V I S I O N - Pakistan Banks · Bank Alfalah with an asset size of Rs.185 billion overtook Allied Bank Ltd whose assets totaled Rs.170 billion in the period ended June ’05. Assets

V I

S I

O N To be the pre-eminent financial institution

in Pakistan and achieve market recognitionboth in the quality and delivery of serviceas well as the range of product offering.

M I

S S

I O

N To be recognized in the market place byInstitutionalizing a merit & performanceculture, Creating a powerful & distinctivebrand identity, Achieving top-tier financialperformance, and Adopting & living outour core values.

July - August 2005BULLETINECONOMIC

Contents

§ Editor’s Corner ii§ Banking Sector Performance – 2004 in Review 4§ Basel II 21§ Credit Ratings of Financial Institutions 26§ Market Analysis 27

NBP Performance at a Glance

ii

Dear Readers,

Local and foreign banks operating in Pakistan have, over the last few years, started publishing their quarterlyand half yearly balance sheets. Most of them have published their financial results for the period endedJune 30, 2005.

Available un-audited figures show that the banks have performed well in the first half of 2005. Profitabilityhas increased significantly. Advances and deposits have risen, as have investments. Earnings have improvedfollowing acceptance of innovative consumer finance products. Banks are giving focused attention toquality customer services, largely with a view to increase performance in the emerging competitiveenvironment. A key to this is the investment into human resource development and use of informationtechnology. Branch network has expanded with some having opened Islamic banking branches. Others arestill pondering whether to follow or not. Their lending portfolios include commercial banking, small andmedium enterprises, agriculture as well as consumer financing. Some large banks have received internationalrecognition.

Total assets have risen significantly for the large Pakistani banks, with National Bank of Pakistan leadingat Rs.578 billion, followed by Habib Bank Ltd at Rs.517 billion in the first six months of 2005. For mostof the large banks assets grew by between Rs. 10 to 30 billion. Bank Alfalah with an asset size of Rs.185billion overtook Allied Bank Ltd whose assets totaled Rs.170 billion in the period ended June ’05. Assetsof Askari Commercial Bank showed a substantial rise of Rs.20 billion. Askari Investment ManagementLtd, a wholly owned subsidiary of the Bank was incorporated during this period.

The increasing health of the balance sheets of the banks has provided them an opportunity to increase theirearnings. With an increased asset base, the loan portfolio of the banks has risen. The momentum in advancesgrowth continued in the period under review. This was despite gradual increase in interest rates and theconsequent apprehensions surrounding fall in consumer loans, implying continuity of economic activitiesand giving rise to optimisim for yet another profitable year for the banks. For instance, banks like NBP,HBL, Bank Alfalah, increased their lending portfolios by around Rs.30 billion, while UBL, MCB by aroundRs.20 billion. There was growth in all sectors; corporate portfolio as well as retail banking portfolio.National Bank’s retail banking portfolio has shown exceptional growth with number of customers increasingto over 550,000. Similarly the Bank is the second largest lender to the agricultural sector, just behind ZaraiTaraqiati Bank, with a market share of around 19%. Retail lending by other banks has increased the demandfor consumer durables, which in turn has spurred investment in industry.

As a result of increased lending to the different sectors of the economy, the Banks witnessed an overallstrengthening in earning position –– net interest income increased substantially for all banks, and earningsper share rose. As lending rates maintained their rising trend, net interest income posted higher growth.For NBP it rose by Rs.3.8 billion, for HBL by Rs.4.4 billion, MCB by Rs.3.3 billion and for UBL by Rs.3.1billion compared to end December 2004 figures.

Editor’s Corner


iii

Net interest income received support by non-interest incomes, which though grew at a slightly slower pace.Of these, fee based income performed better as the active business activity maintained the demand forbanks’ fee earning services.

Deposits have surged: the NBP has the largest deposit base, of slightly over Rs.490 billion. The other bankshave also done well in mobilizing larger sums in this six-month period. Examples include Bank Alfalah’sincrease in its deposit base by 25% outgrowing Allied Bank’s deposit base which has expanded by 13%.Askari Commercial recorded a growth of 24%, UBL 17%, and MCB nearly 10%.

The investment portfolio of the banks increased during the six months under review. This was a result ofan increase in yields on government securities, which induced banks to channel more funds towardsinvestment.

Continuing the previous rising trend in profits, this six-month period saw National Bank of Pakistanrecording a pre-tax profit of Rs.7 billion (Rs.4.0 billion in June 04). It was the highest in the banking sectorand was primarily due to enhanced core banking income. This can be attributed to both growth in theoverall quantum of advances and improvement in both yield on advances and on investments. The largeprivatised and private banks have also done well. ABL showed a positive turnaround from a loss to a profitwithin six month. Standard Chartered before tax profit rose to Rs.2 billion against Rs.1.5 billion for theyear ended December 2004.

Notwithstanding efforts to the contrary, there was a minor increase in non performing loans by all banksand development financial institutions during the six months under review, although the percentage of cashprovisions for NPS have increased to approximately 70% on an industry basis. These now total Rs.205.5billion with commercial banks constituting 67.9% of the total outstanding defaults (public sector banks28.5%, local private banks 69.7% and foreign banks 1.8%), specialized banks 30.2% and DFIs 1.9%.

Banks have Rs.201.4 billion in non-performing loans, while development finance institutions have Rs.4.1billion on their books. While banks are enjoying good financial health and increased profits, small defaultshave arisen partly because of consumer loans, auto and house loans.

Given the trends in the banking sector, the financial results for the year ending December 2005 are expectedto be favourable.


4


Pakistan’s banking sector maintained its growthmomentum during the year and showedsignificant growth of its core business activities.The key indicators show an impressive pictureof its financial health. Today, Pakistan’sfinancial sector stands at the threshold of a newera. The changing financial landscape hasushered in fresh business opportunities:automated and electronic banking, innovativeproducts, diversified lending portfolios, mergersand consolidation, effective bankingsupervision. In effect the form and fabric ofthe banking sector has altered. With 35scheduled banks operating in Pakistan; twonationalized, four privatized, 16 private, 2provincial and 11 foreign, having a network of6581 branches and over 81 thousand employees,the sector is providing well-diversified servicesto its customers.

Prior to the reforms of the early 1990s bankswere faced with major issues. These included,but were not limited to, poor management andperformance atypical of the public sector,weakness in the supervisory system, lack ofgovernance in state owned banks, looseenforcement of regulations by the State Bank,crowding out of the private sector, deterioratingquality of assets, political patronage limitingaccess to credit by the chosen few, a largeportfolio of non-performing loans, etc.Cumulatively these and other factors hadworsened the overall performance of thebanking sector and the quality of services beingdelivered.

The private sector has become the dominantowner of the overall financial sector, withprivatisation of major nationalised banks, andsetting up of private banks. There is now betteraccess to credit for the previously marginalizedborrowers as financing to sectors that cater tomiddle and lower income groups, such asagriculture and SMEs are being focused uponby the commercial banks. Reformsaccompanied by privatisation of banks increasedcompetition, brought innovation in terms ofnew products, and improved the quality and

Banking Sector Performance — 2004 in Review

Banksmaintaingrowthmomen-tum

standard of financial services available to theclientele.

They have also brought effective results asfinancial soundness indicators have shownmarked improvement. Key financial ratiosrelated to capital adequacy, managementsoundness, earnings and liquidity revealsignificant improvement in the financial health.Also the sector has developed, diversified andis highly competitive today. The financial sectorhas grown in recent years, with all the segmentsexpanding their asset bases in relation to GDP.

In the past five years, banks have encouragedusage of credit cards, made available consumerfinancing for automobiles, mortgages, consumerdurables, and personal loans. Agricultural creditby banks has quadrupled over the past threeyears and there has been an increase in lendingto small-and medium-sized enterprises (SMEs).The customer base has doubled in the past twoyears alone. Capitalization requirements havebeen raised substantially, improving the sector’soverall capital adequacy ratios. Riskmanagement techniques have been improvedand good corporate governance andaccountability has been rigorously enforced bySBP. Prudential regulations have been beefedup with good results.

After the privatization of state owned HBL lastyear, NBP is the only large bank left in thepublic sector. However, the government soldsome 23% of its ownership in the bank during2001-03. The divestiture of state ownership inthe commercial bank has substantially changedthe structure of the banking sector. While ABL,MCB and UBL were privatized earlier, thesubsequent privatization of HBL increased theprivate ownership share to 75-80%.

National Bank of Pakistan enjoys the positionof No.1 bank in the country, with a marketshare varying in the range of 16% to 23% interms of assets and deposits. FWB, the onlybank for women in the public sector, has aminor share of less than 0.5% in the entire

Newinitia-tions

Owner-shipstructurechanges

Periodprior tofinancialreforms

Reformsbringpositiveresults

5


industry. Foreign banks operating in Pakistanhave around 10% market share.

Banking sector continues to register high growthin profits, deposits and advances. This isattributable among others, to revival ofeconomic activities which has led to increasedbusiness and trade volumes; improvedmanagement of assets and liabilities, effectivecontrol over operating expenses andintroduction of market oriented products andservices.

The year 2004 was the third consecutive yearof double-digit growth in profitability. Thiswas primarily due to enhanced growth in banks’core business activities. During the year,commercial banks operating in Pakistanreported a combined profit (BT) of Rs.52.2billion and a profit (AT) of Rs.35.5 billion.This was higher by 10.1% and 23.7%respectively over the previous year. In theprevious year, a major portion of the profitscomprised of capital gains on governmentsecurities.

The five large banks still enjoy a major sharein the banking industry. They togethercontributed to record growth of 22.5% in PBTand 35.4% in PAT in 2004. NBP with Rs.12bnPBT in 2004, continues to be the market leader.The 33% growth in NBP’s profit last year, wasthe highest amongst the large banks andsurpassed the entire industry’s profit growthof 10%. The 47% growth in the bank’s PATwas also higher over the sectors growth of24%. The growth in the profits of HBL andUBL, though lower than NBP’s, surpassed theoverall industry growth. ABL profit wassqueezed by 50% and was the smallest in thegroup.

Private and provincial banks are steadilyincreasing their market share. In 2004, theirshare in overall banking sector's pre-tax profitwas 31%, contributed mainly by nine banks(Askari, Al-Falah, Al-Habib, Soneri, Faysal,BoP, Metropolitan, Union and PICICCommercial), which posted PBT of overRs.14bn, more than 90% of the group’s total.As a whole, this sector’s profit growth was

substantially smaller over the growth recordeda year earlier.

Of the 18 banks in this group, eight banksrecorded an increase in their PBT, while anothereight banks recorded declines and two bankssuffered losses. Askari Bank emerged as thetop profit earner with Rs.2.8bn of PBT andRs.1.9bn of PAT, while Bank Al Falah whichhad attained No.1 position in 2003 after a recordpre-tax profit of Rs.3.5bn, came down tofourth position after registering a sharp fall ofalmost 53%,.

In 2003, record profit of Bank Al Falah was aone-time gain on sale of PIBs. The profit ofFaysal Bank, though 20% lower over 2003,was the second highest amongst the privatebanks. BoP occupied third position in terms ofits profit earnings. For the first time, UnionBank was able to cross the figure of Rs.1bnafter registering an impressive growth of 149%.Profitability of Soneri Bank, Bank Al-Habib,Metropolitan Bank and PICIC Commercialalso exceeded Rs.1billion.

Mergers and acquisitions of some foreign banksin the past four years have reduced theirnumbers operating in the country. The existingones have expanded their branch network,number of clientele has gone up and theirmarket share is a little over 10%.

With the amalgamation of Bank of Ceylon witha local bank in the private sector last year, thenumber of foreign banks has been reduced to11, operating with a network of 80 branchesand a staff strength of nearly three thousand.Amongst these banks, ABN Amro, Citibank,Standard Chartered Bank and Habib Bank AG.Zurich account for 85%—88% of the group’sassets and deposits and contribute to over 96%of the profitability of this group.

In 2004, foreign banks’ pre-tax profit fellby nearly 2%, after growing by 16% a yearearlier, as profits of Citibank and ABN Amrodeclined and growth slowed for SCB. Citibankand ABN Amro, the two main competitors ofSCB posted significant declines (26% and 13%respectively) in their pre-tax profit. Inspite ofa decline in the profits of SCB, its PBT was

Factorsforgrowth inprofits

Profitsincrease

NBP’sprofithighest inthe sector

Privatebanksprofiti-bilitygrowthslows

ElevenforeignbanksoperatinginPakistan

Foreignbankspre-taxprofitfalls

6


Substantial growth in advances and increasingnet interest income of banks have been a majorsource of growth in pre-tax profit, while reducedtax rate and tax-exempt gains helped banksincrease their after tax profit substantially.Aggressive marketing and extensive efforts tofacilitate improved banking services, lendingto new business areas assisted banks to raise

their advances portfolio. There was animpressive growth in banks advances to theprivate sector in 2004.

Increased deposits coupled with demand forconsumer and SME financing has led to abroad-based loan growth. Banks advances havegrown by 45% despite increase in lending rates.The private local banks contributed the highestgrowth (56%) in advances, as some banks likePICIC Commercial and Crescent Commercial,KASB with very small credit portfolio alsoreported very high growth ranging between80% to 135%.

In the category of private banks ACBL, BAF,BAH, MBL, FB and UB cumulativelydisbursed Rs.349 bn or 65% of the group total,while Bank Al Falah emerged the lead creditlender in this group, and it occupies the 10thposition amongst the top 16 banks in terms ofprofitability.

Slightly more than half of the advances weredisbursed by the five large banks. HBL retainedits position as the biggest lender by disbursing17% of the total advances, followed by NBP,which lent 14.5%. UBL registered the highestgrowth (52%) amongst the large banks,alongwith substantial credit expansion by ABL(45%) and MCB (41%).

