Prepared By: Umair Mazher Submitted To: Iqbal Lalani (3371)

Course: Analysis Of Financial Statements

INTRODUCTION:National Bank of Pakistan is the largest commercial bank of Pakistan. The bank handles treasury transactions for the government of Pakistan as an agent to the State Bank of Pakistan.

The bank has a network of 1,287 branches in Pakistan and 22 overseas branches including the Export Processing Zone Branch. NBP has captured approximately 27% of the market share in the banking industry till 2009. It also provides services as trustee to National Investment Trust, including the safe custody of securities on behalf of the NIT. National Bank of Pakistan was established on November 9, 1949 under the National Bank of Pakistan Ordinance, 1949 in order to cope with the crisis conditions, which were developed after the trade deadlock with India and devaluation of Indian rupee in 1949. Initially, the bank was established with the objective to extend credit to the agriculture sector.

VISION:To be recognized as a leader and brand synonymous with trust, highest standards of service quality, international best practices and social responsibility.

MISSION:NBP will aspire to the values that make NBP truly the Nations bank, by:

Institutionalising a merit and performance culture Creating a distinctive brand identity by providing the highest standards of services

Adopting the best international management practices Maximising stakeholders value Discharging our responsibility as a good corporate citizen of Pakistan and in countries where we operate

GOALS:To enhance profitability and maximization of NBP share through increasing leverage of existing customer base and diversified range of products.

INVESTMENT SUMMARY AS AT 2009:NBP initiates with a Dec09 target price of 74 per share offering a dividend yield of 8%. Although NBP is trading at lower multiples than its peers, its lower return on equity justifies its standing. With high cost of financing and slow economic activities, credit growth is expected to remain dull during the year. We believe as interest rates decline, spreads will begin shrinking on the back of lower benchmark interest rates and high cost of funds. Moreover, earning potential might slip as bank shifts its funds from high risk advances to safer investments in comparatively low yield government bonds. Furthermore, as the overall economic environment of the country remains under pressure, coupled with high interest rates, credit risk in the sector will continue to pose a concern, therefore NPLs would remain on the higher side during the ongoing year.

IMPORTANT POINTS OF NBP DIRECTORS REPORT 2008-09: 2008 has been exceptionally challenging year from a number of perspectives witnessing extreme volatility in commodity prices, the near collapse of international finance and the impact of deepest recession since 1933. A slowdown in the domestic economy posed many challenges to the Pakistan banking sector including a steep rise in non-performing loans (NPL) and a reduction in the pre-tax profit due to higher provision charge. In the year 2009, the economy showed signs of stabilization. Inflation remains the top concern which eased to 10.7% by August, its lowest in 20 months, as a result of monetary tightening. Pre-tax profit reduces on account of higher administrative cost and provision charge while the after-tax profit increases owing to higher fee and commission income, tax credit and capital gains.

Six years at a glance

Particulars Total assets Deposits Advances Investments Shareholders equity Pre-tax profit After-tax profit Earnings per share Number of branches Number of employees 2004 553,231 465,572 220,794 149,350 24,900 11,978 6,195 5.76 1,226 13,745 2005 577,719 466,427 268,839 156,985 37,636 19,056 12,709 11.81 1,242 13,824 2006 635,133 501,872 316,110 159,947 53,045 26,311 17,022 15.81 1250 14,019 2007 762,194 591,907 340,319 211,146 69,271 28,061 19,034 17.68 1261 14,079 2008 817,758 624,939 412,987 170,822 81,367 23,001 15,459 14.36 1,276 15,441 2009 944,233 726,465 475,243 217,643 94,792 22,300 18,212 16.92 1,287 16,248

ANALYSIS:As per analysis for the above figures, we identified that total assets, deposits, advances and shareholders equity of the bank were either stable or were rising during the period 2004-2009. This indicates the effective fund utilization, deposit mobilization and revenue adding to equities. Despite of these facts when we talk about the income, the pre-tax profit was continuously rising till the year 2007. But in the year 2008 there was a decline of about 5 million in the pre-tax profit causing the after-tax profit and earnings per share to also decline. The reason for such a decline is the increase in mark up/interest expensed in the year 2008. Another very important thing that we identified was the decrease in pre-tax profit in the year 2009 following with an increase in

after-tax profit and the earnings per share (EPS). This effect shows a large difference between the corporate tax percentages during the year 2008 and 2009.

