Bank Al-Falah

Presented to: Miss Sumera Sajjad

Bank Al Falah

Acknowledgements
First of all we would like to thank to Allah without His help we would havent succeededin doing our project. We would also like to thank our teacher Miss.Sumeira Sajjad who supported us in every part of our project throughout the term. In the end we wish to thank our family members and friends who at all time supported us with much needed financial support and also the moral support..

Bank Al Falah

Table of Contents

Banking industry Historical background of Alfalah Analysis in balance sheet and income statement Major source and major use of fund Profitability measures Expense control measures Credit risk Liquidity risk Market risk Solvency and capital adequacy Comparison with bench mark rates

Bank Al Falah

Banking Industry in Pakistan

Banking is one of the most sensitive businesses all over the world. Banks play very important role in the economy of a country and Pakistan is no exemption. Banks are custodian to the assets of the general masses. The banking sector plays a significant role in a contemporary world of money and economy. It influences and facilitates many different but integrated economic activities like resources mobilization, poverty elimination, production and distribution of public finance. It is purchase of car or building of a home banks are always there to serve you better. It is play ground or any educational or healthy societal activity the money of banks nurture them. It is an industrial project or agricultural development of the country the sponsor-ship of banks is very much involved. Banks play very positive and important role in the overall economic development of the country. Pakistan has a well-developed banking system, which consists of a wide variety of institutions ranging from a central bank to commercial banks and to specialized agencies to cater for special requirements of specific sectors. The country started without any worthwhile banking network in 1947 but witnessed phenomenal growth in the first two decades. By 1970, it had acquired a flourishing banking sector. Nationalization of banks in the seventies was a major upset to domestic banking industry of the country, which changed the whole complexion of the banking industry. With irrational decision at the top all the commercial banks were made subservient to the political leadership and the bureaucracy. Specialized banking institutions were already working in the public sector. The new accountability paradigm changed the business ethics in the banking industry, and with this change started the disaster. Nationalization of banking industry was accompanied by violent changes in the external value of rupee. The commercial banks thus lost their assets management equilibrium, initiative and growth momentum. They ceased to be a business concern and became big bureaucracies. This was accompanied by indiscreet loaning under political pressure. They suffered from three terminal diseases: non-performing loans; higher intermediation cost; and loss of initiative and entrepreneurship. The rise to Labour Unions and Officers Associations made life tough and working conditions ugly to honest, dedicated and industrious workers in the realms of domestic banking industry. The era of nineties was the climax of privatization, deregulation and restructuring in the domestic banking industry and financial institutions. The Muslim Commercial Bank was the first bank to privatize. Followed by Allied Bank limited, United Bank Limited and now the Habib Bank Limited have been privatized. One thing good for that particular period was the recruitment of fresh officers in the domestic banking industry through well-organized policies of Banking

Bank Al Falah

Council. With the decay of Banking Council there was flood of insincere, nonprofessional, incompetent candidates directly appointed/ recruited in all the domestic banks of the country. Public Sector Commercial Banks
National Bank of Pakistan First Women Bank Limited The Bank of Khyber The Bank of Punjab NBP FWB KB BOP

The government of Pakistan permitted small private sector banks to operate, which indulged in doubtful policies to promote business. The public sector banking, which constituted the backbone, thus continued to suffer because of their approach, size and carried over liabilities. Mehran Bank is the prime example of that kind of lax banking in the country, which ultimately merged into National bank of Pakistan i.e. last resort of domestic banking industry. Local Private Banks
Askari Commercial Bank Limited Bank Al-Falah Limited Bank Al Habib Limited Bolan Bank Limited Faysal Bank Limited Metropolitan Bank Limited Platinum Commercial Bank Ltd Prime Commercial Bank Limited Saudi Pak Commercial Bank Ltd PICIC Commercial Bank Limited Soneri Bank Limited Union Bank Limited Muslim Commercial Bank Limited Allied Bank of Pakistan Union Bank Limited Mashreq Bank

In the meanwhile, western banks started entering into the business. They, with the support of ruling elite, concentrated on the big business, leaving the routine business to the local banks. This reduced the profitability of the local banks.