Foreign banks’ credit expansion was alsoimpressive at 31% during the year. However,their share in total advances is on the decline,having fallen to 10% from 15% during thepast three years. SCB, Citibank, ABN Amroand AGZ account for 89% of the group and9% of total banks’ advances. Here, while SCBis at the top with 32% share in total foreignbanks lending, highest growth (46%) wasregistered by A.G. Zurich.

In 2004, banks’ assets grew by 22%, primarilybecause of a substantial rise (37%) in the assetsof private banks. Nearly 60% was held by thebig five, 30% by the private banks 10% by theforeign banks. NBP has the largest asset base,nearly 20%, followed by HBL. Meanwhile,ABL posted the highest growth (31%), whileassets of MCB declined by 5%. Amongst theprivate banks, BAF has the largest asset base,whose size now exceeds that of ABL, ACBL,FB and BAH.

Pakistan’s Top 16 Banks - 2004

National Bank of Pakistan 549.7 1 465.6 1 12.02 1Habib Bank Ltd 487.0 2 404.6 2 7.16 2United Bank Ltd 272.6 3 230.3 3 4.89 3MCB Bank 259.3 4 220.3 4 4.20 4Allied Bank Ltd 154.2 8 126.4 8 0.46 16Bank Al-Falah 154.8 7 129.7 7 1.65 10Askari Commercial 107.2 9 83.3 11 2.84 6Faysal Bank 78.5 14 56.5 15 2.21 7Union Bank 77.7 13 63.0 12 1.41 11Metropolitan Bank 67.9 5 48.6 5 1.38 12Bank of Punjab 66.3 10 54.7 9 1.74 9Bank Al-Habib 77.4 12 62.2 13 0.51 14Standard Chartered 94.6 15 76.5 14 3.46 5Citibank 66.1 11 47.1 10 1.75 8ABN Amro 57.5 16 48.2 16 1.15 13Habib Bank AG Zurich 41.2 6 28.2 6 0.51 15

Rs.Bn RankingRs.Bn RankingRs.Bn RankingAssets Deposits Pre-Tax Profit

Selected Banks

still 28% higher and accounted for 48% of thegroup total.

However, growth in after-tax profit of Citibank(49%) exceeded that of SCB (47%) and wasthe highest in the group. Pre-tax profit was thehighest at Citibank in 2002 but in 2003 SCBbecame the top profit earner and it retained itsposition in 2004.

The Bank of Tokyo, with a small PBT of justRs.53mn, recorded the highest growth (90%)in the group. HSCB, Amex Bank, DeutscheBank and Rupali Bank posted small profits astheir earnings declined by between 55-190%.

The analysis so far reveals that only 16 banks,comprising of five large banks, seven privatelocal banks and four foreign banks in the sectorcontrol 85%—90% of the market. These banksare competing with each other to acquire alarger market share. For this they have devisedaggressive policies targeting customers. Somesmall banks like PICIC Commercial, KASBBank and Saudi Pak Commercial are alsorapidly expanding their market share and likelyto join this group soon.

Top 16banks

Advancesgrow

HBL thebiggestlender

Assetsgrow

7


Amongst the foreign banks, SCB has the largestasset base, while Citibank’s is the secondlargest. Except Amex Bank, OIB and Rupali,which recorded decline in their assets, all otherbanks reported growth. Five banks in the groupshowed double-digit growth with DB, recordingthe highest growth. Citibank made a recoveryfrom a decline in 2003 but its growth (8%) in2004 was the smallest amongst the four leadingbanks of the group.

Despite negative real rates of return, banks’deposit showed strong growth. In 2004, allbanks’ recorded a 22% growth, with the fivelarge banks holding the major portion (61%)of these deposits. However, their share is on adownward slope, as growth in depositmobilization has slowed.

National Bank of Pakistan has the largestdeposit base, nearly 20% of all banks’ deposits,followed by HBL. UBL contributed the highestgrowth (24.4%) in the group while MCB, with15.2% share, recorded the lowest growth (4%),ABL the smallest bank in the group has 5% ofall banks’ deposits.

Increasing efforts at deposit mobilization, hasresulted in a 44% growth in deposits of theprivate local and provincial banks, with theirshare in total banks deposits rising to 30%.BAF, after registering an impressive growth ofover 69% now joins the rank of large banks,as its deposit base exceeds that of ABL’s.Within this group, FB posted the highest growth(over 80%) while UB recorded the lowestgrowth (25%). Its share amongst the privatebanks deposits is 9%.

ACBL and AHB, the two main competitors ofBAF, also recorded impressive growth in theirdeposits and cumulatively account for 20% ofprivate banks deposits. Some smaller bankslike KASB, MBL and NIB with relatively smalldeposit base recorded very high growthsranging between 78%—128%.

Foreign banks accounting for 10% of the totaldeposits, showed an 18% rise during the year,with Deutsche Bank recording the highestgrowth of 42%. Within this group, SCBmaintained its lead over its competitors witha 34% share in the group’s depsoits and 3.2%

of all banks. ABN Amro recorded a growth of28%, while Citibank accounts for 21% of thegroup’s deposits.

Rising net interest income (NII) was anothermajor source of banks’ profitability growth. In2004, NII increased by over 14%, where themajor contributory factors were improvedreturns on loans and expansion in the assetbase. While the private banks registered thehighest growth of over 40% in their NII, thelarge banks recorded a growth of only 6%.Foreign banks with the smallest share (slightlyover 10%) recorded 10% growth. NBPcontinued to lead with the highest share of over18% in total NII. The share of privatized bankswas in the range of 6%-17% of total NII.

Consequently, gross spread ratio (GSR) washigh at 70% for all banks; 75% for large banks,71% for foreign banks and 61% for privatebanks. Bank-wise, ABL recorded the highestGSR (85%) followed by SCB (83%) and UBL(81%), while UB’s ratio was the lowest (54%)amongst the top 16.

Non-fund based income (NFBI) of the entirebanking sector declined by 1.5% in 2004, afteran impressive growth of 49% a year earlier.The decline was mainly contributed by privatebanks, which registered a steep fall of over18% after a record growth of 94% in 2003.

Large banks constitute a significant portion ofNFBI (61% of the total). However, their noninterest income ratio (NIIR) of 37% is thelowest in the entire sector. Foreign banks withthe lowest NFBI (13% of the total), on theother hand, recorded the highest ratio (42%)amongst the three groups. NIIR of private bankswas 36%.

Bank-wise HBL, FB and Citibank recordedhighest NIIR (42%, 53% and 48% respectively)in their respective groups. Some banks, likeAmex, DB and BOT inspite of their small size,recorded relatively very high ratio of over 70%.ABL amongst the larger banks recorded thesmallest ratio (28%).

Cost of funds ratio for the banks continued todecline. Due to a competitive market, privatebanks are offering attractive returns to mobilize

Depositsincrease

Depositsof privatebanksjump

Netinterestincomegrows

Non-fundbasedincomefalls

Cost offunds fall

8


deposits. Their cost of funds, though falling isrelatively high at 2%, while large banks havereduced their cost of funds to 1.1% and forforeign banks the ratio is 1.4%.

Among the large banks, NBP’s cost of fundswas the highest at 1.5% while it was the lowestfor ABL at 0.6%. Some banks in the privatebanks’group were offering high returns ondeposits, which increased their cost of fundsto over 3%. In the foreign banks category theratio was the lowest for SCB (0.8%) and highestat 2.7% for AGZ.

Analysis of banking sector performance basedon annual accounts as of end-December 2004also reveals that because of increasing depositsand advances, the credit to deposit ratio (CDR)rose significantly. CDR is one of the indicatorsto judge the liquidity of banks. It indicates howefficiently banks utilize their available funds.An ideal situation for banks is one where CDRranges between 60%-70%.

In this analysis, CDR was 59% for all banks.Category wise, it ranged between 51%, for thefive large banks to 67% for the foreign banksand a high of 73% for the private and provincialbanks. Amongst the large banks, the ratio wasthe highest at 58% for privatized UBL andHBL and lowest at 41% for ABL.

In the private banks category, FB recorded avery high ratio (92%) followed by MB (82%)and UB (81%). CDR for ACBL and AHB wasbetween 60%-70%. For BAF, the lead bank inthe group, the ratio was 67%. A very high CDRsome times becomes alarming for banks.

In the foreign banks group, CDR was very highof DB, Amex and AGZ. These three bankshave small deposits and advances. For the threeleading banks (SCB, ABN Amro and Citibank)the ratio was in the range of 63%-67%,indicating efficient use of deposits by thesebanks. Rupali Bank’s ratio was 9%, the lowestof all banks.

Another indicator of liquidity, is the earningassets to total assets ratio. It shows the profitableinvestment in earning assets. Investment innon-earning assets results in low profitability.The ratio was as high as 85% for all banks.

The ratio for private local banks remained thehighest (85.6%) amongst the three groups. Forlarge banks the ratio was 84.7%, and for foreignbanks it was 80.8%.

In the large banks category, HBL was at thetop with earning assets ratio of 88.4%, followedby UBL (86.3%), MCB (86.2%) and ABL(85.5%). Amongst the private banks, the ratiowas as high as 92% for MB and lowest (9%)for the newly set up DBL. Seven banks in thegroup recorded a higher ratio surpassing theentire group’s average. For the three leadingbanks (ACBL, BAF, BAH) the ratio wasslightly lower.

Amongst the larger foreign banks, AGZ attainedthe highest earning ratio (87%) followedbyABN and SCB. The ratio was the lowest forCitibank (83%). Weaker banks in the groupwere OIB, BOT and DB with a low ratioranging between 30%-54%. ABIB was slightlyabove the group’s average.

Cost of funding earning assets, declined furtherin 2004, with almost all banks reporting falls.On an average this ratio was 1.5% for all banks;being slightly higher at 2.1% for private banks.Among the top 16 banks the ratio was as highas 2.3% for BAF and UB, while it touched thelow of 0.7% for ABL. NBP and Citibank (1.6%)were the leaders in their respective groups. Theratio of some relatively smaller banks wasover 3.5%.

Banks are focusing more on capitalmanagement with greater stress on optimizingcapital levels in terms of risk, regulatoryrequirements and shareholder returns. Capitalmanagement techniques include buy backs,securitisation of lending assets and issuinghybrid capital instruments. Analysis shows thatthere has been a massive growth (44%) inshareholders’ equity.

Major portion of the equity was accounted forby large banks, which contributed a growth of66% followed by private banks (35%) andforeign banks (12%) Amongst the top 16 banks,NBP holds the largest equity (31% of largebanks and 25% of total banks). However, ACBLrecorded the highest growth with a share of

CDRrangesbetween51-73%

CDRhigh atDB,Amex &AGZ

Highearningassetsratio

Cost offundingearningassetsdeclines

Share-holdersequityincreases

9


11% in private banks and 4% in all banksequity. ABL and ABN Amro recorded declinein their equities.

Capital ratio showed a gradual improvementfor all banks. It was 5.1% for the entire sector.Foreign banks recorded the highest ratio (9%),which exceeded all banks. It was the lowestfor large banks (4%). Amongst the top 16,Citibank was leading with a capital ratio of9.5% followed by FB (9.4%) and UBL (5.2%).ABL recorded the lowest ratio (1.4%).However, the ratio was in double digit for manysmall banks, particularly in the foreign banksgroup.

Capital to Risk Asset (CRA) ratio was 10.8%for the entire sector. It ranged between 9.4%for the major banks to 18.4% for the foreignbanks. UBL, KASB and Citibank were leadingin their respective groups. Amongst the top 16banks, the ratio was the highest for Citibank(20.7%) and lowest (4.7%) for ABL.

Pre tax and net profit margins were also higherfor foreign banks, exceeding the banking sectoraverage. SCB’s pre tax margin stood at 59.7%and net profit margin at 48.3%. For the privatebanks, both ratios recorded decline but werehigher against the large banks. NBP and FBwith pre tax margins of 41.1% and 48.2% werethe leaders in their respective groups. Net profitmargin of UBL (31%) and FB (50.9%) werethe highest in their respective groups.

Profitability ratio analysis further shows thatin 2004, RoE of the banks declined for all thethree groups, cumulatively falling to 38% from47% a year earlier. Large banks however,maintained their lead. Bank-wise, RoE of ACBL(60%) was the highest amongst all banks, whileNBP (55%) and SCB (51%) were leading intheir respective groups. ABL was able toimprove its RoE (19.7%) in 2004 after negativeratio in the past three years.

RoA shows comparative efficiency of banksin asset management and is an importantindicator of profitability. In 2004, RoA of largebanks showed further improvement, while theratio declined for private and foreign banks.However, despite declining RoA, foreign banks

ratio (2.5%) was higher than the large banks(1.8%) and private banks (2%). For the entiresector, RoA was 1.9%. Bank wise, SCB earnedthe highest ratio (3.9%), while it was less than1% for ABL (0.3%), the lowest amongst allbanks. NBP (2.4%) and FB (3.5%) were thehighest earner of RoA in their respective groups.Again for some small banks like Rupali, RoAexceeded 5%.

Return on Deposits (RoD) was slightly lowerat 2.4% for all banks. Except large banks, theratio recorded decline for private and foreignbanks. Despite the decline, foreign banksmaintained their lead over the other groups,with highest RoD (3.4%). The ratio was 2.1%for large banks and 2.7% for private banks.FB’s ratio (5%) was the highest, while it waslowest for ABL (0.9%) amongst the top 16banks. NBP (2.8%) and SCB (4.8%) wereleading in their respective groups.

