Established in Lahore in 1942, Allied Bank Limited is one of the largest banks operating in Pakistan with a network of more than 800 branches located in almost 150 cities and towns. The bank offers a full range of retail, commercial and corporate banking services with a focus on service delivery through technology.
Additionally, it also provides general banking services to agricultural, industrial and individual customers throughout Pakistan. Almost 89% of bank’s deposit base is composed of deposits from the urban areas. The bank’s fundamental strength lies in its strong lending capability, as well as providing a variety of financial services, which has allowed ABL to diversify and enhance its deposit base.
The bank also conducts international operations in UK whereby it caters to the needs of the bank’s domestic corporate and other customers in financing import and export transactions. ABL’s products include foreign letters of credit, guarantees, remittances, acceptances and collections.
ABL has highest number of ATMs, which increased to 569 at December 31, 2010 (13% of the industry share) covering 145+ cities whereby, making it the widest geographical coverage for ATM-based service amongst all the banks in Pakistan. It has a completely online network of 806 branches. This accounts for 12% of the market share amongst the online branches in the country.
Allied Bank has also been adjudged as “best bank” of 2009 by CFA Association of Pakistan in its 7th Annual Excellence Awards. It has also been ranked 1st in Pakistan and 9th globally by the Banker Magazine, UK for yielding best profits on capital.
RECENT RESULTS (1Q11)
Mark-up/interest income during three months period ended March 31, 2011 increased to Rs 12,298 million compared to Rs 10,934 million in the corresponding period of previous year, a rise of 12.5% attributable mainly to volumetric growth in earning assets. The corresponding YoY increase in mark-up/interest expense was 9.5%, as mark-up/interest expense grew to Rs 6,094 million during three months period ended March 31, 2011 over corresponding quarter of previous year. As a consequence, the net mark-up/interest income grew by 15.6% to Rs 6,204 million compared to the corresponding period of previous year. The provision expense declined to Rs 312 million during three months period ended March 31, 2011 compared to Rs 1,262 million in the corresponding period of last year. Non-mark-up/interest income during three months period ended March 31, 2011 reduced by 7.9% to Rs 1,447 million over the corresponding period, attributable to lower FX revenue YoY and lesser contribution of advisory and investment banking fee income in the total fee income.
Deposits of the bank grew by 17.2% and stood at Rs 372,254 million as at March 31, 2011 compared to deposits of Rs 317,742 million at March 31, 2010. Given the prevailing circumstances, Gross Investments at Rs 129,919 million constituted much of the Bank’s earning assets growth during the period ended on March 31, 2011, which increased by 34.3% over March 31, 2010 level. Gross Advances, keeping in line with prudent lending strategy were Rs 257,249 million as at March 31, 2011, a growth of 7% over the gross advances of Rs 240,359 million as at March 31, 2010. The balance sheet size stands at Rs 450,308 million as at March 31, 2011, while the equity of the Bank as at March 31, 2011 registered a growth of 30.7% over March 31, 2010 level to reach Rs 39,547 million.
Profit before tax of ABL increased by 43.5% to reach Rs 3,851 million during three months period ended March 31, 2011 as compared to Rs 2,683 million in the corresponding period of previous year. Profit after tax also rose by 41.3% to Rs 2,511 million compared to Rs 1,777 million in the corresponding period. Resultantly, the EPS increased to Rs 3.21 during three months period ended March 31, 2011 compared to Rs 2.27 in the corresponding period of previous year.
BANKING INDUSTRY IN FY10
In FY10, during the second half, devastated floods derailed the economy further with total losses of USD 9-10 billion, of which USD 3-4 billion were in the agricultural sector. This combined with the electricity and gas shortages took a toll on the growth of economic activity during the year.
The SBP also reverted to the increased discount rate, which it decreased during the start of the year due to the decreasing inflationary pressure, seeing the risks to the economy caused by high inflation and the structural fiscal deficit. Despite this, M2 grew because of the sharp increase in borrowings by the Government from the banking sector.
At the same time, the lending to the private sector grew at 4.8% as compared to 1.8% in FY09. The credit was primarily for working capital requirements. On the other hand, the credit for fixed investment witnessed a decline.
However, the banks were careful in lending to the private sector as the number of NPLs rose during the year by almost 14%.
Financial performance (FY05-10)
The bank realised an income (profit after tax) of Rs 8.225 million as compared to Rs 7.122 million in FY09 showing an increase of 16%.
The interest income earned in FY10 was 9.414% high whereas the interest expense rose only by 0.026% which is negligible. The increase in the net interest income of the company is higher than the average for industry, which was 8%. The overall effect was 20.67% increase in net interest income mainly led by growth in average earning asset and improving deposit mix towards low cost core deposits. There was no increase in interest expenses because there were no significant changes in its sources ie the deposits, callable money borrowing, long-term borrowing or the short-term borrowings.
The non-interest income declined by 4.8% in FY10 as compared to FY09. This was mainly due to the decrease in brokerage income, dividend income and a significant decline in the income coming from dealing in foreign currencies. However, there was an increase in income from the sale of securities but the overall impact was of the decrease in the incomes.
The non-interest expenses of the bank increased by 22.7% due to the increase in all the expenses including the administrative expenses, provisions and other charges.
Deposits grew by almost 13%, which equals the industry average of the banking sector. These mainly included the fixed customer accounts. The advances grew by 7.5 % as compared to FY09, which was way higher than the industry average of just 1%.
