The Bank for Everyone 1/18

Submitted to:

Sir Wasim Ullah

Group Members:
 Muhammad Younus Baltistani
 Muhammad Yasir Naran
 Muhammad Zubair Jehlami
 Sajjad Iqbal
 RizwanBisharat
◦ MBA 19 b

INTERNATIONAL ISLAMIC UNIVERSITY ISLAMABAD

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Banking Sector in Pakistan

The financial sector in Pakistan comprises of Commercial Banks, Development Finance

Institutions (DFIs), Microfinance Banks (MFBs), Non-banking Finance Companies
(NBFCs) (leasing companies, Investment Banks, Discount Houses, Housing Finance
Companies, Venture Capital Companies, Mutual Funds), Modarabas, Stock Exchange and
Insurance Companies. Under the prevalent legislative structure the supervisory
responsibilities in case of Banks, Development Finance Institutions (DFIs), and
Microfinance Banks (MFBs) falls within legal ambit of State Bank of Pakistan while the
rest of the financial institutions are monitored by other authorities such as Securities and
Exchange Commission and Controller of Insurance.

Introduction of Arif Habib Bank Limited

AHBL is one of the fastest growing Commercial Banks of the country supported by the
strong sponsorship of Arif Habib Group.
Arif Habib Group is among the largest, most innovative and fastest growing Business
Group in Pakistan. In addition to Financial Services (Asset Management, Brokerage
Services, Corporate Finance and Project Advisory, Private Equity and Commercial
Bank), the Group has also interest in Fertilizer, Cement and Real Estate.
The Bank has an Authorized Share Capital of 6.0 Billion and Paid-up Share Capital of 5.0
Billion. The management intends to double it in a short period by injection of fresh
capital which will strengthen the bank further.
The Bank has a network of 34 Branches/Sub Branches. The branch network covers
Sindh, Punjab, NWFP, and Azad Jammu and Kashmir. The Bank plans to open further
offices to better cover all four provinces within a short time span.
All branches are Real Time Online providing our customers the facility to deposit at or
withdraw from any of our Branches anywhere in Pakistan without incurring any
additional charges making banking with us a faster, reliable and a convenient experience.

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Credit Rating by JCR-VIS

The Bank was incorporated in Pakistan as a public limited company on December 09,
2005 and is listed on all the stock exchanges of Pakistan.
The Bank is principally engaged in the business of banking through its 35 branches. The
medium to long term rating of the Bank rated by JCR-VIS, Credit Rating Company is
"A" with a positive outlook and short term rating of the Bank is "A-2".

Challenges ahead
The challenges to corporate business in year 2007 were manifold, including reduction in
private credit investment as a result of slowing down of economy as well as rising
interest rates. The increasing pressure on the textile industry reduced the lending to this
sector. In addition the bank’s corporate loans yields also faced pressure as substitute form
of funding sources are available in the market in form of Islamic financing, mutual funds,
issuance of debt instruments like TFCs and Bonds and the Capital markets.
Despite these threats and challenges at AHBL our corporate team not only increased the
volume as well as the yield of the loans they also maintained a strong franchise with the
leading Pakistani corporate so as to ensure that AHBL not only increase its market share
but is in a position to meet any challenges in future

Future Outlooks
The Bank’s strategic plan for long term sustainable growth is under implementation.
However, the economic, financial and capital market developments of the second half of
2008 have caused a considerable set-back. We have now re-engineered our short term
strategy to counter the recent developments and to put our long term development plans
back on track. The commitment of your Board towards developing the Bank as a front
runner in its peer group remains very much intact, and we are reinforcing our efforts to
that end by strengthening our management team through the induction of some senior
bankers with rich domestic and international experience. The Bank, AHSL (the holding
company) and a consortium of investors led by Mr. Husain Lawai (investors) have
entered into an agreement on December 24, 2008 for the acquisition by the investors of
upto 60% shareholding in the Bank. Under the terms of the agreement, the Bank shall

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increase its authorized share capital to Rs 25 billion and shall issue further capital for
increasing the existing paid-up capital by the amount of investment from the new
investors, subject to approval by the regulators. The subscription price for this new issue
for investors will be Rs 10 per share. The injection of fresh capital will greatly enhance
the Bank’s capacity to grow and to diversify our activities into the Small and Medium
Enterprises sector as well as Retail Banking services, while retaining our strengths in the
Corporate and Investment Banking activities. The increased capital base will also enable
us to look at acquisition opportunities while growing organically at a fast pace through an
expanding branch network. We plan to become leaders in the introduction of innovative
products and services using the latest technologies and a highly committed and motivated
workforce.