Equally important for depositors andshareholders is the Equity to Deposits ratio(EDR). The ratio increased for all banks (6.3%)in 2004. Foreign banks ratio at 12.3% wasslightly lower over a year earlier but it remainedhigher than that for the other groups. Privatebanks ratio (7.7%) was down over 2003. Theratio for large banks improved but it remainedthe lowest (4.8%). Within the top 16, Citibankratio (13.9%) was the highest, while that ofABL (1.9%) was the lowest. UBL (6.2%) andFB (12.9%) were the leaders in their respectivegroups.

In 2004 administrative expenses showed afurther rise. Hiring of expertise, refurbishingand expansion of branch network, increase insalaries and allowances and investment ininformation technology pushed up expenses inalmost all banks. In 2004 however,intermediation cost of banks was unchanged.The ratio for foreign banks at 2.9% was slightlyhigher than the other groups.

Large banks registered a marginal increase intheir intermediation cost (2.8%), while forprivate banks the ratio was slightly lower at2.4%. NBP, has managed to keep itsadministrative cost relatively low (2%), whileHabib Bank has a high ratio (3.3%). Some

Capitalratioimproves

Net profitmarginshigherforforeignbanks

RoEdeclines

LargebanksRoAimproves

BanksRoDslightlylower

Banks’EDRimproves

Adminis-trativesexpensesrise

10


private and foreign banks have very high ratioexceeding 4%, Citibank has the highest ratioat 4.6%.

In 2004, banks added 148 new branches totheir network, while manpower strengthincreased by nearly 4200. Of these, over 3000were employed by the private banks, 264 byforeign banks and 284 were added to the staffstrength of large banks. Similarly, foreign andprivate banks carried out expansion in theirbranch network. Private banks opened 171branches and foreign banks 15 new branches.Large banks, however, reduced their branchnetwork by closing 37 branches.

The analysis reveals that staff cost per branchfor the entire banking sector went up by 10%.Inspite of reducing their per branch staff costit remained the highest for foreign banks. Largebanks and private banks recorded increase of9%. Large banks per branch cost was the lowest.Bank-wise, Citibank has the highest staff costper branch (Rs.87mn) followed by UB(Rs.21mn). ABL cost is the lowest (Rs.3.8mn).

At the same time, number of employees perbranch is the lowest (9) at UBL and ABL, ascompared to BAF (37)and it is the highest forCitibank (80). For large banks as a group, the

ratio is only 11, which is the lowest. Foreignbanks have the highest number of staff perbranch (35) while for private banks’ it is 20.The large banks, however, have been successfulin improving the efficiency of their operationsto the extent that their cost to income ratios arelow. This ratio has come down to 69% andcompares with that of private banks, whichincreased to 68%. Foreign banks ratio is stillthe lowest at 60%.

In the year 2004, the banks managed toconsolidate the gains and achieve strongfinancial performance. While much has beenachieved during these past few years, there arestill formidable challenges ahead, which requireconcerted efforts by all. As banks access toSMEs, agriculture sector increases, portfoliosdiversify it would help them strengthen theirearnings. While customer services wouldcontinue to receive focus there is a pressingneed to develop new products for the depositors.Their is a lot of savings in the economy and itis upto the banks to be able to mobilize them.

Banks have to prepare themselves for Basel II.Implementing changes in business processespropagated by Basel II is a challenging taskfor banks.

Man-powerstrengthincreases

Loweststaff costperbranch inlargebanks

Employes perbranchhigh atforeignbanks

Challen-gesahead

NBP National Bank of PakistanHBL Habib Bank LimitedUBL United Bank of PakistanMCB MCB Bank LimitedABL Allied Bank LimitedFWB First Women Bank LimitedACBL Askari Commercial Bank LimitedBAF Bank Al-Falah LimitedBAH Bank Al-Habib LimitedBOP Bank of PunjabKASB KASB Bank LimitedMB Metropolitan Bank LimitedFB Faysal Bank LimitedUB Union Bank LimitedPCBL PICIC Commercial Bank Limited

List of AbbreviationsSCBL Saudi Pak Commercial Bank LimitedMBL Meezan Bank LimitedCCBL Crescent Commercial Bank LimitedDBL Dawood Bank LimitedABN Amro ABN Amro Bank N.ASCB Standard Chartered BankAGZ Habib Bank AG ZurichAmex American Express BankHSBC HongKong & Shanghai Banking CorporationBOT Bank of TokyoOIB Oman International Bank S.A.O.GABIB Al Baraka Islamic BankRB Rupali BankDB Deutsche BankPBT Profit Before TaxPAT Profit After Tax

11


Major Banks Private & Provincial Banks Foreign Banks All Banks

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

(Rs. Billion)

Growth Rates - All Banks

Selected Ratios - All Banks


(In %)


Key Performance Indicators - All Banks

(In %)

Assets NetEquityDepositsAdvancesInvestmentsInterest IncomeInterest ExpenseNet Interest IncomeNon Fund Based IncomeRevenueAdmn ExpenseProfit/(Loss)B.TProfit/(Loss)A.TEmployees (Nos)Branches (Nos)

1383.536.6

1146.9507.6482.5

86.041.944.119.063.138.114.6

6.558015

5686

1520.449.4

1275.1580.2555.9

63.318.345.026.471.535.323.613.6

584345523.0

1732.582.2

1455.5823.8462.4

63.315.747.628.476.640.728.918.5

587195486.0

485.226.2

350.3212.0156.6

31.921.210.6

7.818.4

9.28.34.7

13596727

667.539.6

493.0344.5185.3

29.713.915.915.231.112.616.410.6

16528845

918.853.4

710.5538.3177.6

36.614.422.312.434.716.616.011.3

201641016

260.824.5

176.3124.1

53.717.710.8

6.95.0

11.95.36.34.0

248163

264.824.3

192.4121.3

43.412.2

4.67.66.0

13.66.17.44.5

255565

303.627.2

227.0159.2

30.911.83.48.36.1

14.47.17.25.8

281980

2129.587.3

1673.6843.7692.7135.6

74.061.631.993.552.629.215.1

740926476

2452.7113.3

1960.41045.9

784.5105.3

36.868.547.6

116.254.047.428.7

775176433

2954.9162.8

2392.01521.2

670.9111.733.578.246.9

125.864.352.235.5

817026581

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Assets NetEquityDepositsAdvancesInvestmentsInterest IncomeInterest ExpenseNet Interest IncomeNon Fund Based IncomeRevenueAdmn ExpenseProfit/(Loss)B.TProfit/(Loss)A.T

13.864.511.4-7.2

108.4-9.9

-21.85.4

17.58.83.0

1537.6226.3

9.935.111.214.315.2

-26.4-56.3

2.138.713.2-7.662.3

110.8

13.966.414.242.0

-16.80.0

-14.45.97.67.2

15.322.535.4

44.814.539.137.2

120.87.6

-0.628.667.742.734.682.481.9

37.651.040.762.518.3-6.7

-34.749.294.668.536.997.5

124.1

37.735.043.956.3-4.223.2

3.740.1

-18.411.731.9-2.16.8

14.035.720.821.971.1

-18.0-31.418.230.123.014.541.156.1

1.6-0.99.1

-2.3-19.2-31.0-57.310.419.914.416.116.113.4

14.711.718.031.3

-28.6-3.7

-25.79.61.25.9

15.7-2.029.3

19.739.617.2

5.0107.5

-7.5-18.510.228.915.9

8.5194.2

-

15.230.817.124.013.2

-22.3-50.211.149.424.3

2.662.389.4

21.844.022.045.4

-14.56.1

-9.014.2-1.58.2

19.210.223.9

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Cost of FundsIntermediation CostPre Tax MarginNet Profit MarginGross Spread RatioNon Interest Income RatioCost of Funding Earning AssetsYield on Earning AssetsROEROARODInterest SpreadAdvances to Deposits Ratio(CDR)Earning Assests to AssetsCapital RatioCapital to Risk Assets (CRA)Equity to AssetsDebt Management RatioEquity to DepositCost to Income RatioAdmn Cost to RevenueRevenue to Admn ExpensesPer BranchEmployees (Nos)Staff Cost (Rs.Mn)Deposits (Rs.Mn)Per EmployeeStaff Cost (Rs.Mn)Deposits (Rs.Mn)

3.63.3

13.910.251.330.1

4.08.2

49.61.11.34.6

48.580.6

2.35.62.3

96.12.7

86.260.4

165.4

104.70.2

0.518.8

1.42.7

26.719.171.036.9

1.55.2

55.01.62.03.7

44.984.5

3.07.93.0

95.23.5

73.849.3

202.7

114.60.2

0.420.7

1.12.8

31.624.175.237.0

1.14.6

44.01.82.13.5

51.484.7

4.09.44.0

93.84.8

69.153.1

188.3

115.00.2

0.523.25

5.92.5

20.925.533.442.3

6.19.2

33.72.02.73.3

60.884.8

6.013.4

6.192.5

8.179.149.8

200.6

195.50.4

0.322.1

2.72.5

36.434.053.448.8

2.75.9

49.72.83.93.2

65.487.7

5.711.86.0

92.67.8

63.640.5

246.9

206.40.5

0.325.7

2.02.4

32.633.060.835.7

2.15.3

34.42.02.73.3

73.487.4

5.910.5

6.191.0

7.767.647.8

209.1

207.00.6

0.429.8

5.12.5

27.933.338.942.3

5.69.1

29.82.63.94.0

70.179.5

8.718.9

8.791.013.272.144.1

226.9

3930.6

2.6

0.864.9

2.02.7

40.333.062.244.3

2.15.6

30.12.84.03.6

66.582.3

9.319.9

9.390.313.359.744.7

223.5

3936.9

2.8

0.972.1

1.42.9

40.440.370.842.4

1.55.0

28.02.53.43.6

66.980.8

9.118.4

9.190.812.359.648.9

204.6

3536.0

2.6

1.074.4

4.33.0

17.416.245.434.1

4.78.5

38.81.51.95.4

53.181.3

3.99.13.9

94.74.9

82.656.3

177.7

115.00.2

0.420.9

1.82.7

31.024.765.041.0

1.95.4

47.22.12.64.2

52.085.1

4.410.6

4.494.0

5.569.146.4

215.3

125.20.3

0.423.4

1.42.7

32.928.370.037.3

1.54.9

37.81.92.43.1

59.085.2

5.110.8

5.293.2

6.367.651.2

195.5

125.70.3

0.526.7

12


Key Performance Indicators- Major Banks(Rs. Billion)

NBP National Bank of PakistanFWB First Women Bank LimitedHBL Habib Bank LimitedUBL United Bank LimitedMCB MCB Bank LimitedABL Allied Bank Limited

Source: Annual Reports of the Banks

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Assets Equity Advances InvestmentDepositsBanks

NBPFWBNCBsHBLUBLMCBABLPrivatised BanksTotal

432.88.2

441.0403.0191.8235.1112.5942.5

1383.5

469.09.7

478.7434.9216.9272.3117.5

1041.71520.4

549.79.6

559.4487.0272.6259.3154.2

1173.11732.5

14.30.2

14.512.3

8.76.3

-5.322.036.6

18.10.4

18.516.811.27.7

-4.930.949.4

25.30.6

25.823.114.4

9.49.5

56.482.2

362.96.6

369.4328.2162.7182.7103.9777.5

1146.9

395.58.1

403.6360.6185.1211.5114.2871.4

1275.1

465.68.7

474.3404.6230.3220.0126.4981.2

1455.5

140.50.8

141.4167.5

74.578.945.3

366.2507.6

161.31.3

162.5183.7

96.197.240.7

417.6580.2

221.41.6

223.1258.3146.2137.3

58.8600.7823.8

143.55.5

149.0142.9

67.489.633.6

333.4482.5

166.25.3

171.5158.9

56.5128.3

40.7384.4555.9

144.73.7

148.4134.5

55.067.257.3

314.0462.4

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Interest Income Interest Expense Non Fund Based Income RevenueNet Interest IncomeBanks


27.10.6

27.824.011.415.4

7.558.286.0

19.50.5

20.019.0

8.910.4

5.043.363.3

20.90.5

21.418.1

9.29.35.2

41.963.3

14.70.4

15.111.65.56.13.7

26.941.9

6.70.26.95.41.92.91.2

11.418.3

6.60.16.74.51.72.10.89.0

15.7

12.40.3

12.712.4

5.99.33.8

31.444.1

12.70.3

13.113.6

7.17.43.8

31.945.0

14.40.3

14.713.7

7.57.34.4

32.947.6

5.20.05.26.23.52.61.5

13.819.0

7.20.17.47.84.54.52.1

19.026.4

8.30.09

8.49.84.44.01.7

20.028.4

17.60.3

17.918.6

9.511.95.2

45.263.1

20.00.5

20.421.411.612.06.0851.071.5

22.70.4

23.123.511.911.86.2

53.576.6

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Admn Expenses Provisions Profit (Loss) BT Profit (Loss) ATOther ExpensesBanks


9.10.29.3

11.85.97.53.6

28.838.1

8.30.28.59.86.26.64.2

26.835.3

8.90.29.1

13.86.77.04.1

31.640.7

2.10.02.12.50.70.73.07.09.1

2.60.02.65.50.60.80.67.4

10.1

1.70.01.82.30.30.31.54.46.2

0.30.00.30.20.10.50.20.91.3

0.10.00.10.60.61.00.32.42.5

0.040.00.00.30.00.30.20.70.8

6.00.16.24.12.83.1

-1.68.4

14.6

9.00.39.35.54.33.61.0

14.423.6

12.00.2

12.27.24.94.20.5

16.728.9

2.30.05

2.32.01.51.7

-1.14.26.5

4.20.24.44.02.62.20.49.3

13.6

6.20.16.45.73.72.50.2

12.118.5

13


Major Banks - Selected Ratios(In %)

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Cost of Funds Intermediation Cost Non Interest Income Ratio Gross Spread RatioPre-Tax MarginBanks


