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Presented To:

Sir Waseem Ullah

Project: Financial Analysis of MCB

Pakistan

Presented By: Group No: 14

Imran Khalid

Reg#3414-FMS/MBA/S08 (19B)

Khurram Iftekhar Reg#3422-FMS/MBA/S08 (19B)

Ismail KhanReg#3415-FMS/MBA/S08 (19B)

M.Rizwan Bisharat Reg#-3427S/MBA/S08 (19B)

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Table of Contents

Banking Industry ................................................................................................... 1

Muslim Commercial BankMuslim Commercial Bank ..................................................................................... 2

Bank RatingBank Rating ............................................................................................................. 2

Swot AnalysisSwot Analysis ........................................................................................................... 3

Michle Porter Five forces AnalysisMichle Porter Five forces Analysis ........................................................................ 6

Financial Analysis ................................................................................................... 8

Future Out look ..................................................................................................... 15

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BANKING INDUSTRY In 2008 there is a financial slump in the world economy effects the solvency, liquidity

and the profitability of the banking system and decline in the consumer spending.

Pakistan was already experiencing economic and financial problems before the world

financial crises. Due to excessive money creation and excessive consumer lending’s in

private sector, rising oil prices, food, electricity crises led to a sharp inflation in the

country which effects the balance of payment due to which the foreign exchange reserve

also effected. Pakistan make an arrangements with IMF which helps for short time to

eased the inflationary pressure, this arrangement also released the banks to continue their

businesses.

The stress emerged in usual timeframe, i.e., Eid-ul-Fitr deposit withdrawal and a number

of global, domestic and industry specific factors further compounded it. The current

account deficit was quite high and the real exchange rate had significantly appreciated to

unsustainable levels, which ultimately put pressure on rupee/dollar exchange rate and led

to capital outflows. On top of it, breakdown of capital market in Pakistan and the series of

news on the financial meltdown in advanced markets raised general public doubts about

the financial strength of some Pakistani banks. By this time, due to relatively higher

growth in advances, the liquidity profiles of the banks had already been burdened. In this

backdrop, the usual post-Eid liquidity pressure in interbank market led to rumour-

mongering about the banks. The impact was severe in some banks especially the small

banks with the constrained liquidity profile in terms of ADR.

The reduction in Cash Reserve Requirements (CRR) and Statutory Liquidity

Requirements (SLR) in early weeks of October 2008 to manage the liquidity stress

resulted in a significant decline in cash and treasury bank balances by the end of

December-08 quarter, thus releasing funds for financing the growth of advances.

State bank of Pakistan enabled the system by some regulations to over come the financial

crises.

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MUSLIM COMMERCIAL BANK

MCB is among the oldest banks of Pakistan. It was incorporated in 1947. It was among

those private banks that were nationalized in 1974. Nationalization had drastically

impacted its performance as it affected the quality of loan portfolio and services.

Eventually, it was privatized in 1991 and is currently owned by the Mansha group. Post

privatization, MCB’s focus has been on aggressive cost reduction.

MCB has a network of over 1000 branches across Pakistan, of which, around 750 are

automated. The bank offers various services to its consumers, including personal

banking, corporate banking, virtual banking, Islamic banking and other services. In this

rapid expanding banking sector, MCB has been performing well to compete with its

rivals. MCB has won the "Best Bank of Pakistan" award for the 5th time from 2001 to

2006.

During the year 2008 the bank continued to make strong progress in spite of the difficult

market conditions. Revenues grew strongly and considerable advancement due to

expanding our assets base. A number of strategic actions have been taken ensured that

MCB is having well position for the future and are able to excel in the year to come. In

2008 bank awarded best bank in Asia by Euro money.

Further the BOD of the bank taken steps to improve governance in the bank introducing

good policies.

Bank Rating

The bank has made an extraordinary effort to reduce its dependence on debt, as a source

of finance. Debt management figures reveal that the bank has 96% of its assets financed

by debt in 2003. However, it had reached a very high level and there is always a potential

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to fall back from heights, it has been the case with MCB as it had to reduce its

dependence on heavy debts. Furthermore, debt to equity ratio suggests a tremendous

recovery by MCB to improve its credit rating up to AA+ in long term and A1+ in short

term.

