Indepth Banking Sector Review 9-Months '06 (21st November 2006)

7/29/2019 Indepth Banking Sector Review 9-Months '06 (21st November 2006)

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NOMAN ABID & COMPANY LIMITED Banking Sector - 21st Nov 2006

Banking Sector: Performance Review 9-Month 2006

Key Highlights

The 9-months (J an-Sep 2006) proved to be a rather good period for the banking sector with theoverall profitability of sector (listed commercial banks) surged by 42.9%YoY; attributable mainly tohealthy spreads. However, on a Qtr-on-Qtr basis, profitability witnessed a decline of 12.5%.

During J an-Sep 2006, core income of the sector surged by almost 61%YoY, while markup expensesregistered a relatively higher increase of 99.5%YoY. As a result of this, the net interest income ofthe sector surged by a proportionately smaller 34.4%YoY. Net markup income after provisioningsoared by 33.04%YoY. Non mark-up income & expenses surged by 41.8% and 23.7% respectively.

During the period under review, advances of listed banks increased by 12% while deposits rose by7.11%. Moreover on a Qtr-on-Qtr basis, advances of the sector recorded only a nominal increase of1.5% while deposits witnessed a declined of 0.87%. As on 30thSep 2006, ADR of listed commercialbanks stood at 70.58%.

Annualized Return on Equity (RoE) of the sector is calculated to be 25.5% with MCB bank takingthe lead with annualized RoE of 42.7%.

Average book value (BV) of the sector stands at Rs34.55. At present market capitalization of thesector, which stands at Rs715.8bn (US$11.79bn), the overall sector trades at PBV of 2.61 times.

United Bank Limited witnessed the highest jump of almost 82%YoY in its bottom line (profit aftertaxes).

Analyzing the 9-month financial performance of the sector and on the basis of the futureexpectations associated wit the sector, we hold NEUTRAL to POSITIVE stance on the sector, withBank of Punjab being our top pick.

(Note: This write-up comprehensively discusses financial results of the 9-months06 and latest key balance sheet figuresof all listed banks expect for Bank Islami as prior period data is not available for comparison)

EPS-9m'06 PER ADRBookValue PBV RoE RoE/PBV

Allied Bank Limited Rs 7.53 9.25 68.2% Rs 37.19 2.49 30.2% 12.1%

Askari Commercial Bank Limited Rs 8.65 8.85 73.2% Rs 52.26 1.95 24.2% 12.4%

Atlas Bank Limited Rs 0.04 269.99 85.5% Rs 9.64 1.53 0.8% 0.5%

Bank Al-Falah Limited Rs 2.68 13.25 62.3% Rs 21.51 2.20 19.6% 8.9%

Bank Al-Habib Limited Rs 4.93 9.79 69.0% Rs 23.12 2.78 30.5% 11.0%

Bank of Khyber Rs 1.17 10.70 51.8% Rs 15.27 1.09 11.2% 10.2%

Bank of Punjab Rs 10.50 7.19 76.6% Rs 55.04 1.83 27.2% 14.9%

Crescent Comm. Bank Limited (Rs 1.00) (13.63) 64.0% Rs 6.67 2.71 -21.1% -7.8%

Faysal Bank Limited Rs 5.37 8.73 84.5% Rs 31.55 1.98 21.9% 11.1%

KASB Bank Limited Rs 0.45 32.66 62.7% Rs 9.03 2.16 7.2% 3.3%

Meezan Bank Limited Rs 1.71 9.10 76.4% Rs 13.29 1.56 18.2% 11.7%

Habib Metropolitan Bank Limited Rs 4.38 12.72 77.8% Rs 23.21 3.19 27.7% 8.7%

MCB Bank Limited Rs 16.89 10.87 73.1% Rs 59.67 4.09 42.7% 10.4%

My Bank Limited Rs 1.86 8.08 70.7% Rs 19.16 1.04 15.7% 15.0%

National Bank of Pakistan Rs 19.76 9.82 62.2% Rs 130.63 1.98 22.3% 11.3%

NIB Bank Limited Rs 0.09 207.46 132.0% Rs 12.59 1.93 0.9% 0.5%

PICIC Commercial Bank Limited Rs 3.41 8.13 61.7% Rs 14.92 2.47 30.5% 12.3%

Prime Commercial Bank Limited Rs 0.86 51.00 73.5% Rs 13.18 4.42 8.9% 2.0%

Saudi Pak Comm. Bank Limited Rs 0.05 372.90 55.6% Rs 9.71 2.38 0.6% 0.3%

Soneri Bank Limited Rs 2.79 11.70 64.4% Rs 18.76 2.31 21.1% 9.1%

Union Bank Limited Rs 2.17 36.31 93.7% Rs 15.53 6.76 18.8% 2.8%

United Bank Limited Rs 10.67 11.12 76.4% Rs 41.81 3.77 37.7% 10.0%

Prepared by:Tahir Hussein Ali, Senior Research Analyst, Email: [email protected], Phone: (021) 5693581-85Shuja-ul-Hassan, Research Analyst, Email: [email protected], Phone: (021) 5693581-85


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NOMAN ABID & COMPANY LIMITED Banking Sector - 21st Nov2006

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Table of Content

Core Income & Expense 2

Net Interest/Core Income 3

Non Mark-Up Income & Expense 4

Bottom Line:PAT Climbed by 43% 5

Spotlight on Key Balance Sheet Figure 6

Advances and Deposits 8

Bonus Bonanza 9

Investment Summary 10

Sector Performance at Local Bourses 12


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Core Income & Expenses:

During the first 9-months of 2006, the top line (core / interest income) of listed banks increased by 61%YoY,thanks mainly to the healthy spreads between lending and deposit rates. However, on a Qtr-on-Qtr basis, the topline grew by only 4.5%. During the 9-months under review, average markup charged on advances was 10.25% ascompared to 8.08% in the corresponding period last year, reflecting an increase of217bps YoY. In addition tothis the total advances of the sector during Jan-Sep2006, surged to Rs1,622 billion, an increase of 12%. Duringthe 3rdquarter alone, advances reported nominal increase of 1.5%.