4.05.14.03.43.43.33.53.43.6

1.72.21.71.41.01.31.01.31.4

1.51.31.51.10.80.90.60.91.1

2.52.52.53.53.64.13.43.73.3

2.12.62.12.63.42.93.73.02.7

2.02.52.03.33.13.03.23.22.8

18.720.318.713.618.717.3

-17.711.613.9

33.741.233.920.432.124.213.423.026.4

41.138.441.125.635.831.5

6.627.031.6

29.510.829.233.337.221.828.130.530.1

36.330.236.236.339.237.935.337.236.9

36.620.336.341.837.033.927.937.437.0

45.844.145.851.751.960.550.353.951.3

65.465.665.471.478.971.776.873.771.0

68.775.668.875.481.278.085.178.575.2

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Equity/Deposits Advances/Deposits (CDR) ROA RODROEBanks


3.73.43.73.62.63.4

-4.92.22.7

4.34.34.34.25.73.6

-4.63.23.5

5.05.85.15.26.24.01.94.74.8

43.612.943.154.750.146.150.351.248.5

39.814.439.351.049.144.739.447.544.9

44.417.443.957.858.454.441.355.051.4

46.162.646.337.570.654.9

-32.852.249.6

55.684.356.137.743.351.5

-18.854.355.0

55.443.555.235.938.249.119.738.344.0

1.41.71.41.11.51.5

-1.51.01.1

2.03.02.01.32.11.40.81.41.6

2.42.22.41.62.01.60.31.51.8

1.72.11.71.31.81.8

-1.61.21.3

2.43.72.41.62.51.80.91.72.0

2.82.52.81.92.41.90.41.82.1

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Earning Assets to Deposits Capital Ratio Cost to Income Ratio Net Profit MarginRevenue/Admn. ExpensesBanks


88.8106.5

89.1102.2

98.0105.3

86.199.896.3

95.4111.195.7

106.4101.0112.187.0

104.0101.4

93.8105.6

94.1106.6101.7106.2

96.5104.1100.9

3.12.83.13.02.22.7

-4.51.92.3

3.63.63.63.54.92.8

-4.42.73.0

4.35.04.34.35.23.21.73.94.0

193.0183.8192.8157.2160.9157.6145.4156.6165.4

241.1230.1240.8218.4188.5181.7143.2190.6202.7

255.6198.2254.2170.7177.6168.5152.6169.3188.3

81.379.781.386.481.482.7

117.788.486.1

66.358.866.179.667.975.888.177.073.8

58.961.658.974.464.272.494.773.369.1

12.814.612.811.015.514.6

-20.49.2

10.2

21.033.521.318.822.718.6

6.318.219.1

27.528.527.524.231.121.5

2.722.624.1

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Capital/Risk Asset Ratio(CRA) Debt Management Ratio(DMR) Earning Assets/Assets Admn. Cost/RevenueEquity/LiabilitiesBanks


8.426.1

8.56.55.27.3

-4.55.6

10.730.210.9

8.311.78.0

-6.77.9

11.333.111.59.0

10.67.34.78.69.4

95.193.595.295.695.995.6

103.196.696.1

94.392.994.394.893.395.5

103.395.795.2

93.193.793.194.093.495.193.894.193.8

3.33.03.23.12.32.8

-4.32.02.4

3.838

3.83.75.22.9

-4.32.83.1

4.65.34.64.65.63.41.84.24.3

74.687.974.884.882.784.179.183.580.6

80.291.080.487.486.087.082.586.584.5

79.391.679.588.486.386.285.587.184.7

51.854.451.963.662.263.468.863.960.4

41.543.541.545.853.155.069.952.549.3

39.150.439.358.656.359.365.559.153.1

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Cost of Funding Earning Assets Yield on Earning Assets Interest Spread Staff Cost/Employee(Rs.Mn)Net. Interest Margin(NIM)Banks


4.65.24.73.73.73.44.43.74.0

1.92.11.91.51.11.31.21.31.5

1.61.31.61.10.80.90.70.91.1

8.69.38.67.77.68.78.88.08.2

5.46.25.45.25.14.75.35.15.2

5.25.25.24.54.44.14.54.34.6

3.94.13.94.04.05.24.44.34.2

3.54.13.53.74.03.44.03.73.7

3.63.93.63.43.63.23.83.43.5

4.64.24.64.24.35.45.34.64.6

3.74.03.73.84.13.44.23.83.7

3.73.93.73.43.63.23.93.43.5

0.60.20.60.40.40.50.30.40.5

0.40.20.40.40.40.40.40.40.4

0.50.30.50.50.50.50.40.50.5

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Staff Cost/Branch(Rs.Mn) Deposits/Branch (Rs.Bn) Staff/Branch (Nos) Profit (AT)/Branch (Rs.Mn)Deposits/Employee(Rs.Mn)Banks


5.82.75.75.63.45.22.74.44.7

4.83.34.85.53.64.64.14.64.6

5.33.45.26.23.94.93.84.95.0

0.30.20.30.20.10.20.10.20.2

0.30.20.30.20.20.20.10.20.2

0.40.20.30.30.20.20.20.20.2

29.212.928.616.118.015.414.316.018.8

28.614.028.018.319.719.415.918.520.7

31.316.630.820.522.621.817.820.823.3

10131013

810

91010

11141113

810

91011

11131113

910

91111

1.91.21.91.41.31.7

-1.30.91.1

3.54.23.52.72.42.30.52.22.5

5.13.35.03.93.52.70.22.93.4

14


Key Performance Indicators- Private & Provincial Banks(Rs. Million)

Source: Annual Reports of the Banks

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Assets Equity Advances InvestmentsDepositsBanks

Askari Commercial BankSoneri BankBank Al-HabibBank Al-FalahBank of KhyberBank of PunjabKASB BankMetropolitan BankFaysal BankBolan BankPrime Commercial BankUnion BankPICIC Commercial BankSaudi Pak CommercialMeezan BankCrescent Commercial BankNIBDawood Bank Ltd.Total

703132799849437651671884329525

403741381366711059521637558492798218830

6971---

485237

853873696658066989521899243621

8990589824760611759296286732840134351421110261298693

-667478

1071674985277436

15483423818663201621467891785381343640336777115200842721196971059316557

3687918816

302717921822161612582363

539207541211112138022431323

161476

---

26216

39012230272637531563305212162753561010921536250717841145163718261255

-39586

557328793274436918224420175035686251168429433336348314661861235313781034

53444

517322054534240516851398923767

26402851524458

776114640377602115512341

5080---

350306

616572786846178766981536734938

54513933831332

900621634504523250024578

775734784779

-493011

833193738462171

1297151583454724112014859656460109223011762955440923327113770

509310649

233710505

30036113782377528319

65756621

4901944421935

32989016

2889010876

7773332

---

211958

44777173483523149216

538218344

36473223029626

585313664404091431718536

739716936792

-344462

69938243764736788931

900139439

82954012251373

72452126451075258282548712340

401612158

58538313

267379844

1883124470

631682952118

15014684213287534

1182310306

6279856

---

156592

22104119121410928904

9543114582395

1795911218192998169287

21737937012121366

952-

185271

17239139831441435503

691716197

27151556011503193763106572

13199970714292594

7671008

177554

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Interest Income Interest Expenses Non-Fund Based Income RevenueNet IncomeBanks


485821372776455116172070

28226803046

517139531311777

725311

---

31872

407417142403403314741664

38126852075

5091469346418691305

37676

172-

29742

448719482432562010872555

64127842753

5521641429523361857

534233803

7036629

30171512197631121065

998218

17682168

314965

20911297

532192

---

21223

1380790

11322029

658484173

1312946114649

16941327

872182

3083

-13853

1117752962

2434417719318

12611118141656

144210681147250136413

1614367

1841625801

1439552

107264

912879203430

1040479193120

---

10649

2694924

12712005

8161180208

13731129395820

1770541432193

4690

-15888

3370119514703186

6701836

32315231635

411986

28531268

711284

97391

5522263

846492701695139374125546977253449

1006326581288

---

7798

954463

14313392

142831154651

2714123461

1693967713287192

8-

15176

1633480870

1520155

1097116755

183198

5601604

679394365116112

112386

2687111715022134

6911446

18914581856

456880

2046806774408

---

18448

3648138827025397

9582012

38620243843

5181281346415081145481237

98-

31088

5003167523404706

8262933

47422783466

5201546445719471104649213503

5734696

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Admin Expenses Provisions Profit/Loss(BT) Profit/Loss(AT)Other ExpensesBanks


1090441760

1183247900204513619381512

1563326262195

---

9195

1436500

10751799

307999326662835373719

2190564414255

7462

-12590

1845642

13152678

3031116428814

1135381943

2567823539409222394

5116604

35144

11955

238543468

-215057

169-29

-380-61

---

747

30873

10887

2408

16135248137125154120

-299-1646

8

1497

31515

-15373237

47-185

1233075

453-637197473-2

1965

212

415

6054

1314

280.351

3---

228

1264

142

-133

1427

5541

520.0

1--

648

0.11111

34-411

223

271

510.2

14

44189

1244621620895200432

-102876.31255

25306286509842271

---

8278

1902813

15133506

3971002

5612242745

643056682597924111728

-16350

2843104710391654

2861736

5013782207

87525

14101130478221-8431

-3815999

687350290446142284

-114430656

4176164319654223

---

4709

1103439

10122123

305689

25678

2151-2027742862137821411121

-10554.4

1923648541

1092259

1368120815

175384

345830900307224-87123

2511270

15


Private & Provincial Banks - Selected Ratios(In %)

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004



5.57.25.56.66.94.35.85.96.53.86.05.47.23.96.7

---

5.9

2.02.82.32.74.11.53.43.02.81.22.83.14.43.42.61.61.2

-2.7

1.31.91.62.12.31.53.02.22.21.32.12.22.53.22.02.53.80.62.0

2.02.12.12.51.63.95.41.71.94.63.24.01.81.96.8

---

2.5

2.01.82.22.41.93.26.41.52.53.93.14.01.91.63.73.80.9

-2.5

2.11.62.12.31.72.34.01.42.23.53.03.92.01.53.24.13.72.12.4

21.823.617.817.111.417.7

-25.027.231.2

3.216.6

6.924.264.545.2

---

20.9

37.837.439.547.224.640.110.536.757.3

1.022.311.029.148.436.443.615.4

-36.4

46.543.131.523.223.147.5

6.638.948.213.423.923.937.521.224.6

-24.13.4

-54.032.6

31.544.146.732.620.125.866.037.552.755.551.149.240.575.170.7

---

42.3

26.133.452.962.914.841.339.932.270.623.736.048.964.162.259.880.8

7.9-

48.8

32.728.737.232.318.837.426.433.152.818.836.236.034.935.156.254.322.2

1.835.7

37.929.228.831.634.151.822.834.028.839.330.933.227.026.638.4

---

33.4

66.153.952.949.755.470.954.751.154.477.655.851.129.033.151.460.152.1

-53.4

75.161.460.456.761.671.950.454.759.474.560.166.454.338.353.241.748.777.860.8

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Equity/Deposits Advances/Deposits (CDR) ROA RODROEBanks


6.09.15.73.68.4

10.819.6

8.414.313.610.7

6.06.93.1

46.9---

8.1

6.18.35.74.29.69.2

22.47.1

16.513.2

8.05.45.83.1

24.252.526.3

-7.8

6.57.85.53.9

10.88.3

17.87.2

12.913.9

8.75.26.94.6

16.247.817.1

234.07.7

57.459.067.357.948.029.039.869.981.643.661.073.155.967.476.9

---

60.8

66.059.373.460.440.742.551.176.292.454.662.578.647.071.385.148.7

142.1-

66.4

79.163.976.266.946.164.471.782.392.365.767.580.752.477.491.766.6

122.814.273.4

44.637.337.060.116.918.2

-15.644.731.2

2.522.916.347.8

315.420.2

---

33.7

54.940.566.5

130.628.237.0

6.250.759.7

0.629.523.853.2

168.715.512.8

4.4-

49.7

60.041.034.640.718.346.5

3.443.639.0

6.323.448.342.936.612.6-4.02.4

-7.134.4

2.12.61.61.71.11.6

-2.22.63.20.31.70.72.55.96.0

---

2.0

2.42.52.84.32.12.70.92.46.50.11.70.92.43.62.73.80.6

-2.8

3.02.41.51.31.33.20.42.23.50.71.51.92.51.21.4

-1.00.2

-0.22.0

2.73.42.12.21.42.0

-3.13.84.50.32.41.03.39.89.5

---

2.7

3.43.43.85.52.73.41.43.69.80.12.41.33.15.33.86.71.2

-3.9

2.93.21.91.61.83.90.63.15.00.92.02.53.01.72.1

-2.00.4

-32.72.7

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Earning Assets/Deposits Capital Ratio Cost / Income Ratio Net Profit MarginRevenue/Admn ExpensesBanks


113.2116.3115.8111.1111.1104.0109.8133.7113.398.2

125.6117.9119.7132.7

95.3---

115.5

120.6119.2117.2112.0113.5109.4131.3136.1133.4107.8126.1119.2115.4122.7114.8139.1169.7

-119.9

117.1119.2109.7103.6122.1108.7127.3132.9129.0103.1120.0109.8108.6115.9115.3142.2150.1

1480.9115.3

4.66.94.32.86.68.5

13.85.7

10.210.3

7.44.15.11.9

29.7---

6.0

4.46.24.23.37.57.4

13.94.81.59.95.73.94.62.2

17.229.814.4

-5.7

4.95.94.43.27.96.8

11.85.09.4

11.06.44.05.73.4

11.425.011.42.95.9

246.5253.6197.7180.4279.3160.7

92.8284.3299.7119.9171.7130.9247.0296.0209.0

---

200.6

254.0277.6251.5300.0312.2201.3118.4305.7460.2138.5178.1158.2267.7276.8188.1319.7157.3