Product portfolio:
Our product line up continues to fulfil and satisfy the banking requirements of not just the
conventional consumer, but the demanding financial needs of the corporate sector as
well. The line-up includes.
• Online banking
• ATMs
• Mahana Amdan : 3 months- 3 years—10%-13.75% profit rates
• Debit Cards
• Credit Cards
• Phone Banking
• Car Financing

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SWOT Analysis

Strengths:

• AHBL is one of the fastest growing Commercial Banks of the country supported
by the strong sponsorship of Arif Habib Group.
• Arif Habib Group is among the largest, most innovative and fastest growing
Business Group in Pakistan.
• All branches are Real Time Online providing our customers the facility to deposit
at or withdraw from any of our Branches anywhere in Pakistan

Weaknesses:

• Inefficient HR department recruitment system is very poor and employees are

hired on personal biases. Employees are hired on deposit basis
• Small branch with overload employees.
• Promotions generally on seniority basis
• As most of the employees are young they have more tendencies to switch the
organization and to seek more opportunities.
Opportunities
• Tackling the competition owing to various takeovers and mergers in banking
sector
• Introduction of several banking products
• Increase in interest rates owing to tight monetory policy and incease in costs
of operation because of growth stage of bank among the peer group are the
few challenges in front.
• Avaibility of low cost resources and their utilization for optimum returns by
effective management.
• Available gab in the market are amongst the opportunities available to the
bank to earn healthy return on the resources.

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Threats:

• The market is already saturated there is no need to issue new licenses to new
banks upcoming banks are major threat of Arif Habib Bank Limited.
• Uncertainty in Pakistan and poor law and order situation are also big threat for
bank
• Restructuring of privatized banks
• Tough competition by foreign nationalized and privatized banks in foreign trade
business in fact competition is always a threat for organization.
• The stiff competition also causes switching of employee bank have to pay more
salaries to their employees.
• Cost of doing business is increasing day by day so it’s very hard to compete with
financial sector.
• Government policies are changing day by day and government stability is also not
there

Michel Porter’s five forces analysis:

The model of the five competitive forces was developed by Michael E. Porter in his book
“Competitive strategy: Techniques for Analyzing Industries and Competitors” in 1980
Porter’s model is based on the insight that a corporate strategy should meet the
opportunities and threats in the organizations external environment.

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Threats of New Entrants

The entry barriers in this market are high. The new banks need permission from SBP so
entry of new banks is restricted.

Bargaining Power of Buyers

Keeping in view the core customer needs and differential customer oriented products and
services, policies have been designed in a way that it meets the requirements of the
customer. In consideration of these services, customer has a lot of options and can
obviously shift to other bank voluntarily if he is not satisfied with the bank he is dealing
with.
Bargaining Power of Suppliers
The main suppliers in the banking sectors are depositors. Although the bank is given
higher return then any other bank (13.75% per annum) to attract the depositors but the
low innovation in the product and also low investment in the marketing sector of the bank
may provide difficulties in coming years.

Threats of Substitute Product or Services

The non banking financial institutions including development finance institutions (DFIs),
private sector investment banks (PSIBs); leasing corporations (LCs) and Modarbas are
almost in the same line of business and can be treated to the bank. Other substitutes that
compete include the national saving certificates, the stock market, and its supporting
industry and brokerage houses

Revalry Among Existing Firm

Arif Habib Bank limited is facing a strong competition from other private Pakistani banks
like My bank, The bank of Khaiber and Atlas Bank ltd. The improved performance of the
nationalized commercial banks (NCBs) is also the threat for the Arif Habib Bank. Many
Islamic bank also dealing in the same product and services Foreign banks are also
competing with the bank for same small medium sized companies.

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Peer Group OF Arif Habib Bank Ltd.