Amongst all the listed commercial banks, Atlas Bank,NIB Bank and Bank of Punjab recorded the highestgrowth in their top-lines with an increase of 136%YoY, 119%YoY and 100%YoY respectively. In our view, themajor reason behind such a massive top-line growth is: In the case of Atlas Bank and NIB Bank, due to therelatively smaller base-effect. However, for BOP the growth was primarily due to rising interest rates charged onadvances, along with a growth in the credit portfolio / advances. Crescent Commercial Bank is the only bank thatrecorded a single digit growth in its top-line which is 8.93%YoY, the lowest in the sector. During the periodunder review, net interest income as a percentage of total revenue of listed commercial banks climbed to 82.5% ascompare to 79.5% reported in the corresponding period last year, under-scoring the healthy trend of reliance oncore operations, rather than speculative short-term gains.

The average cost of deposits during the period under review was 2.87% which was 1.74% in the comparableperiod last year, witnessing an increase of 113bps YoY. During Jan-Sep 2006, total deposits of the sectorwitnessed an increase of 7.11%, increasing to Rs2,298 billion. However, in the 3rdquarter alone, despite the factthat many banks were offering increasingly attractive returns to depositors, the total deposits witnessed a declineof 2.96% Qtr-on-Qtr. Average mark-up on fresh deposits hovers around 4.72%, which was 2.83% in thecomparable period last year, depicting an increase of 190bpsYoY . As a result of these two factors, the totalmark-up expenses of listed banks increased by 99.5%YoY, surging to Rs75.1 billion as against Rs37.66 billionreported in the corresponding period last year. Allied Bank Limited witnessed a massive growth of 340%YoY,which is the highest in the sector, while National Bank of Pakistan reported an increase of 41%YoY in itsmarkup expenses, the lowest in the sector.

(Core Income & Expense of Listed Commercial Bank in 9-month 2006)Interest / Markup Earned Interest/Financing Expense

Amount in PKR mil li on 9M06 9M05 %Chg YoY 9M06 9M05 %Chg YoY

Allied Bank Limited 12,594 6,615 90% 4,675 1,063 340%

Askari Commercial Bank Limited 9,093 6,025 51% 5,004 2,728 83%

Atlas Bank Limited 572 242 136% 478 146 228%

Bank Al-Falah Limited 15,537 8,204 89% 11,067 4,331 155%

Bank Al-Habib Limited 5,635 3,353 68% 2,832 1,363 108%

Bank of Khyber 1,434 1,025 40% 952 606 57%

Bank of Punjab 8,258 4,095 102% 5,171 1,600 223%

Crescent Comm. Bank Limited 385 353 9% 442 288 53%

Faysal Bank Limited 7,035 4,386 60% 4,496 2,148 109%

KASB Bank Limited 1,285 759 69% 998 433 130%

Meezan Bank Limited 1,886 963 96% 985 453 117%

Habib Metropolitan Bank Limited 4,816 3,049 58% 2,980 1,543 93%

MCB Bank Limited 18,570 12,223 52% 3,059 1,946 57%

My Bank Limited 1,210 746 62% 626 205 205%

National Bank of Pakistan 31,596 23,272 36% 9,875 6,981 41%NIB Bank Limited 2,443 1,115 119% 1,722 722 138%

PICIC Commercial Bank Limited 4,347 2,890 50% 2,604 1,318 98%

Prime Commercial Bank Limited 3,257 2,127 53% 1,958 895 119%

Saudi Pak Comm. Bank Limited 2,641 1,875 41% 2,242 1,282 75%

Soneri Bank Limited 4,016 2,551 57% 2,750 1,325 107%

Union Bank Limited 9,144 5,585 64% 5,139 2,295 124%

United Bank Limited 23,763 13,849 72% 8,525 3,989 114%

169,515 105,303 61% 78,578 37,662 109%


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Net Interest/Core Income:

As a result of the hike in markup on advances, followed by a laggard rise in the interest paid on deposit, theaverage spreads of the banking during Jan-Sep 2006 remained robust at 7.38%, against 6.34% in the comparableperiod last year, depicting an increase of 104bps YoY. During the period under review (Jan-Sep 2006), netmarkup income of the listed banks witnessed an increase of 34%YoY, surging to Rs 90.9 billion from Rs67.4billion reported in the comparable period last year. However, on a Qtr-on-Qtr basis, net mark-up income of thesector recorded a nominal increase of 1%.

Overall, NIB Bank witnessed the highest increase, followed by Meezan Bank, while on the declining side;Crescent Commercial Bank reported the highest decline in its net interest income. Among large banks (havingdeposit base of more than Rs 150 billion), United Bank reported an increase of 55%YoY in its net markupincome, which is he highest in the sector, followed by MCB Bank with an increase of 51%YoY.

Considering the net markup income after provisioning, the sector depicted an increase of 33%YoY. MeezanBank clinched the top spot, followed by NIB Bank. On the other handCrescent Commercial Bank remained thetop decliner as its interest income declined by 49%YoY. On a Qtr-on-Qtr basis, the net income after provisioningfor the sector depicted a decline of 1.17%.

(Net Core income of L isted Commercial Banks in 9-month 2006)Net Core Income Net Core Income after Provision

Amount in PKR mil li on 9M06 9M05 %Chg YoY 9M06 9M05 %Chg YoY



Atlas Bank Limited 94 97 -3% 77 95 -18%

Bank Al-Falah Limited 4,470 3,873 15% 3,961 3,593 10%

Bank Al-Habib Limited 2,803 1,990 41% 2,795 2,002 40%

Bank of Khyber 482 419 15% 321 304 5%

Bank of Punjab 3,087 2,495 24% 2,802 2,444 15%

Crescent Comm. Bank Limited (57) 65 -188% (109) (212) -49%

Faysal Bank Limited 2,539 2,238 13% 2,316 2,552 -9%

KASB Bank Limited 287 326 -12% 204 319 -36%

Meezan Bank Limited 901 510 77% 833 460 81%

Habib Metropolitan Bank Limited 1,836 1,506 22% 1,785 1,494 19%

MCB Bank Limited 15,511 10,277 51% 15,103 9,626 57%

My Bank Limited 583 541 8% 551 502 10%

National Bank of Pakistan 21,720 16,291 33% 20,489 14,465 42%

NIB Bank Limited 721 392 84% 647 369 75%

PICIC Commercial Bank Limited 1,743 1,571 11% 1,552 1,604 -3%

Prime Commercial Bank Limited 1,299 1,232 5% 1,029 1,088 -5%

Saudi Pak Comm. Bank Limited 399 593 -33% 300 427 -30%

Soneri Bank Limited 1,267 1,226 3% 1,248 1,237 1%

Union Bank Limited 4,005 3,291 22% 2,541 2,598 -2%


90,937 67,640 34% 82,418 61,949 33%


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Non Mark-Up Income & Expenses:

During Jan-Sep 2006, the non mark-up income of listed commercial banks increased by 33%YoY. Atlas Bank,NIB bank, KASB bank, My bank and Bank of Punjab witnessed an increase of more than 100%YoY in theirnon mark up income. Amongst all these banks, Altas bank reported the highest jump of 993%YoY, which isprimarily due to lower base effect on the one hand and rapid improvement brought by changed business strategiesafter the management change on the other. Meezan Bank, Bank of Khyber and Crescent Commercial Bank werethe only banks that witnessed a decline in their markup income on year-on-year basis.

None markup expense, which comprises mainly administrative expense, witnessed an increase of 27%YoY. AtlasBankonce again leads the show as its non markup expenses increased by 114%YoY whileMCB Bank witnesseda marginal increase of 7%YoY in its non markup expenses, which is lowest in the sector.

(Non Markup Income of Listed Commercial Banks in 9-month 2006)Non Markup Income Non Markup Expenses

Amoun t in PKR mi ll ion 9M06 9M05 %Chg YoY 9M06 9M05 %Chg YoY



Atlas Bank Limited 58 5 993% 178 83 114%

Bank Al-Falah Limited 2,334 1,474 58% 4,396 3,004 46%Bank Al-Habib Limited 987 712 39% 1,735 1,219 42%

Bank of Khyber 249 289 -14% 299 266 12%

Bank of Punjab 2,277 1,121 103% 1,225 903 36%

Crescent Comm. Bank Limited 70 90 -22% 489 302 62%

Faysal Bank Limited 2,142 1,721 24% 1,373 1,027 34%

KASB Bank Limited 453 185 145% 565 420 35%

Meezan Bank Limited 451 467 -3% 703 494 42%

Habib Metropolitan Bank Limited 993 597 66% 860 720 19%

MCB Bank Limited 3,661 3,479 5% 5,760 5,371 7%

My Bank Limited 382 186 106% 443 393 13%

National Bank of Pakistan 9,001 7,022 28% 9,327 8,413 11%

NIB Bank Limited 322 143 126% 888 460 93%

PICIC Commercial Bank Limited 673 579 16% 974 754 29%

Prime Commercial Bank Limited 531 327 62% 1,232 835 48%

Saudi Pak Comm. Bank Limited 483 360 34% 726 546 33%

Soneri Bank Limited 563 457 23% 760 594 28%

Union Bank Limited 2,102 1,790 17% 3,464 2,381 45%


35,812 26,891 33% 49,386 38,954 27%


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Bottom Line: Profit Before & After Taxes:

PAT Climbed 43%YoY but Plunged 12.5%Qtr-on-Qtr

Overall, 9-month 2006 proved to be a fairly impressive period for the sector, as the cumulative profit before taxesof listed commercial banks rose by 38%YoY, while Profit After Taxes (PAT) surged by43%YoY. However, on aQtr-on-Qtr basis, Profit Before Taxes (PBT) depicted a decline of 12.17% while Profit After Taxes witnessplunged by12.57%. In our view, the key rational behind the decline in bottom-line Qtr-on-Qtr basis was the rise inCash Reserve Requirement (CRR) and Statuary Liquidity Requirement (SLR), by the State Bank of Pakistan, by200bps and 300bps from 5% and 15% to 7% and 18% respectively. In addition to this, the non markup income ofthe sector witnessed a decline of 7.46%Qtr-on-Qtr while, markup expenses increased by 10.09%Qtr-on-Qtr.

Profit Before Taxes (PBT) ofUnited Bank Limited surged 82%YoY while Profit After Taxes (PAT) of MCBBank Limitedclimbed 68%YoY, which are respectively the highest in the sector. As far as the massive upsurge inthe bottom line ofUnited Band Limited is concerned, market leadership in consumer banking and corporatefinance activities were two major factors that contributed significantly to its bottom line. MCB Bank, mainly dueto its low cost of funds, which as per our estimates hovers around 1.47% (on an annualized basis) and is the lowestin the industry, has enabled the bank to outperform the sector. An extensive branch and ATM network, along withcash management arrangements with some mega foreign as well as local institutions enables the bank to be a

banker for choice for the masses and thereby enables it to avoid any need for aggressive mobilization.

However, on a Qtr-on-Qtr basis, both these large banks could not shield their respective bottom lines from thesectors declining profitability trend. PBT ofUnited Bank Limited reported a fall 9.14%Qtr-on-Qtrwhile that ofMCB Bank Limiteddeclined 4.45%Qtr-on-Qtr. Analyzing the 3rdQuarter performance of the sector, out of the 20listed banks (which excludes Bank Islami and Atlas Bank, only six banks reported an increase in their bottom lines(Profit After Taxes) on Qtr-on-Qtr basis, namely Bank Al-Falah, My Bank, MCB Bank, National Bank, NIBBank PICIC Commercial Bank. Out of these six banks, National Bank reported the highest growth in its bottomline on Qtr-on-Qtr basis, mainly due to the receipt of a record dividend income from NIT that had per share impactof Rs2.88 on NBPs earnings. MCB Bank gained by having to pay a relatively low tax in the 3rd Qtr 2006, whichwas the main reason behind the increase in PAT for the quarter. This is despite the fact that its PBT has declinedQtr-on-Qtr.