Bank Al Falah

Foreign Banks
ABN Amro Bank Al Baraka Islamic Bank American Express The Bank of Tokyo Mitsubishi CITI Bank Credit Agricole Indo Suez Deutsche Bank Doha Bank Emirates Bank Habib Bank A. G. Zurich Hong Kong Shangai Banking Corporation IFIC Mashreq Bank PJSC Oman Bank Rupali Bank Standard Chartered Bank

Specialized Banks
Zari Tarqiati Bank Ltd. Industrial Development Bank of Pakistan Punjab Provincial Cooperative Bank Limited

Bank Al Falah

Bank Alfalah Limited was incorporated on June 21st, 1992 as a public limited company under the Companies Ordinance 1984. Its banking operations commenced from November 1st, 1997. The bank is engaged in commercial banking and related services as defined in the Banking companies ordinance, 1962. The Bank is currently operating through 195 branches in 74 cities, with the registered office at B.A.Building, I.I.Chundrigar, Karachi. Since its inception, as the new identity of H.C.E.B after the privatization in 1997, the management of the bank has implemented strategies and policies to carve a distinct position for the bank in the market place. Strengthened with the banking of the Abu Dhabi Group and driven by the strategic goals set out by its board of management, the Bank has invested in revolutionary technology to have an extensive range of products and services. This facilitates our commitment to a culture of innovation and seeks out synergies with clients and service providers to ensure uninterrupted services to its customers. We perceive the requirements of our customers and match them with quality products and service solutions. During the past five years, we have emerged as one of the foremost financial institution in the region endeavoring to meet the needs of tomorrow today. PRODUCTS BY BANK ALFLAH
GENERAL BANKING Deposit account Lockers Lending & deposit rates Remittance HIlal/Debit Card

Islamic Banking Intrdoduction Principal Islamic Banking Personal Banking Corporate Banking Consumer Banking Branch Network

TREASURY & INTL. Money market Forex market Investment Goveronment Custodianship Advisory Services Correspondent Bkg. Nostro Accounts Home Remittance Money Gram

CONSUMER FINANCE Credit Card Home Loans Auto/Vehicle Loans Debit Card

FINANCIAL SERVICES Structures Finance Trade Finance SME Lease Finance Agri Finance

Bank Al Falah

Analysis in balance sheet and income statement

Commenting on the balance sheet ,Total assets increased from 328,895,152 to 348,990,764 which is a good sign for the bank. Most important source of funding for total asset is advances which has increased in 2008.The ratio for investments to total asset in 2007 is 52.05% and for 2008 is 55.20% which has increased over years. Advances has increased due to lending more loans, cash credits, running finance over both years. The ratio for Loans,cashcredits to total advances for 2007 are 89.19% and for 2008 is 92.93% which has increased due to which advances have shown increase. The second major component is Investments which has decreased compared to to 2007.The ratio for investments to total asset for 2007 is 26.90% and for 2008 is 21.76% which has decreased over years. The major reason for decrease if we see notes clearly shown investment in federal securities has decreased over both years significantly due to which total investments are decreasing. The ratio for federal government securities to total investment for 2007 is 88.17% and for 2008 is 71.89% which is a major decrease and most important component of total assets. The third most important component is lending to financial institution which is also decreasing over both years,the ratio of lending to financial institution to total asset is 1.04% and for 2008 is 0.95% which has also decreased due to repurchase agreement lending have decreased from 2454477 to 0 in 2008 which was the main reason for decrease in lending to financial institution .Then coming to total liabilities they have increased from 312675308 to 331946025 which means bank has to pay more. The major component of total liabilities being deposits which have increased in 2008 compared to 2007.The ratio for deposits to total liabilities for 2007 is 87.36 and for 2008 is 90.59% which have increased due to which total liabilities are increasing ,if we see notes deposits are increasing due to fixed deposits and current deposits are increasing if compared to 2007 .The ratio for fixed deposits to total deposits for 2007 is 31.30%and for 2008 is 38.8% which has increased .The second major component of total liabilities being borrowings which has decreased which is good sign .The ratio for borrowings to total liabilities for 2007 is 6.79% and for 2008 is 4.12% which has decreased due to borrowings from state bank of Pakistan has decreased .The ratio for borrowings from state bank to total borrowings for 2007 is 95.15% and for 2008 is 92.79% which is the major component of total borrowing which is decreasing . Total equity is increasing from 16219844 to 17044739 ,major reason being share capital is increasing over years , the ratio for share capital to total equity for 2007 is 40% and for 2008 is 46.90%.Ordinary shares have increased over years.