SYMBOL OPEN HIGH LOW CURRENT CHANGE VOLUME
Mybank Ltd 3.85 3.94 3.75 3.77 -0.08 123,000
Bank Of Khyber 3.76 3.98 3.61 3.63 -0.13 36,000
Atlas Bank Ltd 3.65 3.85 3.62 3.65 0.00 218,500

Investments Portfolio
These includes mutual funds units / certificates of Pakistan Capital Protected Fund,
Pakistan Strategic Allocation Fund, Pakistan Income Enhancement Fund and Pakistan
Premier Fund Limited which are associated undertakings as per the Companies
Ordinance, 1984 on the basis of common directorship, however, for the purpose of
measurement, it have been classified as available for sale as the Bank does not exercise
any significant influence over them.

Investment by Type 2008

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Market Treasury Bills

7% Pakistan Investment
Bonds
Listed ordinary shares

27% 42% Mutual funds unit closed

ended
Mutual funds unit open
ended
2% Term Finance
Certificates listed
0%
Term Finance
12% 7%
3% Certificates unlisted
Sukuk Bonds

Investment by Segments
Market Treasury Bills and Pakistan Investment Bonds are held with SBP and are eligible
for rediscounting. Market Treasury Bills embody effective yield ranging from 9.84% to
13.85% (2007: 9.0% to 9.4%) per annum and are maturing within 12 months. Pakistan
Investment Bonds carry markup ranging from 7% to 11% (2007: 8% to 11%) per annum
on semi-annual basis and are maturing within 1 to 8 years. Certain government securities
are kept with SBP to meet statutory liquidity requirement calculated on the basis of
demand and time liabilities.

2%

federal government
secureties
36% Fully paidup ordinary
shares/unit / certificate
48%
term finance certificates
and bonds
investment in associates

14%

.Segment by Class of Business

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Advances Deposites
textile Advances textile
Deposites

chemical and chemical and

pharmaceutical 1% pharmaceutical
0%
0%
0%
2% 3%3%
4%
0%
1% cement
cement 21%

automobile automobile
43% 37%
construction construction

financial financial

individuals individuals
67%
18%
others others

Ratio Analysis

The profitability Ratio:

The Return on Equity Capital of Arif Habib Bank Limited for the year 06, 07, 08 was
3.04, 3.64%, and -3.12% means there was a about increase in ROE in FY07 where there
was a significant decrease of 120% in the FY08 that leads the profitability to 3.12% .
ROA in the same decrease about 23%in the fiscal year FY07 where these six thousand
percent decrease in ROA in fiscal year 2008.
The net interest margin was increased in the FY07 but then it decreased in the FY07 but
the Net interest margin was increased by 64% in the FY07 whereas it was increased by
prominent figures 234% in the next year.
The EPS earning per share was increased two but it decreased in the FY08.

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% change % change Peer

Profitability 2008 2007 2006 06-07 06-08 Group
Return on Equity 8.3%
capital -3.12% 3.64% 3.04% 19.82% -120.66%
Return on Asset -77.17% 1.27% 1.65% -23.01% -6050.71% 6.7%
Net non interest 1.11%
margin -2.46% -0.21% -1.22% -82.53% -1054.93%
Net interest margin 16.36% 4.80% 2.92% 64.68% 234.18% 1.87%

Trend Anaylsis:
The banks for the trend analysis we selected were Khyber Bank, My Bank and Atlas bank
because these bank had almost same assets and liabilities as of Arif Habib bank.
The industry was also decreasing as there was a decrease of -2.91% in ROE in the year
F08.Whereas there was a slight decrease in the ROA but there was less increase in the net
interest margin in the year FY08 by just about 2% as compared to the 16% in Arif Habib
Bank. But the net profit margin was also decrease in the net profit margin that was almost
same as the decrease in the NPM.
The profitability was decreased due
Profitability
to the reason that the interest
20.00%
income was decreased by 332 reas 10.00%
0.00%
the the interest expense was -10.00%
-20.00%
increase by 900% that was the main -30.00%
-40.00% Arif Habib
reason decrease in the net interest -50.00% peer group
-60.00%
by almost 205% in there was -70.00%
-80.00%
significant increase in fee earned Return Return Net non Net
on Equity on Asset interest interest
and gain from holding the foreign capital margin margin

currency but there was loss in revaluation in the investment overall there was increase in
the net profit in year O7 but the FY08 a year of decrease where the interest income was
increased more than the increase in the interest expense but the no markup interest was
decrease overall at almost 96%. As the company overall decreased so the the earning per
share was also decrease by 166%.