(Earnings of Listed Commercial Banks for the 9-Months Ended 30th September 2006)

Profit Before Taxes Profit After Taxes Diluted EPS

Amount in PKR mil li on 9M06 9M05 %Chg YoY 9M06 9M05 %Chg YoY 9M06 9M05

Allied Bank Limited 5,102 3,417 49% 3,380 2,052 65% 7.53 4.57

Askari Commercial Bank Limited 2,476 2,219 12% 1,733 1,434 21% 8.65 7.16

Atlas Bank Limited (42) 17 N/A 13 12 3% 0.04 0.04

Bank Al-Falah Limited 1,899 2,062 -8% 1,342 1,360 -1% 2.68 2.72

Bank Al-Habib Limited 2,047 1,495 37% 1,297 918 41% 4.93 3.49

Bank of Khyber 281 328 -14% 234 260 -10% 1.17 1.30

Bank of Punjab 3,854 2,662 45% 3,011 2,000 51% 10.50 6.98

Crescent Comm. Bank Limited (537) (425) 26% (276) (428) -36% (1.00) (1.54)

Faysal Bank Limited 3,085 3,246 -5% 2,275 2,491 -9% 5.37 5.88

KASB Bank Limited 92 85 8% 103 73 42% 0.45 0.32

Meezan Bank Limited 580 433 34% 444 306 45% 1.71 1.18

Habib Metropolitan Bank Limited 1,918 1,372 40% 1,316 977 35% 4.38 3.25

MCB Bank Limited 13,004 7,734 68% 8,643 5,383 61% 16.89 10.52My Bank Limited 490 294 67% 383 257 49% 1.86 1.25

National Bank of Pakistan 20,163 13,074 54% 14,008 8,707 61% 19.76 12.28

NIB Bank Limited 84 52 62% 30 92 -68% 0.09 0.27

PICIC Commercial Bank Limited 1,251 1,430 -12% 932 1,048 -11% 3.41 3.83

Prime Commercial Bank Limited 328 580 -43% 235 385 -39% 0.86 1.41

Saudi Pak Comm. Bank Limited 40 241 -84% 18 203 -91% 0.05 0.53

Soneri Bank Limited 1,051 1,100 -5% 720 650 11% 2.79 2.52

Union Bank Limited 1,179 2,007 -41% 737 1,250 -41% 2.17 3.69

United Bank Limited 10,487 6,464 62% 6,907 3,798 82% 10.67 5.87

68,831 49,886 38% 47,484 33,229 43%


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(Quarterly Earning Trend of Listed Commercial Banks during the ongoing CY 2006)

Profit After Taxes Fully Diluted EPS

Amount in PKR million In Pak Rupee

1st

Qtr06 2nd

Qtr06 3rd

Qtr06 *%Chg QoQ 1st

Qtr06 2nd

Qtr06 3rd

Qtr06

Allied Bank Limited 1,069 1,192 1,119 -6.11% 2.38 2.66 2.49

Askari Commercial Bank Limited 414 704 615 -12.63% 2.06 3.51 3.07

Bank Al-Falah Limited 387 425 530 24.64% 0.77 0.85 1.06

Bank Al-Habib Limited 415 529 353 -33.30% 1.58 2.01 1.34

Bank of Khyber 86 92 56 -39.33% 0.43 0.46 0.28

Bank of Punjab 585 1,846 580 -68.59% 2.04 6.44 2.02

Crescent Comm. Bank Limited (159) 49 (166) N/A -0.57 0.18 -0.60

Faysal Bank Limited 466 1,479 331 -77.62% 1.10 3.49 0.78

KASB Bank Limited 101 (64) 67 -203.52% 0.44 -0.28 0.29

Meezan Bank Limited 182 136 127 -6.56% 0.70 0.52 0.49

Habib Metropolitan Bank Limited 353 485 477 -1.63% 1.17 1.62 1.59

MCB Bank Limited 3,003 2,738 2,902 5.96% 5.87 5.35 5.67

My Bank Limited 146 76 161 110.16% 0.71 0.37 0.78

National Bank of Pakistan 3,612 4,405 5,991 36.02% 5.09 6.21 8.45

NIB Bank Limited 4 9 17 86.41% 0.01 0.03 0.05

PICIC Commercial Bank Limited 394 256 282 10.27% 1.44 0.94 1.03Prime Commercial Bank Limited 131 100 4 -95.82% 0.48 0.36 0.02

Saudi Pak Comm. Bank Limited 73 24 (79) -426.75% 0.19 0.06 -0.21

Soneri Bank Limited 229 306 185 -39.42% 0.89 1.18 0.72

Union Bank Limited 537 483 (284) -158.77% 1.59 1.43 -0.84

United Bank Limited 2,260 2,435 2,212 -9.14% 3.49 3.76 3.42

14,287 17,704 15,479 -12.57%

Note: Atlas Bank is not i ncluded as the bank was not lis ted as a commercial bank on the bours es in the start of CY06

* % Chg Q-o-Q is the growth or decline in PAT duri ng 3rd Qtr 2006 over the 2nd Qtr 2006.

Spotlight on Balance Sheet Key Figures:

During Jan-Sep 2006Total Assetsof listed commercial banks have surged to Rs2,961 billion from Rs2,673 billionas on 31stDec2005, reflecting an increase of 10%. However on a Qtr-on-Qtr basis, the total assets of the sectorwitnessed a slight decline of 1.20%. The decline in assets on a Qtr-on-Qtr basis is primarily due to a decrease in thetotal investments, which although increased by 9.16% during the Jan-Sep 2006, they reduced by 1.32% on a Qtr-on-Qtr basis. During the 9-months 2006 under review,Crescent Commercial Bank andUnion Bank were the onlytwo banks that witnessed decline in their total assets, reducing by 20.06% and 3.03% respectively. However, somebanks witnessed a healthy increase as well. Atlas Bank reported an increase of 113% in the total asset base, whichis the highest in the sector. Again the main reason behind such a massive jump (in % terms) is the lower baseeffect, which allows for a higher proportionate growth. Amongst large banks, Allied Bank depicted the highestincrease of 20.8% in its total assets, a fact that could be attributed in part to the changed corporate vision andactivities brought about by the new management.

Total liabilities of the sector portray a similar same picture: These witnessed an increase of 9%, increasing to Rs2,688 billion from Rs 2,455 billion during Jan-Sep 2006. However, on a Qtr-on-Qtr basis, the liabilities of thelisted commercial banks declined by 1.92%. Once again Atlas Bank, due to the same reason (lower base effect),depicted an increase of 117%, whileCrescent Commercial Bank andUnion Bank,which were the only two banksto have witnessed a decline in their total assets, also saw their total liabilities reducing by 27% and 3%respectively.