SWOT Analysis

Strengths:

Mainly operated by Mansha's group.

Offers a wide variety of services to its customers and has a customer bank of

round about 4 million.

The bank has efficient and experienced management making significant

The bank has efficient IT infrastructure and network of on line branches.

Brand image because of "Muslim" word in the name in an Islamic country.

MCB is working in Pakistan over 60 years of success.

Muslim Commercial Bank (MCB) falls under the category of 'big five'

domestic commercial banks.

Rapidly its performance is going up and it has above 10000 employees and it

has 1000 branches network in which 700 are online branches.

The culture of MCB is strong and employees are professional and committed

to their work.

Bank is continuously focusing on developing a new and innovative products

to attract their target market.

Strong customer relationship.

Asset utilization is very good.

GPRS enabled banking.

At present it has the largest ATM network in Pakistan.

The launch of MCB switch allows other banks to utilize MCB's ATM

network.

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Weaknesses:

Less job satisfaction of employees.

Customer facing problem of NADRA verification while opening their

accounts because its process is time consuming.

To give everyone equal protocol is lacking among employees Customers

having account with small amount are not given same services like dealing to

others who have high account.

Actuarial gains lead to boost the administrative expenses due to decreasing

discount rate.

Lack of decentralization. Banks is planning to restructure its departments and

is going to be centralized very soon.

Lack of organizational loyalty among employees.

Promotions generally on seniority basis.

Attitude of senior managers at head office has to change towards junior staff

Competent staff unwilling to serve in the audit due to an absence of firm

rotation policy.

As most of the employees are young they have more tendencies to switch the

organization and to seek more opportunities.

Opportunities:

To go global fully.

Low exposure to consumer banking providing opportunity to explore the

segment.

Emergence of Islamic banking in the country and MCB is increasing its

Islamic Banking operations.

SBP policy to allow Islamic banking business separately.

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Bank has earned a good name by introducing innovative products

like car financing home financing credit cards these products can easily

enhance the market share.

Bank introduces Islamic banking in country that attracts large number of

people.

Free staff training facilities offered.

Greater profitability can be achieved through strong internal control

Profit and deposit of banking industry have shown an increasing trend because

of better marketing environment.

Elimination of risk of fraud through professional training

Opportunity to open branch in ruler area to increase its branch network and

gain more profit.

The bank can earn more profit by advancing to farmers and industrialists at

low rates.

New schemes for deposits and finances should be introduced regularly.

Threats

Current economic crunch.

Political instability.

Strong competition.

Rising deposit rates.

Foreign banks in market having more marketing budgets.

People losing trust in banks.

Decline in private and public sector credit due to tight monetary policy.

Participation of foreign banks in local market that can hurt the market share.

Growing NPL's of the industry which may hurt MCB also.

Mergers & acquisition activities, consolidating the banking sector and MCB is

also vulnerable to it.

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The market is already saturated Uncertainty in Pakistan and poor

law and order situation are also big threat for bank.

Restructuring of privatized banks.

Tough competition by foreign nationalized and privatized banks in foreign

trade business in fact competition is always a threat for organization.

The stiff competition also causes switching of employee bank have to pay

more salaries to their employees.

Cost of doing business is increasing day by day so it’s very hard to compete

with financial sector.

Government policies are changing day by day and government stability is also

not there.`

Michal Porter Analysis

Bargaining power of the Buyers

The banking industry is confronted with diversified customers. Keeping in view

the customer needs and differential customer oriented products and services,

policies have been designed in a way that it meets the requirements of the

customer. In consideration of these services, customer has a lot of options and can

obviously shift to other bank voluntarily if he is not satisfied with the bank he is

dealing with. Its is important for bankers should keep his customers well-

informed regarding their offerings because on the basis of which customer decides

that which bank should be chosen with regards to interest rate and mark-up etc.