NBP in comparison with the banking industry

PARTICULARS NBP After-tax profit Advances Deposits Investments Net income 11.82% 07.77% 17.94% 50.62% 2007 INDUSTRY NBP 04.82% 14.05% 19.80% 69.85% 09.86% -18.78% 21.23% 05.58% -18.96% 10.20% 2008 INDUSTRY NBP -04.37% 22.89% 12.98% -08.69% 15.98% 17.81% 15.07% 16.25% 27.41% 03.78% 2009 INDUSTRY 26.07% 04.75% 10.03% 33.53% 19.69%

interest 11.53%

ANALYSIS:Looking at the growth rates of 3 years, we see that the growth rate of NBPs profit after tax is higher in 2007 but lower in 2008 and 2009 than the industry average. On the other hand, the growth rate of banks advances and deposits is lower in 2007 and 2008 but is higher in 2009 than the industry average. Indicating (particularly for the year 2009) that the NBP possesses a large asset base and has very effective policies for deposit mobilization. However, NBPs investments

are lower than the industrys average for all the years. While the net interest income was higher than the industry average in 2007 but it is also lower in the following 2 years.

Balance sheets (values in 000)

Assets Cash and balances with treasury banks Balances with other banks Lendings to financial institutions net Investments net Advances net Operating fixed assets Deferred tax assets net Other assets Total assets 2007 94,873,249 37,472,832 21,464,600 211,146,038 340,318,930 25,922,979 30,994,965 762,193,593 2008 106,503,756 38,344,608 17,128,032 170,822,491 412,986,865 24,217,655 3,204,572 44,550,347 817,758,326 2009 115,827,868 28,405,564 19,587,176 217,642,822 475,243,431 25,147,192 3,062,271 59,316,438 944,232,762

Liabilities Bills payable Borrowings Deposits and other accounts Sub-ordinated loans Liabilities against assets subject to finance lease Deferred tax liabilities Other liabilities Total liabilities Net assets

2007 7,061,912 10,815,176 591,907,435 33,554 5,097,831 30,940,041 645,855,939 116,337,654

2008 10,219,061 40,458,926 624,939,016 25,274 39,656,831 715,299,108 102,459,218

2009 10,621,169 45,278,138 726,464,825 42,629 42,269,623 824,676,384 119,556,378

Equities Share capital Reserves Unappropriated profit Surplus on revaluation of assets net Total equities

2007 8,154,319 15,772,124 45,344,188 47,067,023 116,337,654

2008 8,969,751 19,941,047 52,456,204 21,092,216 102,459,218

2009 10,763,702 22,681,707 61,346,510 24,764,459 119,556,378

Common size balance sheets

Assets Cash and balances with treasury banks Balances with other banks Lendings to financial institutions net Investments net Advances net Operating fixed assets Deferred tax assets net Other assets Total assets 2007 12.44% 04.91% 02.81% 27.70% 44.64% 03.40% 04.06% 100% 2008 13.02% 04.68% 02.09% 20.88% 50.50% 02.96% 0.391% 05.44% 100% 2009 12.26% 3.00% 02.07% 23.04% 50.33% 02.66% .3243% 06.28% 100%

Liabilities Bills payable Borrowings Deposits and other accounts Sub-ordinated loans Liabilities against assets subject to finance lease Deferred tax liabilities Other liabilities Total liabilities

2007 01.09% 01.67% 91.64% 0.0051% 0.79% 04.79% 100%

2008 01.42% 05.65% 87.36% 0.0035% 05.54% 100%

2009 01.28% 05.49% 88.09% 0.0051% 05.12% 100%

Equities Share capital Reserves Unappropriated profit Surplus on revaluation of assets net Total equities

