differences, using the liability method in respect of those timing differences, which may reverse in the foreseeable future. Deferred tax debits are, however, recognized only if there is reasonable expectation of realization of the amount. C) Foreign Currencies Balances are translated into rupees at the applicable rate of exchange prevailing at the balance sheet date or where applicable at contractual rates. During year transactions are converted into Pak rupees applying the exchange rate at the date of respective transactions. Gains and losses are included in income currently. D) Deferred Cost and Lease Payments These are amortized over a period of five years. Rental obligations under operating leases are charged to profit and loss account as incurred. 5.4 RISK MANAGEMENT The bank is primarily subject to interest rate, credit and currency risks. The bank has designated and implemented a frame work of controls to identify, monitor and manage these risks are as follow; CURRENCY RISK MANAGEMENT For the purpose of efficient management of this risk, the group enters into ready, spot, forward and swap transactions in the inter bank market and with the State Bank of

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Chapter 9

Financial Statements

Pakistan in order to kedge its assets and liabilities and cover its foreign exchange position. CREDIT RISK MANAGEMENT

Out of the total assets of Rs.183, 139.879M assets subject to credit risk amounted to Rs.178; 958.323M. The banks major credit risk is concentrated in textile sector. To manage it the bank applies credit limits to its customers and obtains collaterals. Credit risk in the portfolio is monitored by the CRM who formulate appropriated policies and procedures to ensure building and maintaining quality credits and efficient credit process. The banks financial institution risk management unit assesses, recommends financial institutions and also controls cross border/country risk. INTEREST RATE RISK MANAGEMENT The group is mainly exposed to mark up interest rate risk on its deposit liabilities and its loans and advances and investment portfolios. The asset liability committee of the bank reviews the portfolio of the bank to ensure that risk is managed within acceptable limits. Most of the loans and advances portfolio comprises of working capital, which are reprised on a periodical basis. The groups interest is limited since the majority of customers deposits are retrospectively reprised on a six monthly basis due to the profit and loss sharing principles. 5.5 CONCENTRATION OF CREDIT AND DEPOSITS The major class of business for UBL related to advances is the textile and private sectors. UBL is advancing 27.2% to textile and 74.5% to private sector. Majority of the depositors fails in the category of individuals, contributing 65% of the total deposits. 5.6 INVESTMENT PORTFOLIO UBL employs diversified investment portfolio. The bank invests its funds both in risk free assets as well as in risky assets. This enables it to minimize its unsystematic risk to a great extent. UBL values its security holding on market value, in accordance with the guidelines given in SBP circular. Any unrealized surplus/deficit arising on such revaluation is taken directly to Surplus/Deficit on revaluation of securities in the balance sheet. Where an active market is not available, securities continue to be stated at cost. Provision for diminution in the value of these securities is made after considering permanent impairment, if any, in their value. Where securities are sold subject to commitment to repurchase them at a predetermined price, they remain on the balance sheet and a liability is recorded in respect of the consideration received in Borrowing from Bank or Deposits as appropriate. Conversely, securities purchased under analogous commitments to resell are not recognized on the balance sheet and consideration paid is record in lending to financial institutions or loans and advances as appropriate. 5.7 PROFITABILITY The operating profit before provisions and write offs decreased by 10% where as the profit before tax and extraordinary items decreased by 80% as compared to last year.

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Chapter 9

Financial Statements

Performing advances increased by Rs. 6.6 billion as compared to 2007 while NPA decreased by 4 million. Presently NPA constitutes 1.6% as compared to 1.2% in 2007 of the total loan portfolio. The branches reduced to 1056 from 1112. The bank handled over Rs. 96 billion of import and export business during the year, an increase of 24.7% as compared to last year. 5.9 FINANCIAL RATIO ANALYSIS

The user of financial statements finds it helpful to calculate ratios when they interpret companys financial statements. A financial ratio is simply one quantity divided by another. Ratios focus on special relationship between two items of balance sheet, income statement or one from each. Ratios make it easier to understand a specific relationship between various items of financial statements then looking simply at the raw numbers themselves. The number of financial ratios that might be created is virtually limitless, but there are certain basic ratios that are frequently used, these ratios can be placed into six different classes. Liquidity Ratio Asset Turnover Ratio Leverage Ratios Coverage Ratios Profitability Ratios Market Value Ratios The calculation and interpretation of these ratios of financial statements of UBL are as follows.

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Chapter 9

Financial Statements

Table: 5-3
Years

Financial Ratio analysis

Financial Ratios Formula Net Profit / Revenue x 100 Net Profit / Total Assets x 100 Net Profit / Total Equity x 100 Current Assets / Current Liabilities Total Equity / Total Assets Total Debt / Total Assets 2007 40.41% 1.67% 22.20% 0.48:1 12.30 0.92 3.76 Markup Revenue / Total Assets 0.023 0.96 2008 43.79% 1.47% 23.29% 1.17:1 12.97 0.83 1.53 0.023 1.02 2009 22.85% 1.33% 21.26% 1.05:1 15.02 0.94 1.35 0.013 1.03 2010 18.33% 1.5% 17.24% 1.7:1 10.17 0.89 0.64 0.082 2.43

Net Profit Margin Return on Assets Return on Equity Current ratio Debt to Equity Ratio Total Debt to total Assets Current Asset Turn Over Ratio Assets Turnover Ratio Fixed Asset Turnover Ratio

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Chapter 9

Financial Statements

Net profit margin ratio: Formula: Net profit margin ratio = Net profit/revenue x 100 = Comment: Net profit margin of the bank for the year 2010 is showing a downward shift as compared with that of 2009. Return on assets: The bank is showing good progress because the return on assets increased from the figures of the last year. Return on equity: Bank is lacking behind in return on equity because the figures show that the return on equity is showing declining trend. Current ratio: Bank has shown improvement in this ratio because it has increased its ratio from the previous year. Total debt to total assets: Total debt to total assets ratio has declined as compared to the last year. Current asset turn over ratio: Current assets turnover ratio is also showing the declining trend as compared to the year 2009. Assets turnover ratio: Asset turnover ratio has increased as compared to the last year. Fixed asset turnover ratio: Fixed assets turnover ratio has shown a quick boost and is increased from the last years values.

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