During the period under review, Net Assets or Total Equity of the sector surged by 21%, withAtlas Bank onceagain leading the show, with its equity climbing up by 97%. On a Qtr-on-Qtr basis, the total equity of the sectorincreased by 7%..Bank Al-Falah, due to the 25% rights issue, witnessed the highest increase as its total equitywhich surged by 30.34%QoQ; whileUnion Bank, due to some after taxes loss in the quarter, witnessed a declineof 4.58%QoQ in its equity. For the 9-month period, only Faysal Bank reported a decline in its equity base by 6%,presumably due to some adjustments for unrealized losses arising out of re-measurement of investments.


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(Balance Sheet Highlights of L isted Commercial Banks as on 30th September 2006)

Total Assets Total Liabilit ies Net Assets/Equity

Amoun t in PKR mi ll ion30

thSep

200631

stDec

2005%Chg 30

thSep

200631

stDec

2005%Chg 30

thSep

200631

stDec

2005%Chg

Allied Bank Limited 232,178 192,170 21% 215,487 179,134 20% 16,691 13,035 28%

Askari Commercial Bank Limited 152,484 137,086 11% 142,009 128,499 11% 10,475 8,587 22%

Atlas Bank Limited 16,938 7,952 113% 13,924 6,422 117% 3,014 1,529 97%Bank Al-Falah Limited 261,499 248,314 5% 250,747 240,850 4% 10,753 7,464 44%

Bank Al-Habib Limited 107,914 91,502 18% 101,836 86,255 18% 6,078 5,246 16%

Bank of Khyber 26,522 25,034 6% 23,464 22,514 4% 3,057 2,520 21%

Bank of Punjab 139,223 111,154 25% 123,444 97,484 27% 15,779 13,670 15%

Crescent Comm. Bank Limited 7,689 9,618 -20% 5,842 7,986 -27% 1,848 1,632 13%

Faysal Bank Limited 116,847 110,281 6% 103,478 96,021 8% 13,369 14,260 -6%

KASB Bank Limited 23,461 19,103 23% 21,391 17,367 23% 2,070 1,736 19%

Meezan Bank Limited 38,831 30,676 27% 35,379 27,651 28% 3,453 3,025 14%

Habib Metropolitan Bank Limited 94,298 79,666 18% 87,324 74,007 18% 6,973 5,659 23%

MCB Bank Limited 317,608 298,777 6% 287,067 275,469 4% 30,541 23,308 31%

My Bank Limited 22,246 17,219 29% 18,305 14,669 25% 3,940 2,550 55%

National Bank of Pakistan 625,592 577,719 8% 532,969 503,378 6% 92,623 74,341 25%

NIB Bank Limited 40,258 30,019 34% 36,025 25,806 40% 4,232 4,213 0%

PICIC Commercial Bank Limited 65,349 65,129 0% 61,268 61,071 0% 4,081 4,058 1%

Prime Commercial Bank Limited 54,458 53,757 1% 50,849 50,323 1% 3,609 3,434 5%

Saudi Pak Comm. Bank Limited 49,480 47,749 4% 45,744 43,942 4% 3,736 3,807 -2%

Soneri Bank Limited 67,014 63,345 6% 62,174 59,121 5% 4,840 4,224 15%

Union Bank Limited 113,556 117,101 -3% 108,294 111,966 -3% 5,262 5,135 2%

United Bank Limited 388,177 347,049 12% 361,107 325,381 11% 27,070 21,668 25%

2,961,622 2,680,418 10% 2,688,126 2,455,316 9% 273,495 225,102 21%


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Advances and Deposits:

As on 30thSeptember 2006, thetotal advancesof listed commercial banks surged to Rs1,622 billion from Rs1,448billion in the corresponding period last year, showing an increase of 12%. Moreover on a Qtr-on-Qtr basis,advances of the sector recorded only a nominal increase of 1.5%. Amongst listed commercial banks, the 5 bigbanks, which include NBP, MCB, UBL, ABL and Bank Al-Falah commanded 60.9% of the total advances of the

sector. Other than Crescent Commercial, the only other bank to report a decline in its advances was PICICcommercial Bank, declining by a nominal 1%. However, more surprising is the quarterly trend: During the 3rdQuarter of 2006 alone, amongst the 20 list commercial banks (excluding Bank Islami and Atlas Bank as they werenot listed before in the 2nd Qtr 2006) only 8 banks witnessed an increase in their advances, while the remaining 12banks depicted a decrease. This can be attributed to the increase in CRR and SLR requirement that compelled somebanks to restrict further lending activities, particularly those having higher ADRs. In addition to this, the increasein the SBP discount rate by 50bps increased the KIBOR, thereby making borrowing more expensive. As a result ofthis the private sector credit off-take during the period July-Oct 2006 stood reduced to Rs 62.37 billion, as againstRs94.45 billion in the comparable period last year, showing a reduction of 34%YoY during this period.

As on 30th Sep 2006, ADR (Advance-to-Deposit Ratio) of listed commercial banks stood at 70.58%,ascompared to 67.48% on the last working day of CY2005. NIB Bank is the only bank in the sector whose ADR hasexceeded 100% (including export re-finance acquired through the SBP), which is highest in the sector. In our view,

those banks having higher ADR & / or mismatch between assets and liabilities (having larger portion of short termdeposits and long term advances, or vice versa) are likely to see their cost of funds rising even further to bring thefinancial gap caused by the timing mismatch. This could adversely affect their profitability going forward. Bankof Khyber recorded the lowest ADR of 51.79%, followed by Saudi Pak Commercial Bank with 55.61% ADR.Despite the fact that most of the banks are offering attractive returns to depositors, they are still facing difficulty inmobilizing deposits at a pace that could ensure sustained growth in advances with manageable ADRs.