2007 07.09% 13.55% 38.97% 40.45% 100%

2008 08.75% 19.46% 51.19% 20.58% 100%

2009 09.00% 18.97% 51.31% 20.71% 100%

ANALYSIS:While analyzing the common size balance sheets we identified that cash, balances with other banks, lending, bills payable and deposits were more or less carrying the same percentages in comparison with total assets and liabilities respectively. Apart from that we identified that percentage of operating assets as compared to total assets was declining during the three years we analyzed which is not profitable for the bank. In 2007 bank has deferred tax liability that has to be paid in future but in 2008 and 2009 it was converted into a deferred tax asset. Unappropriated profits proportion in the total equities is increased from 2007-2009 referring to revenue adding to equities. Investment proportion in assets is greatly declined in 2008 but this effect was altered to some extent with a steady increase in 2009. The decline in the investments in 2008 refers to NBPs precautionary policy against the collapse of banking industry due to high recession and slowdown in the domestic economy

Trend analysis of balance sheets

Assets Cash and balances with treasury banks Balances with other banks Lendings to financial institutions net Investments net Advances net Operating fixed assets Deferred tax assets net Other assets Total assets 2007 100% 100% 100% 100% 100% 100% 100% 100% 2008 112.25% 102.32% 79.79% 80.90% 121.35% 93.42% 143.73% 107.29% 2009 122.08% 75.80% 91.25% 103.07% 139.64% 97.00% 191.37% 123.88%

Liabilities Bills payable Borrowings Deposits and other accounts Sub-ordinated loans Liabilities against assets subject to finance lease Deferred tax liabilities Other liabilities Total liabilities Net assets

2007 100% 100% 100% 100% 100% 100% 100%

2008 144.70% 374.09% 105.58% 75.32% 128.17% 110.72% 88.07%

2009 150.40% 418.65% 122.73% 127.04% 136.61% 127.68% 102.76%

Equities Share capital Reserves Unappropriated profit Surplus on revaluation of assets net Total equities

2007 100% 100% 100% 100% 100%

2008 110.00% 126.43% 115.68% 44.81% 88.07%

2009 132.00% 143.80% 135.29% 52.61% 102.76%

ANALYSIS:In comparison with year 2007, total assets undergo a large increase (23%) in the following 2 years with an increase in cash, advances and other assets indicating increase in branches (purchase of assets) and effective fund utiliztion. On the other hand total liabilities were also increased with an increase in bills payable, borrowings and deposits. As far as total equities are concerned they were decreased in 2008 but this effect was leveled with increase in 2009.The main cause of decrease in equities was the decrease in surplus on revaluation of assets and the increase resulting from rise in share capital, reserves and unappropriated profit.

Income statements (values in 000)

Particulars Mark up / return / interest earned Mark up / return / interest expensed Net mark up / interest income Provision against non-performing advances net Provision for diminution in the value of investments net Provision against off balance sheet obligations Bad debts written off directly Net mark up / interest income after provisions Total non-mark up / interest income Total interest income after provisions Administrative expenses Other provisions / write offs Other charges Profit before taxation Taxation Profit after taxation Exchange adjustments on translation of net assets of foreign branches Total comprehensive income for the year 21,996,788 18,081,654 19,131,321 13,544,845 42,451,580 (14,205,911) (168,027) (17,141) 28,060,501 (9,026,728) 19,033,773 2,963,015 16,415,862 42,503,078 (18,171,198) (747,521) (583,361) 23,000,998 (7,542,408) 15,458,590 2,623,064 19,025,357 45,814,070 (22,571,470) (620,780) (321,647) 22,300,173 (4,088,327) 18,211,846 919,475 (38,899) 28,906,735 26,787,216 26,788,713 (4000) (20,237) 40,248 (373,249) (605,629) 2007 50,569,481 (16,940,011) 33,629,470 (4,723,084) 2008 60,942,798 (23,884,768) 37,058,030 (10,593,565) 2009 77,947,697 (39,489,649) 38,458,048 (11,043,469)