Coming to Profit & Loss statement net income had decreased from mainly due to provisions having increased over years & non-interest income had decreased. Interest income has increased from 25783871 to 31046583 in 2008. With the reason being that advances have increased which
Bank Al Falah

has also been shown in balance sheet. More interest has been generated. The other reason for interest income being increased is investment in available for sales securities have increased. The ratio for advances to total interest income for 2007 is 69.40% & for 2008 is 73.60 % which shows an increase. On the other hand interest expenses are increasing due to more interest being paid on deposits which can also be verified through balance sheet as deposits are increasing. The ratio for deposits to total interest expense for 2007 is 91.6% and for 2008 is 90.06%. In case of bank alflah fixed deposits have increased due to which more interest has to be paid. Coming to non-interest income which has also decreased from 6038466 to 5245427. The major reason being Gain on sale of securities has decreased significantly . The ratio for gain on sale on securities for 2007 is 34.11% and 2008 is 8.08% which is significant decreased. The dividend income has increased significantly. The ratio for dividend income to total non-interest income for 2007 is 1.07%& for 2008 is 5.73%. Though it is a good sign but has not shown major impact on total non-interest income. Coming to non-interest expenses they have increased significantly from 8289111 to10622739, which is a great change. The ratio for administrative expenses to total noninterest expenses for 2007 is 99.80% and for 2008 is 98.57%. Total administrative expenses have increased majorly due to increase in salary allowances the ratio for salary and allowances to total administrative expenses for 2007 is 42.68% and for 2007 is 41.54%. The other reason being rent, taxes, insurance has significantly increased over years.

Major source and use of funds Assets and liabilities as percentage of total assets

Assets cash and balance with treasury bank balance at other banks lending to financial institutions Investments Advances fixed assets deffered tax assets other assets

2008 32687335 21581043 3315500 75973238 192671169 13773293 0 8989186 348990764 348990764 348990764 348990764 348990764 348990764 348990764 348990764

% 9.366246 6.183844 0.950025 21.76941 55.2081 3.946607 0 2.575766

Bank Al Falah

total assets Liabilities bills payable Borrowing deposits and other accounts surbordinated loans liabilities against assets deposits tax liabilities other liabilities represented by Equity

348990764

348990764

100

3452031 13690222 300732858 2571169 0 208465 11291280 17044739

348990764 348990764 348990764 348990764 348990764 348990764 348990764 348990764

0.989147 3.922804 86.17215 0.736744 0 0.059734 3.235409 4.884009

Assets cash and balance with treasury bank balance at other banks lending to financial institutions Investments Advances fixed assets deffered tax assets other assets total assets Liabilities bills payable Borrowing deposits and other accounts surbordinated loans liabilities against assets deposits tax liabilities other liabilities represented by Equity

2007 29436378 18380738 3452059 88491564 171198992 11922324 0 6013097 328895152

% 8.95008 5.588631 1.049593 26.90571 52.05276 3.624962 0 1.828272 100

4138243 21230697 273173841 3220858 0 1379809 9531860 16219844

1.258226 6.455157 83.05803 0.979296 0 0.419529 2.898145 4.931615

Percentage of Cash and balance at the treasury to total assets has increased by 1% as compare to the last year. Same is the case for the balances at the other banks. % of lending to financial institutions and investments to total asset comparing to the last year has decreased. The % of loans has increased as it was 52% last year and 55% this year. There is a very small increase in the % of fixed and other assets to total assets this year. Current liability in the form of bills payable as % of total assets has declined. Same is the case for borrowings; they have declined
Bank Al Falah

this year as compare to the last year. The ratio of deposits to total assets has increased this year 2008 with respect to year 2007. All other liabilities have been following a declining trend. The major use of funds was advances whish were about 55% of total assets. The most advances were in the form of loans, cash credits running and finance. While the major source of funds were the deposits and other accounts which accounted for 86% of total assets. The case was similar last year also. The banks also used its funds in the investment sector although investment declined this year but still the second highest funds were allotted to this sector, this year about 21% of total assets.