-246.9

271.2260.9177.9175.7272.9262.8111.0279.9305.5136.5163.9173.6236.7208.1158.6

96.1127.5112.5209.1

78.276.482.282.988.682.3

125.072.868.896.883.493.175.835.554.8

---

79.1

62.262.760.552.875.459.993.763.342.799.077.789.070.951.563.756.384.6

-63.7

53.558.169.476.877.052.598.061.051.988.376.276.162.979.575.4

123.896.7

157.267.6

25.631.419.320.920.519.6

-60.429.535.4

0.820.0

8.039.684.554.7

---

25.5

30.231.637.439.331.834.3

6.533.556.0-3.921.612.441.233.044.546.621.1

-34.0

38.438.723.123.231.346.725.335.850.616.122.318.646.227.434.640.927.743.433.0

16


Private & Provincial Banks - Selected Ratios(In %)

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Capital Risk Assets Ratio Debt Management Ratio Earning Assets/Assets Admn. Cost/RevenueEquity/LiabilitiesBanks


10.515.5

8.56.3

17.637.349.312.117.531.317.5

8.212.4

4.660.9

---

13.4

9.314.0

7.76.9

23.621.743.7

9.317.824.112.9

6.912.3

4.428.5

107.818.5

530.011.8

8.312.2

7.35.9

21.712.924.8

8.714.021.212.8

6.413.1

5.917.773.213.9

1631.710.5

94.492.194.594.592.489.584.592.588.489.691.795.592.297.459.7

---

92.5

94.192.594.794.990.188.484.893.184.390.193.895.693.497.581.669.985.5

-92.6

94.393.594.996.190.488.188.393.685.689.193.595.993.896.587.574.989.6

7.290.9

4.97.54.53.07.19.8

16.36.2

11.611.58.04.35.61.9

49.7---

6.5

4.76.74.53.48.38.4

16.45.2

13.011.06.14.04.92.2

21.142.616.9

-6.2

5.26.34.73.38.17.7

13.35.3

10.512.4

6.84.26.13.5

13.033.311.640.6

6.3

86.787.787.086.486.681.977.490.681.274.586.880.288.980.460.3

---

84.8

87.988.887.687.688.087.881.692.088.380.989.385.390.983.981.578.993.3

-87.7

88.189.687.784.289.088.684.192.189.881.588.885.890.384.680.672.991.7

9.387.4

40.639.450.655.435.862.2

107.735.233.483.458.276.440.533.847.9

---

49.8

39.436.039.833.332.049.784.532.721.772.056.163.237.336.153.231.363.6

-40.5

36.938.356.256.936.638.190.135.732.773.361.057.642.248.163.1

104.178.488.947.8

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Cost of Funding Earning Assets Yield on Earning Assets Interest Spread Staff Cost/Employee(Rs.Mn)Net Interest MarginBanks


5.77.15.86.86.84.56.05.76.84.46.16.17.04.77.0

---

6.1

2.02.72.42.83.91.53.32.82.51.32.83.24.33.92.51.32.0

-2.7

1.31.91.62.32.21.53.02.22.01.42.12.32.63.52.02.23.60.92.1

9.210.0

8.110.010.4

9.37.78.69.57.38.99.19.66.4

11.4---

9.2

6.05.95.15.68.95.27.25.85.65.66.46.66.05.85.13.14.3

-5.9

5.35.04.15.35.75.26.04.84.95.45.36.95.65.64.33.86.94.15.3

3.52.92.33.23.54.81.82.92.82.92.73.02.61.74.4

---

3.1

3.93.22.72.84.93.73.93.03.04.43.63.41.81.92.61.92.2

-3.1

4.03.12.53.03.53.83.02.62.94.03.24.63.02.22.31.63.43.23.2

3.82.92.63.43.45.01.92.73.03.52.83.72.52.44.7

---

3.3

4.03.22.82.94.83.63.82.82.84.43.63.51.72.32.51.61.8

-3.2

4.03.12.53.23.43.73.02.52.74.13.24.73.12.42.31.33.1

-3.2

0.30.20.30.30.40.20.30.20.80.10.30.50.20.20.6

---

0.3

0.40.20.30.40.50.20.40.20.60.10.40.70.30.20.50.20.10.00.3

0.40.20.30.30.50.20.40.20.60.20.40.80.30.30.30.20.50.40.4

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Staff Cost/Branch (Rs.Mn) Deposits/Branch (Rs.Bn) Staff/Branch (Nos) Profit(AT)/Branch(Rs.Mn)Deposit/Employee (Rs.Mn)Banks


10.53.54.9

10.65.12.54.34.1

15.33.06.7

17.72.83.3

16.3---

5.5

10.73.95.2

12.76.42.76.74.6

10.82.67.7

20.83.25.0

12.54.8

14.5-

6.4

11.14.06.5

12.16.12.87.75.1

10.43.28.8

20.93.15.1

11.16.3

19.511.27.0

1.00.50.50.90.50.10.20.71.20.10.40.90.40.30.5

---

0.4

1.00.60.61.10.50.10.20.80.70.20.41.00.40.70.60.31.2

-0.5

1.00.60.71.10.50.20.40.90.90.20.51.10.40.80.70.40.80.10.6

31.923.529.327.237.4

7.111.430.461.1

7.019.025.930.218.018.0

---

22.1

32.927.432.130.139.9

9.712.337.738.6

8.320.233.438.429.127.013.1

9.60.0

25.5

34.234.837.130.843.314.320.942.148.8

9.724.440.140.840.421.112.819.1

2.129.8

322018331312162220212033121727

---

19

30201836131317231920213111232422

125-

20

28182037121219221821222710193228402820

14.99.05.19.94.91.2

-6.412.328.5

0.15.34.87.6

23.437.2

---

6.5

19.010.014.536.010.5

2.91.3

17.055.2-0.46.49.99.7

13.521.418.510.3

-12.5

25.612.5

7.312.1

8.95.45.7

17.335.1

1.77.0

15.79.58.3

14.07.3

13.912.511.3

17


Key Performance Indicators - Foreign Banks(Rs. Million)

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Assets Equity Advances InvestmentDepositsBanks

ABN Amro

Standard Chartered Bank

Citibank

Habib Bank AG Zurich

American Express

HSBC*

Deutsche Bank

Oman International

Bank of Tokyo

Al Baraka Islamic Bank

Rupali Bank

Total

45722

81133

62148

28027

13588

8754

4764

2611

5129

8226

670

260771

45963

84124

61362

32855

10042

10115

3879

1848

4359

9663

620

264828

57506

94602

66064

41203

8298

12031

5109

1845

4472

11939

562

303631

3089

6074

6623

1528

1207

1007

936

1004

1789

1172

108

24538

2843

6369

5870

1660

1270

1233

1134

1002

1712

1138

85

24316

2811

7163

6173

2074

1359

1630

1327

1035

1836

1657

92

27157

34696

56439

40838

20192

5979

5773

2701

1142

3007

5345

203

176315

37679

67881

39748

22928

5122

7339

1461

745

2630

6627

207

192367

48213

76514

47103

28167

5070

8924

2069

504

2107

8128

178

226977

25141

42234

25657

13674

4841

4270

2293

877

91

4931

77

124086

23430

39952

25288

17363

2394

4994

1444

323

71

5982

25

121265

32088

51508

33008

25405

2070

4761

2020

486

823

6991

11

159171

8935

17653

11280

9361

4192

304

197

295

816

203

418

53653

9442

15583

5190

9069

2330

196

17

149

693

339

351

43359

6523

13165

955

7437

1641

-

15

45

392

416

359

30948

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Interest Income Interest Expense Non-Fund Based Income RevenueNet Interest IncomeBanks

ABN Amro


Citibank


American Express

HSBC*

Deutsche Bank

Oman International

Bank of Tokyo


Rupali Bank

Total

3473

4438

5072

1875

885

552

295

146

376

550

46

17708

2160

3815

3311

1600

344

327

111

81

75

358

32

12213

2210

3735

3145

1611

225

275

71

41

61

351

33

11757

2029

2428

2820

1511

706

386

150

128

269

370

31

10827

667

903

1266

1117

206

135

23

60

48

187

6

4618

515

652

832

911

128

130

22

21

30

184

7

3432

1444

2010

2252

364

179

166

146

18

107

180

15

6881

1493

2912

2045

483

138

192

88

21

27

171

27

7596

1695

3083

2313

700

96

145

49

20

31

167

26

8324

789

955

1897

376

336

133

155

17

69

137

1891

5045

775

1598

2253

378

291

172

363

14

71

129

3

6049

694

2062

2120

319

287

168

189

13

88

181

4

6125

2233

2966

4149

740

515

299

301

35

176

318

196

11926

2268

4510

4298

861

430

364

451

35

99

300

30

13645

2389

5145

4434

1019

383

313

238

33

119

348

30

14449

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Admin Expense Provisions Profit/Loss(BT) Profit/Loss (A.T)Other ExpenseBanks

ABN Amro


Citibank


American Express

HSBC*

Deutsche Bank

Oman International

Bank of Tokyo


Rupali Bank

Total

907

1195

1708

324

349

183

292

43

90

119

48

5257

927

1825

1841

416

369

186

278

41

73

135

14

6104

1123

1785

2509

486

396

221

256

36

66

166

18

7063

11

21

150

40

2

10

-10

0

-2

25

71

311

14

-9

69

16

-0.08

-29

-12

0

-2

21

50

117

119

-106

175

21

-28

-1

-21

2

-

15

-20

155

7

1

5

1

0

0

3

0

0

0

0

17

3

0.4

34

0

23.0

0

0.01

0

0.4

0.1

1

61

0.4

5

4

0

0.1

0.3

2

1

0.2

0.3

1

14

1308

1749

2287

375

164

106

22

-9

88

173

78

6342

1324

2693

2355

429

37

207

184

-6

27

144

-35

7359

1147

3461

1746

511

15

93

0.4

-6

52

167

32

7217

1026

1038

1064

297

138

89

119

-9

28

146

37

3971

806

1688

1323

323

80

231

-34

-6

20

94

-23

4502

714

2485

1969

380

51

58

0.4

-6

34

127

8

5820

Source: Annual Reports of the Banks* Hongkong & Shanghai Banking Corporation

18


Foreign Banks - Selected Ratios(In %)

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004


ABN Amro


Citibank


American Express

HSBC*

Deutsche Bank

Oman International

Bank of Tokyo


Rupali Bank

Total

4.5

4.4

5.4

7.0

5.9

4.6

3.7

6.7

5.1

5.8

4.8

5.1

1.6

1.2

2.4

4.2

2.1

1.7

1.0

5.1

1.7

2.5

1.5

2.0

1.1

0.8

1.5

2.7

1.8

1.4

1.0

2.7

1.2

2.1

1.8

1.4

2.0

2.2

3.3

1.5

2.9

2.2

7.2

2.3

1.7

1.9

7.5

2.5

2.2

2.5

3.5

1.6

3.8

2.3

12.4

3.5

2.6

1.8

3.3

2.7

2.4

2.3

4.6

1.5

5.6

2.4

11.7

4.5

2.5

1.9

4.6

2.9

30.7

32.4

32.8

16.7

13.5

15.5

5.0

-5.7

19.7

25.1

34.3

27.9

45.1

49.8

42.3

21.7

5.8

41.5

39.0

-6.0

18.7

29.5

-97.8

40.4

39.5

59.7

33.1

26.5

3.0

21.0

0.2

-10.6

34.9

31.3

85.1

40.4

35.3

32.2

45.7

50.9

65.2

44.5

51.6

47.7

39.2

43.3

92.1

42.3

34.2

35.4

52.4

43.9

67.8

47.3

80.6

40.7

72.6

43.1

11.1

44.3

29.0

40.1

47.8

31.2

74.8

53.7

79.4

39.8

74.2

52.0

13.3

42.4

41.6

45.3

44.4

19.4

20.2

30.1

49.4

12.4

28.5

32.7

33.5

38.9

69.1

76.3

61.8

30.2

40.1

58.7

78.8

26.0

36.0

47.7

81.8

62.2

76.7

82.5

73.5

43.5

42.9

52.7

69.0

48.0

50.7

47.4

78.8

70.8

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Equity/Deposits Advances/Deposits(CDR) ROA RODROEBanks

ABN Amro


Citibank


American Express

HSBC*

Deutsche Bank

Oman International

Bank of Tokyo


Rupali Bank

Total

8.4

10.4

15.0

7.9

19.4

15.5

23.8

60.2

36.3

20.5

36.2

13.2

8.2

10.0

15.5

7.4

22.3

17.1

49.8

106.3

62.1

19.3

46.8

13.3

6.6

9.4

13.9

7.3

25.8

17.6

69.7

163.1

74.9

18.9

45.9

12.3

71.1

78.8

64.1

66.0

82.3

74.3

81.6

67.7

10.6

88.8

44.5

70.1

67.1

66.1

63.2

72.0

65.2

70.7

89.8

63.6

2.9

91.2

24.9

66.5

64.6

63.3

67.1

83.7

43.8

60.0

98.1

64.8

18.9

87.9

9.3

66.9

45.3

41.5

37.1

25.8

14.2

11.8

2.8

-1.0

5.1

16.7

87.2

29.8

44.6

43.3

37.7

27.0

3.0

18.5

17.8

-0.6

1.6

12.4

-36.3

30.2

40.6

51.1

29.0

27.4

1.2

6.5

0.03

-0.6

2.9

11.9

35.7

28.0

2.7

2.9

3.7

1.5

1.2

1.1

0.4

-0.3

1.3

2.3

9.6

2.6

2.9

3.3

3.8

1.4

0.3

2.2

4.3

-0.3

0.6

1.6

-5.4

2.8

2.2

3.9

2.7

1.4

0.2

0.8

0.01

-0.3

1.2

1.5

5.3

2.5

3.8

4.3

5.6

2.0

2.8

1.8

0.7

-0.6

1.8

3.4

31.5

3.9

3.7

4.3

5.8

2.0

0.7

3.2

8.9

-0.6

1.0

2.4

-17.0

4.0

2.7

4.8

4.0

2.0

0.3

1.1

0.02

-0.9

2.2

2.3

16.4

3.4

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Earning Assets/Deposits Capital Ratio Cost/Income Net Profit MarginRevenue/Admn ExpensesBanks