During the period under review, total deposits of the sector recorded an increase of 7%. For the 9-month period,Atlas Bank, mainly due to low base effect, witnessed an increase of 287% in its deposits. Crescent Commercial,Bank Al-Falah and PICIC Commercial were the only three listed commercial banks that depicted a decline in theirdeposit base which reduced by 30%, 3% and 1% respectively. However, on a Qtr-on-Qtr basis, the total depositswitnessed a nominal decline of 0.87%, against the overall 7% increase in the 9-month period. Amongst listedcommercial banks (excluding Bank Al-Islami and Atlas Bank), 10 banks reported an increase in their deposit base,while the remaining 10 witnessed decrease.

(Advances and Deposit Position of L isted Commercial Banks as on 30th September 2006)

Advance Depo si t Rat io Adv ances Depos it s

Amount in PKR mil lion Sep 2006 Dec 2005 Sep 2006 Dec 2005 %Chg Sep 2006 Dec 2005 %Chg

Allied Bank Limited 68.18% 68.52% 135,025 110,947 22% 198,030 161,907 22%

Askari Commercial Bank Limited 73.17% 72.37% 89,780 85,977 4% 122,701 118,795 3%

Atlas Bank Limited 85.53% 36.57% 7,230 799 804% 8,453 2,186 287%

Bank Al-Falah Limited 62.26% 53.46% 133,755 118,864 13% 214,843 222,345 -3%

Bank Al-Habib Limited 68.96% 72.96% 60,684 55,304 10% 88,003 75,796 16%

Bank of Khyber 51.79% 60.81% 10,067 10,612 -5% 19,440 17,452 11%

Bank of Punjab 76.57% 71.92% 87,974 63,624 38% 114,898 88,465 30%

Crescent Comm. Bank Limited 63.98% 62.22% 2,667 3,724 -28% 4,169 5,985 -30%

Faysal Bank Limited 84.50% 83.39% 66,099 62,324 6% 78,229 74,737 5%

KASB Bank Limited 62.70% 72.43% 11,946 10,739 11% 19,051 14,828 28%

Meezan Bank Limited 76.42% 86.70% 22,503 19,741 14% 29,447 22,769 29%Habib Metropolitan Bank Limited 77.82% 76.64% 46,982 43,463 8% 60,377 56,713 6%

MCB Bank Limited 73.11% 78.63% 183,582 180,323 2% 251,092 229,345 9%

My Bank Limited 70.71% 72.29% 11,463 9,294 23% 16,212 12,857 26%

National Bank of Pakistan 62.20% 58.01% 300,575 268,839 12% 483,232 463,427 4%

NIB Bank Limited 131.97% 92.90% 28,649 19,623 46% 21,709 21,124 3%

PICIC Commercial Bank Limited 61.66% 62.02% 32,772 33,162 -1% 53,150 53,468 -1%

Prime Commercial Bank Limited 73.46% 65.65% 31,337 25,524 23% 42,659 38,876 10%

Saudi Pak Comm. Bank Limited 55.61% 52.55% 22,629 19,514 16% 40,692 37,136 10%

Soneri Bank Limited 64.36% 67.33% 32,778 32,053 2% 50,931 47,606 7%

Union Bank Limited 93.69% 75.64% 68,752 68,969 0% 73,385 91,187 -20%

United Bank Limited 76.38% 70.81% 235,301 204,810 15% 308,065 289,226 7%

70.52% 67.48% 1,622,552 1,448,228 12% 2,298,767 2,146,228 7%


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9

Bonus Bonanza:

Our stock market has always maintained a liking for bonus shares over cash dividends. The prospects of bonusissues from banking sector stocks have always been high. This is due to two reasons: First, in general cash isregarded as a commodity by the banking sector, on which further assets are built-upon. Thus cash dividends asa percentage to total income remain low. Secondly, as per SBP requirements, paid up capital of commercialbanks should be Rs 3,000 million by the end of the ongoing CY06. Presently nine listed commercial banks(including Bank Al-Islami Pakistan) are following short of meeting this requirement. This means that all thesebanks would have to issue bonus shares; or raise fresh capital in varying ranges of 3.5% - 50%. AskariCommercial Bank, Bank of Khyber and Bank Islami are facing the largest shortfall while Bank of Punjab facesthe least short-fall in its paid-up capital. Presently its paid-up capital is Rs2,868 million and right shares @1.25%, for which Letters of Right have already been issued, would raise the paid-up capital to Rs 2,904 million.Still there would remain a nominal shortfall which could easily be met.

According to SBP regulations, banks are required to enhance their paid up capital to Rs 6,000 million by 2009.National Bank of Pakistan and United Bank Limited are only two listed commercial banks which have alreadymet this target. In addition to this, Union Bank, which has been recently acquired by Standard Chartered Bankand going forward the new entity would be listed under the name Standard Chartered Pakistan Bank, also has apaid-up capital in excess of Rs 6,000 million.

Going forward investors can expect hefty bonus issues from the banking sector. Some banks may also opt toraise their paid-up capital by issuance of right shares. One of the SBPs rational behind enhancing the paid-upcapital is to increase the overall equity base so that banks can adequately meet Capital Adequacy Ratio (CAR)requirement when stringent conditions of upcoming Basal II would be implemented. Thus, in order to increasecore capital as well as equity base, the probability of rights issue can not be ruled out.

(Advances and Deposit Position of L isted Commercial Banks as on 30th September 2006)

Paid-up-Capital Mandatory Bonus / Rights Issue

Rs in PKR million 20th

Nov06 CY06 CY07 CY08 CY09

Allied Bank Limited 4,489 N/R N/R 11.50% 20.00%

Askari Commercial Bank Limited 2,004 50.00% 33.33% 25.00% 20.00%

Atlas Bank Limited 3,126 N/R 28.00% 25.00% 20.00%Bank Al-Islami Pakistan 2,000 50.00% 33.33% 25.00% 20.00%