Common size statement

Particulars Mark up / return / interest earned Mark up / return / interest expensed Net mark up / interest income Provision against non-performing advances net Provision for diminution in the value of investments net Provision against off balance sheet obligations Bad debts written off directly Net mark up / interest income after provisions Total non-mark up / interest income Total interest income after provisions Administrative expenses Other provisions / write offs Other charges Profit before taxation Taxation Profit after taxation Exchange adjustments on translation of Net assets of foreign branches Total comprehensive income for the year 43.49% 29.66% 24.54% 26.78% 83.94% 28.09% 0.33% 0.033% 55.48% 17.85% 37.63% 05.85% 26.93% 69.74% 29.81% 01.22% 0.95% 37.74% 12.37% 25.36% 04.30% 24.40% 58.77% 28.95% 0.79% 0.41% 28.60% 05.24% 23.36% 01.17% 0.0792% 57.16% 43.95% 34.36% 0.0065% 0.025% 0.079% 0.61% 0.77% 2007 100% 33.49% 65.78% 09.33% 2008 100% 39.19% 60.80% 17.38% 2009 100% 50.66% 49.33% 14.16%

ANALYSIS:As per analysis we identified that in comparison with total mark up/interest earned the total interest expense was increased, in result decreasing not only the proportion of net mark up earned but also the pre-tax and after-tax profits of the bank.

Trend analysis of income statement

Particulars Mark up / return / interest earned Mark up / return / interest expensed Net mark up / interest income Provision against non-performing advances net Provision for diminution in the value of investments net Provision against off balance sheet obligations Bad debts written off directly Net mark up / interest income after Provisions Total non-mark up / interest income Total interest income after provisions Administrative expenses Other provisions / write offs Other charges Profit before taxation Taxation Profit after taxation Exchange adjustments on translation of Net assets of foreign branches Comprehensive income of the year 100% 82.20% 86.97% 100% 100% 100% 100% 100% 100% 100% 100% 100% 121.19% 100.12% 127.91% 444.88% 3403.30% 81.96% 83.55% 81.21% 88.52% 140.46% 107.92% 158.88% 369.45% 1876.47% 79.47% 45.29% 95.68 % 31.03% 100% 92.66% 92.67% 100% 927.37% 1504.74% 2007 100% 100% 100% 100% 2008 120.51% 140.99% 110.19% 224.29% 2009 154.13% 233.11% 114.35% 233.81%

ANALYSIS:In comparison with the year 2007, for the following 2 years the interest earned was increased but the interest expensed was increased with a larger % minimizing the effect of increase on the net interest earned. The increase in interest expense was subject to increase in deposits, short term borrowings and securities sold under repurchase agreements. Similarly, provisions were also increased resulting a decline in net interest earned after provisions. This decline effect (in years 2008-2009 in comparison with year 2007) was also observed in the pre-tax and after-tax profit figures but as there was a low tax rate in the year 2009 the after-tax profit figure for 2009 shows an increase as compared to 2008.

Cash flow statements (values in 000)

Particulars Net cash from operating activities Net cash from investing activities Net cash from financing activities Net cash from all activities Effects of exchange rate changes on cash and cash equivalents Increase / decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at end of the year 131,456,989 144,676,388 144,169,195 118,813,121 131,456,989 144,676,388 12,643,868 13,219,399 (507,193) 2007 78,804,419 (63,304,392) (2,845,646) 12,654,381 (10,513) 2008 2,532,681 14,184,626 (6,120,972) 10,596,335 2,623,064 2009 45,451,673 (41,036,979) (5,841,362) (1,426,668) 919,475

ANALYSIS:As per cash flow analysis we observed that most of the cash is generated through the operating activities during the 3 years. We also identified the year 2008 as the year of low cash transactions for NBP. However, the net cash from all activities during 2007 and 2008 shows an increase, while during 2009 it shows a decrease indicating the low cash inflow for NBP.