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Bargaining power of suppliers

The depositors perform the function of suppliers for the bank as they keep their

money with the bank whereas on the other hand it enhances the banks lending

ability which is then invested in some other business activities like providing

personal and business loans etc. The profit earned from these is then paid back to

the customers in the name of interest. The bargaining power of the suppliers is

high because they move where they find the maximum interest rate. The banks

need to concentrate on devising and making policies so as to draw and grab more

customers.

Threat of new entrants

Market always has a room for new entrants. Different Islamic banks have entered

the market claiming that their banking system is according to the sharia’h

complaint solutions commonly known as Islamic Banking, certified by a

distinguished sharia’h board. Along with this their infrastructure deals with all

kinds of solutions for the customers such as consumer banking and corporate

banking. If the culture, norms and religious values are given consideration then

they can attract a considerable percentage of target market, which believes that the

existing banking system is against sharia’h.

Threat of substitute products or services

The leasing companies and other financial institutions (e.g. Adamjee Insurance

etc) currently operating are also dealing in consumer products providing them on

different terms and conditions. These can act as a substitute for the customers.

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Therefore it is important to keep an eye on these companies and revise

the policies accordingly.

Intensity of Rivalry among Competitors

In traditional banking system, competition among rival banks turns down the

profit, but competition is not perfect and banks are not unsophisticated passive

price takers. Rather banks strive for a competitive advantage over their rivals. The

intensity of rivalry among banks varies according to products and services they

offer to their target market, whereas strategic analysts are interested in these

customer oriented differences.

Financial Analysis of statement of financial year

2006, 2007 and 2008

Risk

1) Credit Risk: Annual provision for loan losses to equity ratio was 0.065 in FY06

but in FY07 and FY 08 it decreased to 0.026 and remain constant in both the Financial

years, which is positive sign for bank because it means that borrowers are repaying their

loans properly, and the Peer group average is 0.079. Total loans to Total deposits ratio

was 0.770 in FY 2006 and in FY 2007 it decreases to 0.750, and in current FY it is 0.795,

and peer group average is 0.677.

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2) Liquidity Risk: MCB Advances have grown by 19 percent in FY 2008 as compare

to FY 2007. Cash and due-from balances held at other financial institutions to total assets

ratio was pretty low in FY 2006 (0.56) it increased to 0.72 in FY 2007 and now in FY

2008 it is 0.108 which is still high with its peer group ratio which is 0.144. This means

that MCB is having low liquidity risk as compare to Peer Group.

3) Interest Rate Risk: Interest rate fluctuated in the last three years in the country,

but the banks interest rate risk ratio remain same in FY 2006 and 2007, some how it is

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increased .03 in 2008, this is because the ratio of increase in deposits is too

much than MCB’s investments and other return portfolio. And the Peer Group average is

1.28.

PROFITABILITY

The profits of FY08 are lower than profits for the last two years, but MCB is still

profitable. The overall profitability is affected due to increase in operating expenses and

provisioning for loan losses. In absolute terms, expenses increased by about 50 %in FY08

as compare to previous year, which affected the overall profitability of the bank.

Non-interest income decreased by 3.1 % as compare to previous year. And interest

income also decreased by 3 % as compare to previous year this was due to slump in

economy. ROA also decreased by 4% to 3 % this year and the reason was same.

As a whole all the profitability ratios decreased but as compare to Peer group MCB is in

profit and earning more than its competitors.

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Return on Asset

DuPont Analysis

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INVESTMENTS

The investments, especially the government papers, which declined in both absolute

rupee terms as well as a proportion of total assets during the first nine months of CY08,

registered a slight increase during the last quarter. Actually, the heightened credit risk on

account of deterioration in macroeconomic fundamentals and already constrained

liquidity profile induced the banks to shift their preference towards risk-free

.

The banking system is marked with a high concentration as a few number of banks hold a

major share of the systems total assets and deposits. This concentration has been

following an overall declining trend as the medium sized banks gradually gained market

share. However, due to unusual liquidity stress that affected mainly the small and

medium sized banks, the market share of five large banks inched up to 52.4.

DEPOSITS

The deposit component is a indicator of strong growth, foreign remittances, is the main

factor behind the recent years strong growth in deposits, and grew by 13.07 percent over

CY08.

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In the current year trend shows the shift in deposite from saving to term deposite.