Bank Al-Falah Limited 5,000 N/R N/R N/R 20.00%

Bank Al-Habib Limited 2,629 14.00% 33.33% 25.00% 20.00%

Bank of Khyber 2,002 50.00% 33.33% 25.00% 20.00%

Bank of Punjab* 2,904 3.50% 33.33% 25.00% 20.00%

Crescent Comm. Bank Ltd 2,770 8.30% 33.30% 25.00% 20.00%

Faysal Bank Limited 4,237 N/R N/R 18.00% 20.00%

KASB Bank Limited 2,293 30.00% 33.33% 25.00% 20.00%

Meezan Bank Lim ited* 3,780 N/R 6.00% 25.00% 20.00%

Habib Metropolitan Bank Limited 3,005 N/R 33.00% 25.00% 20.00%

MCB Bank Limited 5,118 N/R N/R N/R 17.00%

My Bank Limited* 3,086 N/R 33.00% 25.00% 20.00%

National Bank Limited 7,091 N/R N/R N/R N/R

NIB Bank Limited 3,362 N/R 18.00% 25.00% 20.00%

PICIC Commercial Bank Limited 2,735 9.10% 33.33% 25.00% 20.00%

Prime Commercial Bank Limited 2,739 9.00% 33.33% 25.00% 20.00%

Saudi Pak Comm. Bank Limited 3,848 N/R 3.00% 25.00% 20.00%

Soneri Bank Limited* 3,117 N/R 28.50% 25.00% 20.00%

Union Bank Limited** 3,388 N/R N/R N/R N/R

United Bank Limited 6,475 N/R N/R N/R N/R

*Note: Recently announced rights by listed commercial banks have been adjusted in their paid up capital.

**Note: Union Bank has been acquired by Standard Chartered Bank and new entity would be listed on bourses by the name of

Standard Chartered Bank Pakistan. The paid up capital would be more than Rs8.926bn which is sufficiently above the paid up

capital requirement of Rs6bn by 2009. Thus, would not be required to announce by mandatory stock dividend going forward.


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Investment Summary:

In addition to many valuation techniques in use, we have seen that investors have preferred methods that havemore or less been dependent upon variants of Book Value or the Return on Equity. In our view, comparing banksfor investment purpose, one should not consider PBV or RoE in isolation. We believe both these key ratios to beconsidered simultaneously. Thus our key valuation indicator for banks is RoE/PBV as it provides the indicative

return available to a secondary market investor at a certain price payable for the share.

LARGE SIZE BANKSBased on our key valuation indicator, that is, RoE/PBV and considering future prospects of these banks, we hold aNeutral to Positive stance on large banks (having deposit base more than Rs150bn), with Allied Bank Limitedand National Bank of Pakistanbeing our top pick in this category. On the closing price of 20th November 2006,average earning yield of 5 listed large commercial banks is 9.35%, while average PBV and RoE of these are 2.91and 30.51% respectively.

It is worth mentioning here that the balance sheet composition and thus share price expectations of MCB Bankhave been somewhat changed after its recent GDR issue. The total size of the GDR issue was US$ 150 million (Rs9,105 million at Rupee Dollar parity of 1US$=Rs60.7). The bank issued 8.62million GDRs or 34.48millionordinary shares (1 GDR=4 ordinary shares) for Rs264 per ordinary share. This issue increased banks paid-up-

capital to Rs 5,152.48 million (515.248 million shares) while enhanced the equity base from Rs 30,541 million toRs 39,646 million. Some key changes in the fundamental valuations of the banks scrip can be seen in the tablebelow:

(Relative Attractiveness of Listed Large Commercial Bank)

EPS-9M'06 Earning Yield PER ADR Book Value PBV RoE RoE/PBV

Allied Bank Limited Rs 7.53 10.81% 9.25 68.2% Rs 37.19 2.49 30.2% 12.14%

Bank Al-Falah Limited Rs 2.68 7.54% 13.25 62.3% Rs 21.51 2.20 19.6% 8.91%

MCB Bank Limited Rs 16.89 9.20% 10.87 73.1% Rs 59.67 4.09 42.7% 10.43%

MCB Bank Ltd (Post GDR) Rs 15.82 8.62% 11.61 70.7% Rs 72.58 3.36 29.0% 8.62%

National Bank of Pakistan Rs 19.76 10.18% 9.82 62.2% Rs 130.63 1.98 22.3% 11.30%

United Bank Limited Rs 10.67 9.00% 11.12 76.4% Rs 41.81 3.77 37.7% 9.99%

Average 9.35% 10.86 68.43% Rs 58.16 2.91 30.51% 10.55%

MID SIZE BANKSKeeping in view the growth potential and recent financial performance, at the market price of 20th November 2006,we hold a Neutral to Positive stance on mid size listed commercial banks (having deposit base less Rs 150billion but greater than Rs 50 billion).

Mid size banks are offering average earning yields and annualized RoE of 10.8% and 26.1% respectively and aretrading at average PBV of 2.36 times. Bank of Punjab, Askari Commercial Bank, PICIC Commercial Bank andFaysal Bank are our preferred stocks among mid size banks. Moreover, Bank of Punjabis top pick in the entireNACL banking universe.Though not a financial criteria, the take-over potential of some banks have lead toconsiderable price flare-ups from this segment.

(Relative Attractiveness of Listed Mid Size Commercial Bank)

EPS-9M'06 Earn ing Yield PER ADR Book Value PBV RoE RoE/PBV

Askari Com Bank Ltd Rs 8.65 11.30% 8.85 73.2% Rs 52.26 1.95 24.2% 12.4%

Bank Al-Habib Ltd Rs 4.93 10.21% 9.79 69.0% Rs 23.12 2.78 30.5% 11.0%

Bank of Punjab Rs 10.50 13.90% 7.19 76.6% Rs 55.04 1.83 27.2% 14.9%

Faysal Bank Ltd Rs 5.37 11.45% 8.73 84.5% Rs 31.55 1.98 21.9% 11.1%

Habib Metropolitan Bank Ltd Rs 4.38 7.86% 12.72 77.8% Rs 23.21 3.19 27.7% 8.7%

PICIC Commercial Bank Ltd Rs 3.41 12.30% 8.13 61.7% Rs 14.92 2.47 30.5% 12.3%

Soneri Bank Ltd Rs 2.79 8.55% 11.70 64.4% Rs 18.76 2.31 21.1% 9.1%

Union Bank Ltd Rs 2.17 2.75% 36.31 93.7% Rs 15.53 6.76 18.8% 2.8%

Average 10.80% 9.59 72.4% Rs 31.27 2.36 26.1% 11.4%


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SMAL L SIZE BANKSWe have classified small size banks as those having a deposit base of less than Rs 50 billion. At present themarket prices (as on 20th November 2006), small size banks trades at an average PBV of 2.09 times which islower than the average PBV of large and mid size banks and might make such banks appear to be attractive atpresent level. However, they remain laggards when it comes to average earning yield and annualized RoE of mere3.50% and 4.71% respectively. Clearly the other indicators make these banks expensive at current price levels.