Ratio analysis
Profitability ratios Profit margin Assets turnover Return on assets Return on equity Return on deposits Earnings per share 2004 01.21% 16.78% 01.44% 05.76 2005 02.25% 20.82% 02.74% 11.81 2006 02.81% 21.58% 03.53% 15.81 2007 37.63% 07.23% 02.72% 19.20% 03.48% 17.68 2008 25.36% 07.71% 01.96% 14.13% 02.54% 14.36 2009 23.36% 08.84% 02.07% 16.41% 02.70% 16.92

ANALYSIS:In analyzing the profitability ratios we identified that profit margin is continuously decreasing and the asset turnover is continuously increasing during the period (2007-2009). Which indicates the decline in net income on interest earned and increased efficiency of assets to operate. While the ROA, ROE and ROD were increasing till 2006 then there is a decline in 2007 and 2008 followed with a rise in 2009, and a decline was also observed in the EPS in the year 2008. All these effects indicate the year 2008 to be less profitable for NBP.

Solvency ratios Debt to equity Debt to assets Equity to assets Interest coverage Equity to deposits

2004 12.85 0.93 07.22% 08.57%

2005 8.27 0.89 10.79% 13.14%

2006 6.69 0.87 13.01% 16.34%

2007 6.05 0.86 14.19% 02.65 18.13%

2008 6.22 0.86 13.85% 01.96 17.98%

2009 6.94 0.87 12.60% 01.56 16.43%

ANALYSIS:Here we identified that debt to equity and debt to assets are facing a decline trend during the period (2004-2009) indicating that NBP is moving more towards equity financing rather than debt financing. It is also observed that equity to assets and equity to deposits was declined in the years 2008 and 2009. This shows that the NBPs average increase in assets and deposits during these 2 years is more than the average increase in equities. The interest coverage ratio was also declining during the period (2007-2009) that indicates the decreasing ability of paying off the interest expense.

Market test ratios Price to earnings Average share price For the year Market value to book value

2004 6.48 67.91

2005 7.04 126.18

2006 12.05 251.63

2007 10.77 251.46

2008 12.17 174.76

2009 04.29 72.60

01.09

01.47

02.26

02.07

01.72

0.70

ANALYSIS:Here we observed that price to earnings was rising till 2008 indicating the increase in amount that market will pay for NBPs earning but there was a large decline in 2009. Similarly, average share price also shows a decline after 2007. Another important fact was that in 2008 average share price was decreased but price to earnings increase showing that EPS was decreased with a greater extent. It is also observed that market value to book value of shares was increasing till 2006 and there is a declining trend from onwards. Indicating that till 2006 banks premium on shares was increasing as the market value was increasing while from 2007 it started to decrease

and in 2009 we can say company was selling shares on discount. Based on above facts particularly for 2009 we can say the overall market value of NBP is declined.

Liquidity ratios Advance to deposit Earning assets to assets

2004 0.44 0.72

2005 0.53 0.73

2006 0.61 0.76

2007 0.60 0.75

2008 0.62 0.74

2009 0.66 0.75

ANALYSIS:Here earning assets to assets more or less remains the same in the 6 year period while the advance to deposits undergoes an increasing trend throughout the 6 year period. This signifies that most of the funds were utilized for advances rather than any other earning asset.

CONCLUSION:To conclude the report, I would like to say that by analyzing the performance of NBP from year 2004-2009 with the help of ratios, common sizing, trend analysis, cash flow analysis and also by comparing its performance with the banking industry it is clearly identified that in years 2008 and 2009 NBP is not been able to perform as good as it requires to be the largest commercial bank of Pakistan. Our analysis clearly reflects that NBPs performance from 2004 -2007 was better than the recent 2 years in terms of profit, asset utilization, market valuation and expansion of equities.