The earnings profile of the bank shows marked improvement over the period under consideration. Over last few years there have been slight changes in the earnings ratios as most the elements increased promotionally. These have been mainly achieved through considerable improvements in equity and profits of the bank. The bank’s interest and non-interest income continued to grow. The bank’s performing advances were higher this time. The yield on the earning assets grew by 12% and the cost of funding also increased by 6%. Of the non-interest income, the highest increase came from fee, commission and brokerage income as well income from the purchase and sale of securities and the dividend income.
The bank’s earnings per share for the year ended 2010 were Rs 10.52, an increase of 15.5% as compared to the fiscal year 2009 which registered earnings per share of Rs 9.11. There were no significant changes in the return to deposits, return on assets and the return on equity.
The graph above shows the market share of Allied Bank Limited in terms of deposits, advances and the total assets in the banking sector. Allied Bank’s deposits account for 7.3% of the total deposits of all the banks whereas its advances account for 7.6%. ABL’s total assets constitute 6.6% of the total assets of the banking industry. This proves that ABL has one of the major shares in the market and hence come under the top 5 banks of Pakistan.
The bank has been able to contain the growth of its NPLs till the FY08. But in FY09, they rose significantly by 46%. When compared to the industry average of NPL growth, it was 27.2% which means that the company’s NPLs were much higher. Consequently, the bank also raised its provisions for the NPLs.
For FY10, NPLs growth has been 13% and on a comparative basis it’s a bit better than industry. The industry the average growth of NPLs has been close to 14%.
There has been a growth in the deposits as well as advances and the equity of the company as compared to 2009. The overall debt of the bank, ie the liabilities increased by 6.6% whereas the equity and assets increased by 20% and 7.5% respectively. The increase in the debt was due to the increase in deposits and bills payable. The increase in the assets was primarily due to the increase in the investments registering a growth of 28%, mainly in risk-free MTBs.
The CAR also increased to 13.84% at December 31, 2010 from 13.47% last year. The industry average for the ratio stood at 16%. The asset mix remained dominated by advances comprising 56% of the total assets at end-December 2010.
The CASA ratio, which shows the current and saving deposits as a percentage of total deposits, was 70.43 in FY10 as compared to 68.8% in FY09. The increase was because of the increase in all kinds of deposits from the customer.
All the liquidity ratios of the bank have been maintained at favorable levels varying slightly from FY09’s ratios.
Other than customer’s deposits, the bank’s funding source is the interbank money market and borrowing from other financial institutions in general. The earning assets of the bank have been growing all throughout. Higher deposits are being streamed into greater advances, investments and lending, all generating a higher return.
While expanding the advances portfolio, efficient portfolio diversification has been a key consideration of Allied, always. This diversification has taken into account the volatility of various sectors by placing concentration limits on lending to these sectors, thereby ensuring a diversified advances portfolio. Cement, Agriculture and Electric Generation are major contributors to the advances portfolio. These sectors are considered to be the biggest contributors towards country’s GDP as well.
The solvency ratios of the bank have persistently shown a stable trend throughout 2005-2010. This indicates bright prospects of long-term sustainability of the bank. The solvency ratios of the bank for the last there years have been maintained in the vicinity of each other. The increasing equity portion of the bank explains this. The equity to assets and equity to deposits both have shown an upward trend because of the increase in equity, assets and deposits. However, the earning assets to deposits ratio has declined.
The bank has been a consistent distributor of dividends. However, the rat (an increase of around 100%) has made this sector one of the most lucrative ones to invest. This increasing marketability profile is reflective of Allied’s high yields on earning assets and favorable liquidity and solvency positions. The price to earning ratio increased in 2010 to 6.7 from 5.9 in 2009, which reflects that the earnings as well as the market price both have increased. The market value to book value showed a similar trend. The bank announced and paid dividends of Rs 4/share in both the years, ie, 2009 and 2010. Average price of ABL’s share for the year 2010 was 59.13. The graph below shows the price fluctuation of ABL’s shares for FY10.
The beta is positively related to the market as its apparent from the graph with the red line. The market was closed for most of the period in the last quarter so there isn’t any significant change seen in prices.
As against the worldwide trend of low interest rates even zero-rated, Pakistan continued to follow stance of tightening of the monetary policy using the high interest rate as a tool to contain inflationary pressures at the cost of stalled economic activities. It can be noted that SBP already charging lower mark-up rate from exporters against export refinance facility under EFS in order to enable them to become competitive in the international market. The trade and industry however feels in order to ignite a spark in the dull and dreary economic conditions and to come out of the persisting recession the incentive of low interest should have been given to all stakeholders across the board to achieve the desired results.
Some of the market expectations were that current discount rate at 15% is too high and we recently saw a reduction of 100 basis points. In fact, the cut in the interest rate was long overdue as done by other economies elsewhere as well as in the face of stability returned into macro situation under the IMF program. Trade experts feel that in current times low cost credit is vital to stimulate the economy and international trade. Pakistan exports have a combination which can be well suited to the current world economic situation, ie low value added goods have Income elasticity’s and are least likely to be affected economic slowdown.
Challenges faced by the economy, in general, and banking sector, in specific, include restrained liquidity, slow down of economic activity, and high inflation. Despite of these issues ABL has been able to maintain its profitability. The main focus of the bank during 2011 would be on quality of assets, effective liability management through enhancing the proportion of core deposits, controlling costs and improving efficiencies while making efforts to attain higher standards of service quality and building on our non-fund based income streams.