ABN Amro


Citibank


American Express

HSBC*

Deutsche Bank

Oman International

Bank of Tokyo


Rupali Bank

Total

121.3

120.8

114.9

112.6

183.8

138.5

115.1

101.7

109.6

109.8

270.8

120.7

108.5

110.7

126.7

122.7

169.6

116.1

119.9

99.2

78.5

122.7

295.9

117.3

102.7

103.9

122.2

126.2

130.8

108.5

133.3

89.7

100.4

118.9

274.3

111.8

5.9

6.9

9.9

5.9

8.4

9.2

13.5

31.1

25.2

13.6

11.0

8.7

6.5

7.5

10.1

5.2

10.5

11.9

24.0

45.0

36.9

12.9

14.9

9.3

5.5

7.6

9.5

5.0

14.3

12.9

27.4

55.2

40.2

12.9

14.9

9.1

246.1

248.2

243.0

228.6

147.5

163.6

103.2

79.7

195.2

266.4

411.6

226.9

244.7

247.1

233.5

207.0

116.3

195.8

162.0

86.6

135.5

222.6

212.9

223.5

212.7

288.1

176.7

209.4

96.7

141.6

93.0

90.8

178.8

209.1

169.5

204.6

69.3

67.6

67.2

83.3

86.5

84.5

95.0

105.7

80.3

74.9

65.7

72.1

54.9

50.2

57.7

78.3

94.2

58.5

61.0

106.0

81.3

70.5

197.8

59.6

60.5

40.3

66.9

73.

97.0

79.0

99.8

110.6

65.2

68.7

14.9

59.6

45.9

35.0

25.6

40.1

26.8

29.7

39.7

-26.6

15.7

45.9

18.7

33.3

35.5

37.4

30.8

37.5

18.6

63.5

-7.5

-16.9

20.3

31.3

-77.2

33.0

29.9

48.3

44.4

37.3

13.3

18.5

0.2

-18.3

28.5

36.6

25.3

40.3

19


Foreign Banks - Selected Ratios(In %)

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Capital toRisk Asset Ratio Debt Management Ratio Earning Assets/Assets Admn. Cost/RevenueEquity/LiabilitiesBanks

ABN Amro


Citibank


American Express

HSBC*

Deutsche Bank

Oman International

Bank of Tokyo


Rupali Bank

Total

11.8

13.2

23.3

12.0

23.5

20.8

29.2

88.8

343.3

23.1

81.2

18.9

12.2

15.1

24.5

10.3

34.2

24.2

55.4

167.1

2159.4

21.2

188.2

19.9

10.2

14.8

20.7

8.7

58.9

29.4

71.1

251.6

396.8

21.5

494.7

18.4

94.0

92.9

89.9

93.1

91.5

90.6

86.4

68.6

74.8

86.3

82.9

91.0

93.5

92.0

89.7

93.5

89.4

88.0

75.9

54.4

63.1

86.2

75.5

90.3

94.5

92.2

90.6

94.6

85.7

40.1

72.6

44.5

59.8

85.4

82.9

90.8

6.2

7.4

11.0

6.3

9.1

10.2

15.6

45.4

33.7

15.7

13.3

9.6

6.9

8.2

11.3

5.6

11.7

13.5

31.6

82.6

58.5

15.0

19.7

10.3

5.8

8.2

10.4

5.3

16.7

14.8

37.7

123.9

67.1

15.1

18.0

10.0

84.8

79.9

76.2

84.0

79.3

82.7

65.3

52.7

76.1

72.9

82.5

79.5

85.7

83.3

82.7

86.9

79.7

80.7

57.8

42.0

46.6

82.1

94.1

82.3

85.3

83.9

83.3

87.1

72.7

79.7

52.4

30.3

53.9

81.2

89.3

82.5

40.6

40.3

41.2

43.7

61.1

96.9

125.4

51.2

51.1

37.5

24.3

44.1

40.9

40.5

42.8

48.3

51.1

61.7

115.5

73.8

73.8

44.9

47.0

44.7

47.0

34.7

56.6

47.8

70.6

107.6

110.1

55.9

55.9

47.8

59.0

48.9

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Cost of Funding Earning Assets Yield on Earning Assets Interest Spread Staff Cost/Employee(Rs.Mn)Net Interest Margin (NIM)Banks

ABN Amro


Citibank


American Express

HSBC*

Deutsche Bank

Oman International

Bank of Tokyo


Rupali Bank

Total

4.9

5.0

6.0

7.3

6.4

4.8

3.9

8.5

5.2

6.7

4.6

5.6

1.7

1.3

2.5

4.2

2.2

1.8

0.9

6.4

2.2

2.5

1.0

2.1

1.2

0.9

1.6

2.8

1.9

1.5

0.9

3.8

1.3

2.1

1.3

1.5

8.3

9.1

10.7

9.0

8.1

6.9

7.7

9.7

7.2

10.0

6.9

9.1

5.5

5.5

6.5

6.1

3.7

4.3

4.4

8.6

3.4

4.9

5.3

5.6

5.0

5.0

5.9

5.0

3.4

3.1

3.0

7.3

2.6

4.0

6.3

5.0

3.5

4.1

4.8

1.8

1.6

2.1

3.8

1.2

2.0

3.3

2.3

3.5

3.8

4.2

4.0

1.8

1.5

2.5

3.5

2.2

1.2

2.3

4.4

3.5

3.8

4.1

4.4

2.2

1.4

1.6

2.1

3.5

1.3

1.9

4.9

3.6

3.8

4.6

5.3

2.0

2.2

2.3

3.9

3.0

2.1

4.1

2.1

4.0

3.9

4.3

4.1

1.9

1.6

2.6

3.4

3.6

1.7

2.4

3.9

3.6

3.9

4.2

4.4

2.3

1.6

1.7

2.0

4.6

1.4

1.9

4.4

3.6

1.3

0.7

0.8

0.4

0.8

0.7

1.7

0.8

1.1

0.4

0.4

0.8

1.4

1.2

0.9

0.5

1.0

0.7

2.1

0.9

1.1

0.6

0.2

0.9

1.6

1.2

1.1

0.5

1.2

1.0

1.8

0.7

0.9

0.4

0.3

1.0

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

Staff Cost/Branch (Rs.Mn) Deposits/Branch(Rs.Bn) Staff/Branch (Nos) Profit (AT)Branch (Rs. Mn)Deposits/Employee(Rs.Mn)Banks

ABN Amro


Citibank


American Express

HSBC*

Deutsche Bank

Oman International

Bank of Tokyo


Rupali Bank

Total

51.9

20.5

61.1

16.7

39.3

44.5

38.7

10.5

48.0

10.8

10.0

30.6

53.6

38.4

67.6

16.8

44.3

45.0

64.0

9.0

37.0

9.9

7.0

36.9

74.3

29.4

86.9

14.4

50.5

45.0

57.0

7.6

36.0

10.3

8.0

36.0

4.9

1.9

5.1

2.0

1.5

2.9

1.1

0.7

4.8

1.0

0.2

2.6

5.2

3.1

5.0

1.8

1.4

3.3

1.0

0.5

2.8

1.0

0.2

2.8

6.1

2.5

5.4

1.5

1.3

4.1

0.9

0.3

2.4

1.1

0.2

2.6

126.6

68.1

64.6

52.5

32.3

45.3

49.2

57.0

110.7

33.3

9.5

64.9

134.0

98.5

65.9

51.0

31.9

52.0

34.1

47.2

80.5

34.2

7.1

72.1

133.4

99.2

68.3

52.5

30.3

66.1

28.5

28.4

62.3

36.0

6.9

74.4

39

28

80

80

46

64

23

13

43

30

26

39

39

32

76

76

44

63

31

10

35

29

29

39

46

25

80

80

42

62

31

11

38

29

28

35

146.5

49.4

133.0

74.2

34.5

44.4

39.8

-4.6

27.7

29.2

36.7

63.0

115.1

84.4

165.4

80.8

20.0

115.6

-17.0

-3.0

20.0

15.7

-23.0

69.3

102.0

85.7

246.3

95.0

12.8

29.0

0.2

-3.0

33.6

18.1

7.6

72.8

20


Employees and Branches

2000 2001 2002 2003 2004Banks

NBP

FWB

NCBs

HBL

UBL

MCB

ABL

Privatised Banks

Total

Askari Commercial Bank

Soneri Bank

Bank Al-Habib

Bank Al-Falah

Bank of Khyber

Bank of Punjab

KASB Bank

Metropolitan Bank

Faysal Bank

Bolan Bank

Prime Comm. Bank

Union Bank

PICIC Commercial Bank

Saudi Pak Comm. Bank

Meezan Bank

Crescent Commercial Bank

NIB

Dawood Bank Ltd.

All Privatised/Prov.Banks

ABN Amro

Standard Chartered

Citibank


American Express

HSBC*

Deutsche Bank

Oman International

Bank of Tokyo


Rupali Bank

All Foreign Banks

Grand Total

15351

484

15835

22779

11879

12133

7217

54008

69843

1147

599

584

695

358

3149

405

494

287

1156

395

741

273

464

-

-

-

-

10747

282

330

587

295

252

123

125

29

66

131

28

2248

82838

Employees Branches

2000 2001 2002 2003 2004

15163

484

15647

19352

8899

11614

7082

46947

62594

1281

663

742

959

365

3064

444

561

366

1054

455

858

309

416

-

-

-

-

11537

281

278

605

309

201

131

96

23

55

143

27

2149

76280

12195

496

12691

19005

8446

10926

6947

45324

58015

1456

779

1007

1504

376

3002

292

763

461

1026

658

1127

510

476

159

-

-

-

13596

272

594

637

351

185

128

68

26

43

151

26

2481

74092

13272

524

13796

18800

8815

10164

6859

44638

58434

1723

882

1253

2133

368

3019

328

901

722

1014

900

1319

698

634

238

133

249

12

16526

270

631

611

423

174

126

61

20

35

175

29

2555

77515

13745

507

14252

18625

9206

9889

6747

44467

58719

2118

937

1462

3352

360

3144

398

1045

899

1031

1059

1413

939

704

511

334

403

55

20164

322

728

636

487

168

123

62

22

38

205

28

2819

81702

1428

38

1466

1755

1390

1210

925

5280

6746

29

24

32

32

29

243

18

21

11

50

17

27

15

20

-

-

-

-

568

5

6

5

6

4

2

3

2

1

4

1

39

7353

1245

38

1283

1516

1117

1061

856

4550

5833

36

30

41

32

29

242

18

25

14

50

2

32

20

20

-

-

-

-

611

7

6

8

7

4

2

3

2

1

5

1

46

6490

1204

38

1242

1473

1112

1045

814

4444

5686

46

39

57

45

29

242

18

35

23

50

33

34

42

28

6

-

-

-

727

7

21

8

9

4

2

3

2

1

5

1

63

6476

1199

38

1237

1471

1077

986

752

4286

5523

58

44

70

59

29

241

19

40

39

50

43

43

64

28

10

6

2

-

845

7

20

8

12

4

2

2

2

1

6

1

65

6433

1226

38

1264

1469

1072

946

735

4222

5486

75

52

74

90

29

253

21

47

50

50

49

53

95

37

16

12

10

2

1015

7

29

8

17

4

2

2

2

1

7

1

80

6581

* Hongkong & Shanghai Banking Corporation

All Banks

21


The introduction of the Basel II directiverepresents a tremendous opportunity for theBanks in Pakistan to adopt best practices andimprove their profitability. In this article, wewill provide an outline of the Basel II directive,the three pillars which form the new framework,the new role of the regulator and the challengesand benefits that Banks in Pakistan will reapas a result of this new Capital Accord.

Introduction To Basel II

The introduction of the “InternationalConvergence of Capital Measurement andCapital Framework” aims to address twodimensions of the banking environment. Thefirst one relates to the ability for banks tooperate in a level playing field where the capitalcharge is in direct proportion to the risk taken,to a larger extent than previously possible underBasel I. The second dimension is to reinforceand strengthen the soundness and stability ofthe banking system.

These two imperatives have provided theregulator and the Basel Committee anopportunity to discuss and rewrite prudentialregulations in the context of a more globalfinancial system, directly correlating the risktaken with a capital charge.

Banks have a direct incentive to improve theirrisk policy and specifically, elements relatedto their credit risk, which constitute the largestchanges made to the previous accord. Theintroduction of Operational Risk also providesfinancial institutions with the minimum standardrequired in determining and assessing processesin a view, to reduce the operational risk lossesand to improve the quality of operationalprocesses.

The New Capital Accord also providesadditional levels of freedom between the banksof Pakistan and the regulator; State Bank of

Basel II

* Head of Risk Practice, Asia-PacificSAS InstituteJohn has a Master in Finance from the CERAM, Nice, France and has more than 10 years experience in the fieldof Risk Management in the Banking Industry. He travels to Pakistan on a regular basis and participates in theimplementations projects of Basel II banks in Pakistan.