Other than Bank of Khyber, My Bank and Meezan Bank, we hold a NEGATIVE stance on such and adviceinvestors to book profit at present levels.

Based on rumours concerning mergers & acquisitions, share prices of some of these banks have risen very rapidlyand to levels that simply cannot be justified by conventional secondary market valuations techniques. Strategicinvestors of course pay a take-over premium for acquiring the management of the bank. Since benefits incidentalto management rights are not available to ordinary secondary market investors, they should full evaluate the riskassociated with investing in such stocks at the present highly inflated levels. Thus with a few odd exceptions, wedo not find any upside potential in small size banks.

(Relative Attractiveness of Listed Small Size Commercial Bank)

EPS-9M'06 Earning Yield PER ADR Book Value PBV RoE RoE/PBV

Atlas Bank Limited Rs 0.04 0.37% 269.99 85.53% Rs 9.64 1.53 0.75% 0.49%

Bank of Khyber Rs 1.17 9.34% 10.70 51.79% Rs 15.27 1.09 11.17% 10.24%

Crescent Comm. Bank Ltd Rs (1.00) -7.34% (13.63) 63.98% Rs 6.67 2.71 21.08% -7.79%

KASB Bank Ltd Rs 0.45 3.06% 32.66 62.70% Rs 9.03 2.16 7.19% 3.33%

Meezan Bank Ltd Rs 1.71 10.98% 9.10 76.42% Rs 13.29 1.56 18.24% 11.71%

My Bank Ltd Rs 1.86 12.38% 8.08 70.71% Rs 19.16 1.04 15.70% 15.04%

NIB Bank Ltd Rs 0.09 0.48% 207.46 131.97% Rs 12.59 1.93 0.93% 0.48%

Prime Comm. Bank Ltd Rs 0.86 1.96% 51.00 73.46% Rs 13.18 4.42 8.89% 2.01%

Saudi Pak Comm. Bank Ltd Rs 0.05 0.27% 372.90 55.61% Rs 9.71 2.38 0.63% 0.27%

Average 3.50% 105.36 74.68% Rs 12.06 2.09 4.71% 3.98%


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Sector Performance at Local Bourses:

Since the beginning of ongoing the year, banking sectors stocks have outperformed the KSE-100 Index. In additionto the generally impressive financial performance of the sector, some of the other positive factors affecting thesector include: Acquisition of Union Bank Limited by Standard Chartered Bank followed, ongoing rumours anddevelopments regarding mergers & acquisitions of other listed commercial banks by large multinational banks

namely Barclay, ABN AMRO etc, issuance of MCB Banks GDR were some key reasons that led investor interesttowards this sector and hence the rally in banking sector stocks.

During 1st July-20th Nov 2006, KSE-100 index yielded a return of 4.94% while the banking sector offered a returnof 17.82%, thus over-performing the index by 12.88%. Prime Commercial Bank offered a return of 113%, which isthe highest in the sector. Performance of the banking sector scrips at local bourses during since 1st July 2006 tilltoday can be seen in the table below:

(Performance of Banking Sector Stocks at the KSE)Price as on Price as on Market Cap as on Market Cap as on % chg

20th Nov 2006 30th June 2006 20th Nov 2006 30th June 2006

(In PKR) (In PKR) (PKR in 000) (PKR in 000)

Allied Bank Limited 92.65 88 41,587 39,500 5.28%

Askari Commercial Bank Limited 101.8 77.55 20,404 15,544 31.27%Bank Al-Falah Limited 47.3 40 23,650 20,000 18.25%

Bank Al-Habib Limited 64.25 64 16,893 16,828 0.39%

Bank of Khyber 16.65 16.9 3,333 3,383 -1.48%

Bank of Punjab 100.5 82.7 28,810 23,707 21.52%

Bank Islami 10.6 12.5 2,120 2,500 -15.20%

Crescent Comm. Bank Limited 18.05 8.75 4,999 2,423 106.29%

Faysal Bank Limited 62.35 61.5 26,419 26,059 1.38%

KASB Bank Limited 19.5 15.95 4,471 3,657 22.26%

Meezan Bank Limited 20.7 25.95 7,825 9,809 -20.23%

Habib Metropolitan Bank Limited 74.05 68.75 22,252 20,659 7.71%

MCB Bank Limited 244.2 210.3 124,991 107,640 16.12%

My Bank Limited 20 19.95 6,172 6,157 0.25%

National Bank of Pakistan 258 215.5 182,940 152,805 19.72%

NIB Bank Limited 24.35 20.5 8,185 6,891 18.78%

PICIC Commercial Bank Limited 36.85 25.05 10,078 6,851 47.11%

Prime Commercial Bank Limited 58.25 27.3 15,957 7,478 113.37%

Saudi Pak Comm. Bank Limited 23.15 13.85 8,907 5,329 67.15%

Soneri Bank Limited 43.4 39 13,528 12,156 11.28%

Union Bank Limited 105 74 35,569 25,068 41.89%

United Bank Limited 157.7 137.75 102,111 89,193 14.48%

KSE-100 Index => Index 10,432 Index 9,941 Rs 711,201 Rs 603,637 Diff erence

Return => 4.94% 17.82% 12.88%


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Corporate Office

Research Department Contact Number Email

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Tahir Hussein Ali 92-21- 5693581- 85 [email protected]

Teerath M. Bhojwani 92-21- 5693581- 85 [email protected]

Shuja-ul-Hassan 92-21- 5693581- 85 [email protected]

Sales Department Contact Number Email

Muhammad Hafeez Haroon 92-21- 5650967 (Direct) [email protected]

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PABX: 92-21- 5693581- 85, Fax:(92-21) 5680206, Email: [email protected]

Disclaimer:This document has been prepared by Noman Abid & Co Ltd for information purposes

and is being sent in good faith only. Every effort has been made to ensure accuracy of information.

However, we dont accept any liability for use of the information.

Documents

Indepth Banking Sector Review 9-Months '06 (21st November 2006)