Performance of AlFalah during last two years 2008 and 2007 Profitability and efficiency measures

2008 ROE Net income / equity 1301301/17044739 7.63% 3130229/16219844

2007

19.2%

ROA Net income/ total assets 1301301/348990764 0.37% 3130229/328895152 0.95%

Net interest margin Net interest income/total assets 10715389/348990764 3.07% 9162908/328895152 2.78%

Bank Al Falah

Net non interest margin Net non interest income/ total assets 5245427-10622739/348990764 -1.54% 6038466-8289111/328895152 -0.68%

Net bank operating margin Total operating (rev- exp)/ total assets 1794720/348990764 0.51% 4535552/328895152 1.37%

2008

2007

Asset utilization Total operating revenue/total assets 31046583+5245427/348990764 10.39% 25783871+6038466/328895152 9.65%

Net profit margin Net profit/total operating revenue 1301301/31046583+5245427 3.59% 3130229/25783871+6038466 9.83%

Equity multiplier Total assets/ total equity 348990764/17044739 20.47X 328895152/16219844 20.27X

Bank Al Falah

Yield on earning assets Interest income/earning assets 31046583/ (21581043+3315500 10.57% +75973238+192671169) 25783871/ (18380738+3452059 9.15% +88491564+171198992)

*earning assets include balance at other banks, lending to financial institutions, investments and advances.

2008 Cost of borrowing Interest expense/ interest bearing liabilities 20331194/ (13690222+300732858 +2571169) 6.41%

2007

16620963/ (21230697+273173841 5.58% +3220858)

*interest bearing liabilities include borrowings, deposits and subordinated loans

Spread Yield on earning- cost of borrowing 10.57%-6.41% 4.16% 9.15%-5.58% 3.57%

The profitability of the company in the year 2008 as compare to the last year has shown alarming signs to the bank. The ROE and ROA have fallen by a high percentage. Although the net interest margin had increased but the net non interest margin declined by larger proportion leading to low returns for the company. The cost of borrowing for the bank also increased which means bank had to pay more to gather funds. Bank in order to increase its return needs to collect funds a lot a
Bank Al Falah

low cost and a lot needs to increase its net non interest income by controlling its expenses and putting checks. A lot of new products needs to added to it portfolio and innovation is required to grow and have higher returns.

Expense control measures Interest expense/TA 20331194/348990764 5.83% 16620963/328895152 5.05%

Interest exp/interest bearing liabilities 20331194/ (13690222+300732858 +2571169) 6.41% 16620963/ (21230697+273173841 5.58% +3220858)

Administrative exp/ TA 10471399/348990764 3.00% 8272587/328895152 2.52%

Other operating exp/ TA 122758/348990764 0.035% 9565/328895152 .0029%

Non interest exp/ TA 10622739/348990764 3.04% 8289111/328895152 2.52%

All of the expense control measures calculated above are moving in the wrong direction meaning the expenses of the bank are increasing and the bank has failed to control their expenses. This is not a signal for the bank and immediate attention is required. Management needs to concentrate
Bank Al Falah

on this and needs to control their expenses both the non interest (admin and other) and interest bearing (deposits and loans). They need to collect funds at a low cost in order to control their cost.

2008 Credit risk NPL/ Gross loans and lease 8934000/198811852 4.49% 4705000/175678810

2007

2.67%

Charge offs/ Gross loans and lease 3100728/198811852 1.56% 2714521/175678810 1.55%

ALL/ gross loans 6140683/179066461 2008 ALL/equity capital 6140683/17044739 36.02% 4479818/16219844 27.62% 3.42% 4479818/152706236 2.94% 2007

PLL/gross loans and lease 2035997/198811852 1.02% 2370867/175678810 1.34%

Gross loans/ total deposits 179066461/300732858 59.55 152706236/273173841 55.90%

NPL/TA 8934000/348990764
Bank Al Falah

2.56%

4705000/328895152

1.43%

All ratios in this segment have increased, clearly indicating that the credit risk for the bank has increased which is not a good sign. The top management needs to review their credit policies so that they can make sure that the loan given o the borrowers are collected back. This may help the bank in future to avoid further decline in returns. A more diversified approach must be adopted by the bank to manage its risk. The market risk and political instability in Pakistan at that time also led to higher charge offs. The NPL is clearly following an increasing trend as the growth in it was about 103% from the last year which is a lot. Management needs to give a lot of attention to it and need minimize its credit risk in order to maximize its return.