John Foulley*

Pakistan. The first level of freedom is in thediscretion given to the State Bank of Pakistanto reformulate or specify some of the prudentialelements defined in the Basel framework. Thesecond degree of freedom is provided at thebank level stating that no bank should changetheir business processes for the sole purposeof complying. The implications are many andcomplex. No single rule can be applied on aformulaic basis for the purpose of calculatingcapital requirements but instead a case by caseapproach relying on a continuous dialoguebetween the bank and their regulator.

The Three Pillars

The Basel Document is built around threeprinciples referred to as ‘pillars’. They aredefined as follow:

First Pillar: Minimum Capital RequirementsSecond Pillar: Supervisory Review ProcessThird Pillar: Market Discipline

Market Risk

There are no fundamental changes in the wayMarket Risk is calculated and banks shouldtherefore concentrate on the two newdimensions of Credit and Operational Riskbefore they consider further improvements forthe purpose of improving their Market Risk.

The First Pillar is the simplest to understandyet the most difficult to implement as itintroduces significant changes to the way banksaccount for Risk, specifically Credit Risk whichis now examined in greater details, and theintroduction of Operational Risk.

Credit Risk

For Credit Risk, the Basel Committee providesthe option between a relatively simpleStandardised Approach where the Capital

Basel IIprovidesoppor-tunities

Levelsoffreedom

NewCapitalAccord

22


Charge is a direct function to an availableExternal Rating provided by a Rating Agency.The alternative is the Internal Rating Basedapproach where the bank can choose differentlevel of sophistication based on the data it hasstored and its modeling ability.

It is worth noting that the Internal Rating Basedrequires the bank to calculate ‘Internal’probability of default (likelihood that a debtorwill become unable to repay its credit), ie thereis no market that would encapsulate a rule validfor all banks. Taking the example of Thailand,Bank A might traditionally have been lendingmoney to the agricultural sector and havedebtors which specific characteristics andbehaviour. Bank B might be recently opened,with no branch and focusing on an internetonly platform providing services to the moreaffluent customer segments. These twoexamples, while being extreme, illustrate theneed for internal measurements as thecomposition of the bank portfolio is a functionof its history, traditional lending base, activityand clientele.

For the most sophisticated approach to CreditRisk, banks are not only required to calculatethe likelihood of default, but also the financialimpact when a default occurs. In simple terms,how much money is lost when that defaultoccurs. This element is referred to as LossGiven Default or LGD.

Further options are provided by calculating anExposure at Default or Credit Equivalent. Theproblem to solve here is to understand what isthe total exposure to a customer at the momentof default. This is done by estimating a CreditConversion Factor, allowing the bank to convertundrawn exposures (such as a credit card forexample which would show an availableamount) into Exposure at Default (EAD).

Operational Risk

Operational Risk is a new element for banksand most certainly the most difficult tocomprehend as it encapsulates all the banksoperations. The definition as available in theBasel Accord states “Operational risk is definedas the risk of loss resulting from inadequate or

failed internal processes, people and systemsor from external events.” 1

A basic indicator approach provides an easyway out of the calculation of the operationalrisk capital requirements. Ultimately, theregulator will require banks to move to aminimum of a standardized approach requiringthe implementation of building blocks tounderstand the nature of the operational riskmaterializing within the bank, as well as amonitoring of processes and review process toconstantly improve the way the bank works.

Such concepts are defined in the BaselDocuments require the bank to assess the qualityof its processes (Control Self-Assessment orRisk Control Self-Assessments –CSA, RCSA),capture operational risk losses, monitor driversof risk (elements that influence the occurrenceor severity of operational risk losses) with thehelp of indicators, referred to as Key RiskIndicators (KRI).

To further understand the two concepts of CSAand KRI we can look at the following examples.In Bank A, the Back Office has been the centerof frequent losses due to errors in settlementamount and instructions. The department willdefine a set of questions allowing it tounderstand the quality of its process. This mightcover very diverse elements such as the holidaypolicy (the loss occurred because no one wasavailable to enter the transactions), the trainingpolicy (no one understood the structure of theproducts), the quality of the IT system (wetrade the product but it is not handled in thetransactional system, we use paper andspreadsheets but one copy got lost). A list ofquestions is drawn and description givenillustrating different possible answers. Thisapproach, being subjective, is necessary tointroduce checks and balances in the process(for example Audit department reviewing thequestions and answers). Key Risk Indicatorsprovide a more objective view of risk driversas they are directly observable. For example,if we identify a link between amount of traininggiven and level of losses, we can observe thetraining budget year on year.

While relatively simple to understand, theimplementation of such new practice requires

1 “International Convergence of Capital Measurement and Capital Standards” – Basel Committee on Banking Supervision - §644

Need forinternalmeasure-ments

Movetowards astandard-izedapproach

Under-standingCSA &KRI

23


top management buy-in and a change in culturein the organization.

For most advanced organizations, the loss datacaptured as part of the compliance exercise canbe used to predict future potential losses usingthe Advance Measurement Approach.

Within banks there is pressure to manageand quantify operational risk in a formalisedand structured way. This pressure mainly comesfrom regulators. But it also comes throughrecognition that the increasing sophisticationof financial products and systems suggeststhat operational risk need not be a minorconcern. Furthermore, banks are recognisingthat expected losses due to operationalrisk should be priced into their products.For example, the expected loss of credit cardfraud should affect the pricing of creditcards. At a basic measurement level thisstructuring of operational risk requires threesources of loss or potential loss information.

In particular, there is a need for an internal lossdatabase representing actual loss events, self-assessment and scenario analysis representingexpert opinions on loss events that couldpotentially be experienced, and an external lossdatabase collecting actual external loss events.

A New Role For The Regulator – TheRegulatory Review Process

The nature of the roles of the bank and itsregulator are defined in detail in the BaselCapital Accord:

“The supervisory review process recognisesthe responsibility of bank management indeveloping an internal capital assessmentprocess and setting capital targets that arecommensurate with the bank’s risk profile andcontrol environment. In the Framework, bankmanagement continues to bear responsibilityfor ensuring that the bank has adequate capitalto support its risks beyond the core minimumrequirements.”

“Supervisors are expected to evaluate how wellbanks are assessing their capital needs relative

to their risks and to intervene, whereappropriate. This interaction is intended tofoster an active dialogue between banks andsupervisors such that when deficiencies areidentified, prompt and decisive action can betaken to reduce risk or restore capital.

Accordingly, supervisors may wish toadopt an approach to focus more intenselyon those banks with risk profiles oroperational experience that warrants suchattention.”2

The important word here is dialogue. Basel IIwith its inherent complexity provides for manyinterpretations. There is also discretion providedto the regulator to answer differently based onthe nature and complexity of the bank raisingthe questions.

We will explore more of this dimension in theimplication for banks in Pakistan.

The Carrot and the Stick; Market Discipline

The greater the transparency, the better theoverall banking system. The State Bank ofPakistan provides guidelines and will soonformulate its expectations on what and howbank should be reporting.

“The Committee is aware that supervisors havedifferent powers available to them to achievethe disclosure requirements. Market disciplinecan contribute to a safe and sound bankingenvironment, and supervisors require firms tooperate in a safe and sound manner.

Under safety and soundness grounds,supervisors could require banks to discloseinformation. Alternatively, supervisors havethe authority to require banks to provideinformation in regulatory reports. Somesupervisors could make some or all of theinformation in these reports publicly available.Further, there are a number of existingmechanisms by which supervisors may enforcerequirements. These vary from country tocountry and range from “moral ????suasion”

2“International Convergence of Capital Measurement and Capital Standards” – Basel Committee on Banking Supervision- §721 & §722

Pressurewithinbanks tomanageopera-tionalrisk

Super-visoryauthority

24


through dialogue with the bank’s management(in order to change the latter’s behaviour), toreprimands or financial penalties.”

More importantly, the new directive emphasizesthe need for public disclosure when possibleand desirable. This puts us in a voluntary codewhere market participants may choose toadvertise their transparency and advertise theircontrols. When in the 1990’s the largestAmerican banks started publishing reportsdetailing their market risk, they were sendinga very clear message to the market. We knowwhere our risks are, and we are managing them.Rather than being information to be keptinternally, this provided an incentive fortransparency.

“Banks that do not comply with the Basel IIAccord may also be disciplined at the interbankmarket where they may be charged a premiumon funding, which ultimately will translate intolower margins.

Should the affected bank transfer the additionalcost to customers, it may in turn losecompetitiveness in the longer term.”3

What Does It Means For Banks In Pakistan?

As far as the implementation of Basel II isconcerned, one of the most important challengesthat most organizations are facing is the lackof data or lack of consolidated view of allexposures.

Traditionally, banks have operated in silos withoperational systems taking care of theirindividual business units: a treasury department,a core banking system, a credit card systemand a loan origination system. Based on ourprevious experience and implementations, 70%to 80% of the work is related to datamanagement and data quality.

The Capital Accord requires the ability tocalculate aggregated exposures for each andevery customer, be it an individual or acorporation. This means pulling data from eachof the system that might be used to service thatcustomer.

In most cases, we are confronted with theadditional difficulty of having to deal withinconsistent data across the board. A uniquecustomer might be stored under different namesor spelling in the operational system, orreferenced with two different addresses.

An additional challenge to address is the changein culture in engaging with the regulator. Anybank would typically be talking to regulatorson existing prudential regulations, providingreports as expected by the regulator. However,a new mindset is required when implementingBasel II where constant guidance and validationis required from State Bank of Pakistan. Thisis due to the fact that the organization is facedwith implementation questions that are notresolved in the Capital Accord but requirevalidation from the regulator.

An example would further illustrate the case.a)State Bank of Pakistan currently defines whatconstitutes an SME for Prudential Regulationpurposes. b) Basel II on the other hand definesan SME according to the amount of revenueor profit generated. c)Banks themselves mightoperate a specific branch network view of theSME. In this case, we would need to reconcilethese three differing views of a single reality.

Bank A might choose to define an SME assatisfying disclosure requirements (annualreports) and being treated at an SME branch.This treatment would be appropriate if agreedupon with the regulator and this is the timewhere State Bank of Pakistan’s opinion needsto be constantly solicited and referenced.

Additional implementation challenges face thebank in the treatment of Operational Risk.Operational Risk is largely an unknown andun-practiced discipline. It is therefore criticalthat initiatives evolving around this are clearlysponsored and owned by senior managementand enjoy the buy-in at the highest level of theorganization.

Furthermore Incentive Plans and HR Policyneed to be aligned towards the delivery of theultimate goal that the organization is targeting.

3 Mr. Choo Yee Kwan, Chief Risk Officer, Maybank, Business Times June 28, 2004

TheImple-mentationchallen-ges

Additio-nalchallenge

25


Operational Risk being a new discipline, itssuccess is highly dependent on an extensiveeducational program and the rigorous collectionof losses (which in many cases will be a newadditional responsibility for each head ofdepartment). The emphasis at the beginning ofthis process should be on the accurate andexhaustive collection of losses (KeyPerformance Indicators can be created on thenumber of losses reported by each department).At a later stage of the roll-out process, whenthe number of losses collected is consistentover time, the emphasis needs to turn to theimprovements of processes with theintroduction of RCSA and KRI.

The Human Resource and Training Educationinitiative are both key to a successful roll-outof Operational Risk.

And the Benefits!

Successfully implementing Basel will provideeach of the participants in the Pakistan marketwith new competitive tool.

To start, the requirement to build an aggregatedview of the customers’ products and exposuresprovides a ‘Single Customer View’ a verydesirable marketing tool. When armed withsuch a tool, an account officer can very quicklyidentify opportunities in their portfolio andprovide additional services to their client baserather than only engaging at the time chosenby the client (for example, if it is noticed thatthe client has a fixed deposit of 2M PKR, andno loan or credit, the decision can be made to

grant him a credit or provide investmentservices that are more profitable to the bank).

Furthermore, based on the requirements of theInternal Rating Based approach, banks canbuild a better understanding of the risk of theirclients and their portfolio. As a result thedecision to grant credit is more scientific andstructured, yielding fewer ‘bad’ lendingdecisions.

This can lead to a significant reduction of NonPerforming Loans as a percentage of new creditgranted. The ‘good’ credit decisions are alsomore numerous which allows the bank toincrease its approval rate for new credit withoutsignificantly affecting its risk appetite. In somecases, an increase of credit granted wascorrelated with a reduction in NPL. The bankwins on two fronts, increased market sharesand reduced losses.

Finally, the framework implemented providedthe clarity and transparency for the Board ofthe Bank to make strategic decisions based onrational factors. For example, if both InvestmentBanking and Retail Banking generated thesame amount of profit while taking two verydifferent amounts of risk, the decision can betaken by the board to allocate more capital tothe entity providing the best rapport ofrisk/profit.

The framework also provides the bank withthe ability to free up significant amounts ofcapital which can then be used for organicgrowth opportunities or acquisitions.