It is due to in response to SBPs policy incentives to encourage long term deposit

However, the SBPs policy drive to increase the CRR and SLR in last week of Jun-08 and

exemption of long-term deposits also from SLR requirements during the last quarter and

other factors like general rise in interest rates and innovative deposits scheme have also

increased depositors preference for terms deposits.

ADVANCES

Advance is the one of the big asset in balance sheet of financial situation in year 2006 to

2007 there is a 10% increase but with respect to the FY 2007 in FY 2008 it is increased

by 19.90%.

Advances witnessed a significant slowdown in sharp contrast to industry established

patterns for the last quarter. The worsening business and economic environment

somewhat increased the credit risk, which compelled the banks to adopt cautious lending

strategy, particularly in consumer sector where the advances have been decreasing since

the start of CY08. Some new loans have been issued, of which, a significant portion

disbursed to public sector enterprises (PSEs).

FY08 however, observed a deviation in the growth pattern of advances. Slackness in the

demand for bank credit during FY07 coupled with slowdown in economic activities and

tightening of the monetary regime, forced the banks to reposition their lending strategy

and asset profile. The asset mix of the banking system gradually shifted from lending to

investments during the first three quarters of FY07.

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Non Performing Loan

Rise in NPLs observed across all the banking groups except specialised banks, where

NPLs have actually decreased. NPLs have been on the rise mainly due to poor economic

performance of the economy.

Total provisions for NPLs surged to Rs 53 billion in 2008 as against Rs 42 billion in

Rising inflation and contained disposable incomes coupled with increasing lending rate

have reduced consumers appetite for credit as well as their repayment capacity, resulting

in increasing defaults rate in the consumer finance. Interestingly, in the wake of

economic slowdown, banks seem to facilitate the businesses through

rescheduling/restructuring of loans, the textile sector being the major beneficiary. Latest

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banking industry numbers show an effort to keep balance sheets clear of NPLs by

recognizing and providing for NPLs on criteria that are more stringent. This approach

might look costly in the meantime but in the long run it will definitely benefit banks by

providing a cushion to withstand losses.

FUTURE OUTLOOK

The global financial crisis has badly effects banking systems. The financial sector is

facing problems but its better than other neighbouring countries due to regulations and

the role of SBP to take timely corrective measures. Measures include relaxation of CRR

and SLR in phases. The banking sectors spread continues its rising trend after witnessing

a dip to the level of 6.78% in June 2008 that has being taken as an after effect of

minimum profit payment of 5% on saving accounts. The profits show that long term

investment in Pakistani banking system will be lucrative, as the assets quality is quite

satisfactory.

Pakistan continued to follow stance of tightening of the monetary policy using the high

interest rate as a tool to contain inflationary pressures at the cost of stalled economic

activities. It can be noted that SBP already charging lower mark-up rate from exporters

against export refinance facility under EFS in order to enable them to become

competitive in the international market. The trade and industry however feels in order to

ignite a spark in the dull and dreary economic conditions and to come out of the

persisting recession the incentive of low interest should have been given to all

stakeholders across the board to achieve the desired results.

Some of the market expectations are that current discount rate at 15% is likely to be on a

slope by at most 400bps (basis points). In fact, the cut in the interest rate was long

overdue as done by other economies elsewhere as well as in the face of stability returned

into macro situation under the IMF programme. Trade experts feel that in current times,

low cost credit is vital to stimulate the economy and international trade. Pakistan exports

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have a combination which can be well suited to the current world economic situation, ie,

low value added goods have income elasticity and are least likely to be affected by the

economic slowdown.

Challenges faced by the economy, in general, and the banking sector, in specific, include

restrained liquidity, slowdown of economic activity, and high inflation. Despite these

issues, MCB has been able to maintain its profitability and only concern is of higher

NPLs, which have to be checked as it has surpassed to alarming levels. Besides this, the

bank is equipped to face challenges with its dynamic management and trained workforce.

In this situation the MCB is growing day by day and is going to acquire the RBS bank,

which shows that the MCB is the market leader and management is doing work in this

crunch and getting the benefit of this and purchasing the banks to expand the business.

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