2008 Liquidity risk Cash and deposits due from other banks/TA 21581043/348990764 6.1% 18380738/328895152

2007

5.5%

Government securities/TA 54617725/348990764 15.64% 78023745/328895152 23.7%

Cash assets & government securities/TA 63952584/348990764 18.34% 84658867/328895152 25.74%

Core deposits/TA 300732858/348990764 86.17% 273173841/328895152 83.05%

Net loans/ TA 192671169/348990764

Bank Al Falah

55.20%

171198992/328895152

52.05%

The cash and deposits due from other banks increased over the span of one year from 5.5% in 2007 to 6.1% in 2008. It shows that the liquidity risk has increased over the year. We have noticed over the year that percentage of Assets invested in government securities have decreased from 23.7% to 15.64% in 2008. This shows that the bank has now invested in more volatile investments and not in the safe haven government securities and treasuries. It is now more exposed to the liquidity risk in market. The core deposits of the bank have increased from 83.05% to 86.17% in 2008. They have increased considerably over the year. The deposits with the banks have increased over the year which shows that customers and investors have increased their confidence in the bank and have deposits increased over the year. This has improved the liquidity position of the company. The net loans to asset ratio has increased from 52.05% to 55.20% in the period of one year. It shows that the bank has lended more to the bank over the year. It is exposed to more risk now.

2008 Market risk EPS Value of stock Rs.1.63 Rs.16.83

2007

Rs.3.92 Rs.53

We have seen that the per share price of Bank Alfalah has decreased tremendously over the period of one year. The main reason for this downfall is the market crash in that year. The KSE index dropped by more than 60% which resulted in the decline of price of share of the bank. This shows that the risk in the market has increased tremendously.

2008

2007

Solvency and capital adequacy PE ratio 10.32 13.52

Equity capital/ total assets 17044739/348990764

Bank Al Falah

4.88%

16219844/328895152

4.93%

Equity capital/risk assets 17044739/192671169+75973238 6.3% 16219844/171198992+88491564 6.2%

TA/equity 348990764/17044739 20.47 328895152/16219844 20.27

Total liabilities/total equity 331496025/17044739 19.44% 312675308/162198441 1.93%

We have analyzed that the PE ratio of the bank has decreased over the period of one year. It has fallen from 13.52 to 10.32 over the year. It is a point of concern for the bank as the fall is a very large one as compared to its historic data. The equity to asset ratio has also fallen over the period of discussion. It has decreased from 4.93% to 4.88% over the period of one year. It is a cause of concern also for the company. The equity capital has increased in volume over the year but the ratio has fallen which should not be the case. It should either be maintained or increased. Equity to risk asset ratio has remained more or less the same over the one year as it has decreased from 6.3% to 6.2% in 2008. It hovered around the same ratio over the year and no major change can be seen in that year. The encouraging sign comes as the TA to Equity ratio has increased from 20.27 to 20.47 over the period of one year. It is a positive sign for the company and should maintain this trend in other ratios too.

Comparison with Bench mark rates

We have noticed in our ratios that the bank has not performed upto the mark in the current year till 2008. The averages of Bank Alfalah are below the industry averages. The first one we have
Bank Al Falah

chosen to compare is the asset growth rate. The industry rate growth in 2008 was 8.8% as compared to 6.11 % of the bank we are discussing. The bank was unable to keep up with the growth rate of the industry. We have seen that the industry average of growth in net loans is 18.3% whereas Bank Alfalah was only able to grow its loan lending by 12.5% in 2008. The bank was unable to cope with the pace of the industry and has shown disappointing figures across the board. This is a source of big concern for the bank as the main source of income for bank is the interest on loans received but by not keeping with industry averages, it would suffer in future. The equity equity growth rate of the industry has been 3.4% over the year but surprisingly the equity growth rate of our bank is 5.08% over the year. This is a positive signal as the bank has outperformed the industry averages. The composition of the asset base over the last one year or so has shifted away from advances to investments - and internal composition of advances from private sector to public sector and from Small and Medium Enterprises (SME) and Consumer to Corporate segment. The Non Performing Loans (NPLs) of the system had been showing consistent and fast increase for the last one and a half year or so and almost doubled since CY07. The most important ratio to compare is the deposit ratio of the bank. We have analyzed that the deposit growth of the Bank Alfalah was 10% as compared to 9.4% of the industry. This shows that even when the bank did not performed as per the industry averages, its deposits increased. The customers and investors have shown great confidence into the bank and the deposits increased by whopping 10% over the previous year. This shows that the bank still has a lot of room to improve and can still bounce back in the next year with great results next year.

Bank Al Falah