Incentiveplansand HRpolicyneedto bealigned

26


Credit Ratings of Banks/DFIsAs of 31-08-2005

Previous Credit Rating Latest Credit RatingSr.No. Name of Bank/DFI Rating Agency Short

TermLongTerm Date of Rating Short

TermLongTerm Date of Rating

Nationalised Banks1 First Women Bank Limited PACRA A2 BBB Aug, 2002 A2 BBB+ Aug, 20032 National Bank of Pakistan JCR-VIS A-1+ AAA May, 2004 A-1+ AAA June, 2005

Privatised Banks3 Allied Bank Limited JCR-VIS A-1 A Dec, 2004 A-1 A May, 20054 Habib Bank Limited JCR-VIS A-1+ A+ April, 2004 A-1+ AA June, 20055 MCB Bank Limited PACRA A1+ AA June, 2004 A1+ AA June, 20056 United Bank Limited JCR-VIS A-1+ A+ June, 2004 A-1+ AA June, 2005

Provincial Banks7 The Bank of Khyber JCR-VIS A-2 BBB June, 2004 A-2 BBB July, 20058 The Bank of Punjab PACRA A1 A+ June, 2004 A1+ AA- June, 2005

Private Banks9 Askari Commercial Bank Limited PACRA A1+ AA+ June, 2004 A1+ AA+ June, 2005

10 Bank Al-Falah Limited PACRA A1+ AA- June, 2004 A1+ AA June, 200511 Bank Al-Habib Limited PACRA A1+ AA June, 2004 A1+ AA June, 200512 Mybank Limited JCR-VIS A-3 BB+ June, 2004 A-2 BBB Feb, 200513 CresBank JCR-VIS A-2 BBB+ June, 2004 A-2 BBB+ June, 200514 Faysal Bank Limited JCR-VIS A-1 AA Feb, 2004 A-1 AA July, 200515 KASB Bank Limited JCR-VIS*, PACRA A2 BBB+ April, 2004 A2 BBB+ June, 200516 Metropolitan Bank Limited PACRA A1+ AA+ June, 2004 A1+ AA+ June, 200517 Meezan Bank Limited JCR-VIS A-1+ A+ June, 2004 A-1 A+ June, 200518 NIB (NDLC-IFIC Bank) Limited PACRA A2 A- July, 2004 A1 A+ July, 200519 PICIC Commercial Bank Limited JCR-VIS A-1 A June, 2004 A-1 A+ June, 200520 Prime Commercial Bank Limited PACRA A1 A June, 2004 A1 A+ June, 200521 Saudi Pak Commercial Bank Ltd. PACRA A3 BBB June, 2004 A3 BBB June, 200522 SME Bank Limited JCR-VIS A-3 BB+ June, 2004 A-2 BBB March, 200523 Soneri Bank Limited PACRA A1+ AA- June, 2004 A1+ AA- March, 200524 Union Bank Limited PACRA A1 A+ June, 2004 A1+ AA- June, 2005

Foreign BanksStandard & Poor’s A-1+ AA- A-1+ AA-

Moody’s P-1 Aa3 P-1 Aa325 ABN Amro BankFitch-IBCA F1+ AA-

April, 2004F1+ AA-

April, 2005

26 Al-Baraka Islamic Bank PACRA, JCR-VIS** A1 A- June, 2004 A-1 A March, 2005Standard & Poor’s N/A N/A A-1 A+

Moody’s P1 A2 P-1 A227 American Express BankFitch-IBCA F1 A-

June, 2003F-1 A+

June, 2004

Standard & Poor’s A-2 A- A-1 AMoody’s P-1 A2 P1 A128 Bank of Tokyo-Mitsubishi Limited

Fitch-IBCA F1 A-June, 2004

F1 A-June, 2005

Standard & Poor’s A-1+ AA A-1+ AAMoody’s P-1 Aa1 P-1 Aa129 Citibank N.A

Fitch-IBCA F1+ AA+May, 2003

F1+ AA+April, 2004

Standard & Poor’s A-1+ AA- A-1+ AA-30 Deutsche Bank AGMoody’s Nil Nil

Sept, 2004Nil Nil

March, 2005

31 Habib Bank AG Zurich JCR-VIS A-1+ AA+ June, 2004 A-1+ AA+ June, 2005Standard & Poor’s Nil A+ Nil Nil

Moody’s A1 Aa3 P-1 A132 Hong-Kong Shanghai BankingCorporation (Non HK$)

Fitch-IBCA Nil AA-March, 2004

Nil NilAugust, 2005

33 Oman International Bank JCR-VIS A-2 BBB June, 2004 A-2 BBB June, 2005Standard & Poor’s A-1 A A-1 A

Moody’s P-1 A2 P-1 A234 Standard CharteredFitch-IBCA F1 A+

July, 2003F1 A+

July, 2004

Specialised Banks35 Punjab Provincial Cooperative Bank JCR-VIS A-3 BB+ Feb, 2004 A-3 BB+ Jan, 2005

PACRA A-1+ AAA April, 2004 A2 BBB+ April, 200536 Zarai Taraqiati Bank LtdJCR-VIS A-3 BB+ April, 2004 A3 BB+ April, 2005

Development Financial InstitutionsPACRA A1+ AAA June, 2004 A1+ AAA June, 200537 Pak Kuwait Investment Co. (Pvt) LtdJCR-VIS A-1+ AAA June, 2004 A-1+ AAA May, 2005

38 Pak Libya Holding Co. PACRA A1+ AA- June, 2004 A1+ AA- May, 200539 Pak-Oman Investment Co JCR-VIS A-1+ AA+ June, 2004 A-1+ AA+ May, 2005

40 Pakistan Industrial Credit &Investment Corporation PACRA A1+ AA June, 2004 A1+ AA June, 2005

41 Saudi Pak Industrial & AgriculturalInvestment Company JCR-VIS A-1+ AA+ April, 2004 A-1+ AA+ April, 2005

42 Investment Corporation of Pakistan PACRA A1+ Nil March, 2004 A1+ AA March, 2005Micro Finance Institutions43 The First Microfinance Bank Ltd JCR-VIS A-1+ A+ Sept, 2003 A-1+ A+ June, 2004

* For April 2004 credit ratings ** For March 2005 Source: State Bank of Pakistan

27


The index during the month of July – Aug05gained over 4% on an average daily volumeof 184m shares. The market remained rangebound for the most of the period under reviewon extremely low turnover. The lacklusterperformance of the market finally came to anend when the Prime Minister of Pakistanendorsed the decision taken by the State Bankof Pakistan and Securities and ExchangeCommission of Pakistan with regards to thesubstitution of the Carryover Transaction (COT)with Continuous Funding System (CFS).

Market Analysis

8000780076007400420070006800660064006200

500

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01-Jul-05 21-Jul-05 10-Aug-05 31-Aug-05

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Corporate announcements made by most ofthe companies (quarter ended June '05) havebeen positive and have shown a remarkableimprovement, primarily driven by top-linegrowth which augurs well for the growth inthe overall economy. Sectors which have donewell in particular were banking, OMCs andFertilizers (results for most of the cement andtextile companies have not been madepublic yet).

As expected, the banking industry in generalhas performed exceptionally well during thecurrent calendar year. The cumulative profitafter tax increased to Rs22.8b almost doublingfrom last year. The marked improvement inprofitability has influenced financial ratios forthe industry as a whole. The ROA and ROEfor the sector stood at 1.4% and 22.1%respectively for 1HY05.

Factors which have contributed to theprofitability of the sector:

§ In light of the rising level of inflation, the centralbank tightened the monetary policy andconsequently raised cut-off yields on its

securities. Banks responded quickly in raisingtheir lending rates but were reluctant toaggressively increase their offerings on depositsand as a result spreads improved considerablyfor the industry. The spread between theweighted average lending and deposit rate asof June ’05 stood at 636 bps (approximately).

§ The increase in lending rates so far has beenwell complimented with the private sector creditoff-take. Total advances of schedule banks stoodat Rs1759.6 billion as of June ’05 compared toRs1324.5 billion in the same period last year,showing an increase of Rs435.1 billion. Apartfrom the corporate sector which required fundsfor BMR purposes, there was also a high demandof capital from consumer, SME and agriculturesectors.

§ The high credit off-take was achievable due tothe increase in the deposit base of the sectorwhich rose by Rs362.7 billion to Rs2355.7 billion(as of June ’05). The advance to deposit ratiofor the industry stood at 75% at June ’05compared to 66% in June ’04.

§ Total investments by schedule banks haveregistered a marginal increase from Rs712.2billion in CY04 to Rs716.1 billion in CY05.The reluctance shown by banks in increasingtheir investment’s portfolio in part may beattributable to the rising interest rate environmentwhich has a negative impact on the valuationof debt instruments (the negative correlationbetween the interest rates and market value ofdebt instruments).

§ Apart from the above mentioned factors, bankshave also been able to take advantage of theincreased trade related activity witnessed in the

BankingSector

9.008.007.006.005.004.003.002.001.000.00

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In terms of increase in profitability on a yearon year basis, My Bank tops the list followedby MCB and Union Bank. The 1HY05 - PATfor NIB and Askari Bank have registered adecline compared to the same period last year.

The marked improvement in profitability hasinfluenced financial ratios for the industry asa whole. The ROA and ROE for the sectorstood at 1.4% and 22.1% respectively for1HY05.

The remarkable performance of the bankingsector has not gone un-noticed in the capitalmarket. Amongst banks, MCB has been thetop performer (see chart on ComparativePerformance) during the two months July 01-Aug 31 ’05, followed by Bank of Punjab,Faysal Bank, Union Bank and NBP.

The growth in the autos sector is attributableto various factors. The main driver of growthis the increase in installed capacities and salesof the auto manufacturers to fill the gap betweendemand and supply which had widened due tothe rapid increase in car financing. Theincreased investment in the public sectortransport schemes like Urban Transport System

(UTS) within the country and exports toAfghanistan led to an increase in the sales oftrucks and buses. Agricultural financing (agri-loans) has boosted the sales of tractors.

The auto sector was adversely affected in theJan-March 2005 by the hike in the prices ofsteel and the appreciation of Japanese Yenagainst Pak Rupee together which had increasedthe cost of inputs. Furthermore, the measuretaken by the government in FY’05-’06 budgetto further reduce duties on CBUs had an adverseimpact on the sector. However subsequently,the stability in the prices of steel and in theexchange rate of Japanese Yen against PakRupee during April-June 2005 has normalizedthe situation.

All fertilizer manufacturing companies postedrobust increase both in their top-line as wellas bottom-line during 1HY05. Record fertilizerofftake complimented with high pricescontributed significantly to the profitability ofthe Fertilizer Companies. Agricultural sectortopping the government's priority list, easycredit availability from banks at very reasonablerates, favorable weather conditions and anincrease in income of the farmers are some ofthe factors that have contributed significantlyto the record fertilizer off-take and their prices.

The 55-year old Carryover Transaction (COT)was finally replaced by Continuous FundingSystem (CFS) on August 22, 2005. The newmode of financing has been adopted from'Takasbank', the central securities depositoryof Turkey, with the objective to avert any crisiswhich occurred in the past because of suddenwithdrawal of funds by financiers.

CFS allows more relaxation to investors interms of the number of scrips available,extension in the availability of the facility (i.e.number of days allowed) etc. The increase inthe cap from the previous Rs12b to Rs25 underCFS has helped the market to a great extent tosteer itself out of the liquidity crises andconsequently volumes have improvedconsiderably since the introduction of the newfacility.

economy. More active presence by the banksin trade related activities has enabled them todiversify their sources of incomes which willprove to be beneficial for them in times ofdeclining interest rates.

Autos

Fertilizers

Conti-nuousFundingSystem

PAT (Rsm) EPS % ChgCompany Period 2005 2004 2005 2004 (PAT)BANKSACBL HY 864 1,179 5.73 7.82 -26.7Bank Alfalah HY 847 593 2.82 1.98 42.8Bank Al-Habib HY 547 247 3.00 1.35 121.2BOP HY 1,531 888 8.47 4.91 72.5Faysal HY 1,914 1,140 5.97 3.56 68.0MCB HY 3,040 1,289 8.20 3.48 135.8Meezan Bank HY 150 111 0.88 0.65 35.5My Bank HY 186 55 1.22 0.36 238.4National Bank HY 4,394 2,180 7.44 3.70 101.5NIB HY 42 77 0.30 0.63 -45.0PICIC Comm. Bank HY 733 430 3.22 1.89 70.3Prime Comm. Bank HY 226 172 0.97 0.74 31.0Soneri Bank HY 481 295 2.91 1.78 63.2Union Bank HY 800 358 3.30 1.58 123.5

Earnings Review


NBP Products

NBP Saiban§ Finance available for home purchase, home construction

and home improvement.§ Period of repayment ranges between 3-20 years.§ Loans available upto a maximum of Rs.10 million.§ Mark-up choices available. Rate ranges between 9.0 - 12.85%. Rates subject to change§ Minimum approval and disbursement timing.§ Limited to areas where there are no documentation, fee,

resale and foreclosure related issues, so to protect the bank’s interest.

NBP Advance Salary§ 15 months salary in advance (certain conditions apply).§ Minimum documentation.§ Repayable in 5 years.§ No processing charges; no collaterals, no guarantees, no insurance.§ Mark-up charged at 13% per annum on reducing balance method.

NBP Cash n Gold§ Facility of Rs.5000 against 10 gms of gold.§ Mark-up 9% per annum.§ No maximum limit of cash.§ Repayable after one year.§ Roll over facility.§ No penalty for early repayment.

NBP Kisan Dost§ Loans available for the farmers for production, development

purposes, for purchase of tractors, for installation of tubewells,for purchase of agricultural implements, mirco loans, for godownconstruction, for construction of fish pond, for livestock farming,for milk processing, for cold storage, bio-gas plants etc.

§ Mark-up 9% per annum.§ Loans available at the farmer’s doorsteps.§ Agricultural experts to guide farmers.§ Loans available against agricultural passbooks, gold ornaments

and paper security.

Items 2000 2001 2002 2003 2004

Total Assets 371.6 415.1 432.8 468.9 549.7

Deposits 316.5 349.6 362.9 395.5 465.6

Advances 140.3 170.3 140.5 161.3 221.4

Investments 72.6 71.8 143.5 166.2 144.7

Shareholders’ Equity 11.4 12.0 14.3 18.1 25.2

Pre-Tax Profit 1.03 3.02 6.04 9.01 12.02

After-Tax Profit 0.46 1.15 2.25 4.20 6.24

Earning Per Share (Rs.) 1.24 3.08 5.49 8.53 12.68

Return on Assets (Pre-Tax Profit) (%) 0.3 0.8 1.4 2.0 2.4

Number of Branches 1428 1245 1204 1199 1226

Number of Employees 15351 15163 12195 13272 13745