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The earning spread was was decreased from FY06 there was 16% decrease in year FY07
whereas there was there significant decrease in next year.Total interest income to total
interest expense first increase then in the next it was decreased .

Risk Ratios
Credit Risk:
Credit risk 2008 2007 2006 ind.Avg
Non performing assets to equity -0.10 0.00 0.00 0.12
Non performing loans to total assets -0.10 0.00 0.00 0.10
Total loans to total deposits 0.95 0.85 0.56 0.62

The credit is that the borrower may not be able to repay the principal or interest in the due
course of time.The risk is for both advances and the investment .The investment has
market risk that if there increase in the interest the value of your bond or share etc will
decrease .Equity price is also the component of the market risk.
If you the holding the foreign currency there also be loss or gain due to decrease or
increase in the value of foreign
Credit Risk
currency.There are two types one
1.00
at micro level and one at macro
0.80
level to decrease the risk at micro 0.60
0.40
level you choose the customer 0.20 Arif Habib
after its analysis where to 0.00 Peer group
-0.20
minimize the risk at macro level Non Non Total loans
performing performing to total
you diversify your investment assets to loans to total deposits
equity assets
portfolio you this can decrease
the risk also to zero percent if there is perfect diversification.The non performing assets
to total were decreased in year that was a good.

Liquidity Risk:
The banker and other financial firms are also concerned about the danger of not having
the sufficient cash and borrowings capacity to meet the needs of the customer

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withdrawals and other cash needs etc.significant decrease in the liquidity position often
forces a bank to pay higher interest rates to attract the negotiable money markets.
The earning assets to total equity
0.90
and same during three year and 0.80
0.70
these almost same as the industry 0.60
average.Whereas balance with 0.50
0.40
other banks increased to about 80% 0.30 Arif habib
0.20
as compared thirty percent increase peer group
0.10
0.00
in the total assets.Whereas total Earning Cash and cash assets
assets to balances &
loans to deposits was almost same Total assets with other government
banks to securities to
with the industry average.
total assets Total assets
Liquidity risk 2008 2007 2006 ind.Avg
Earning assets to Total assets 0.32 0.28 -3.01 0.85
Cash and balances with other banks to
total assets 0.23 0.12 -0.15 0.20
cash assets & government securities to
Total assets 0.14 0.12 0.16 0.11

Interest Rate Risk:

Movements in interest rates can also have significant in the margin of the revenues over
cost for both banks and competitors for examples rise in interest in banks margin of profit
.This effect is known as interest rate risk.
The ratio used to calculate the ratio is Interest sensitive assets to interest bearing
liabilities. Interest sensitive assets like advances and investments increased almost
doubled in a FY07 whereas the deposit and other accounts such as borrowings and
deposits &other accounts were as increased but not as much as there was increase in the
case sensitive assets.
Interest rate risk 2008 2007 2006 ind.Avg
Interest sensitive assets To
interest sensitive liabilities 1.14 1.45 0.59 1.03

Earning Risk:

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Earnings may decline unexpectedly due to the factors inside the financial firm or due to
external factors such as changes in economic conditions or in laws and regulations.

Earning risk 2008 2007 2006 ind.Avg

equity to total assets 0.25 0.35 0.54 0.19

Equity to total assets Ratio:

The equity to total asset ratio was decreased in F07 due to there was increase in the assets
106% where increase in the assets was 156% so this was resulted to decrease the equity
to total asset ratio by 35%.In the FY08 this ratio again decreased by about 30% because
there was increase in the total assets by 66% but there was just 3% increase in the equity.
When it was compared with the industry for trend it was better than because was just
18% it was 22% even though it was decreased by 30%.

Capital Risk or Solvency Risk:

Bankers and other financial institutions
must be directly concerned about risks to 0.35

their institutions for long run survival often 0.30

0.25
referred as capital risk. For example if a
Total Equity / Total
0.20
Assets
bank takes on an excessive number of bad
0.15 Total Equity / Total Debt
loans or if a large portion of its security
0.10
declines this results the decrease in the 0.05

capital .Capital acts as a cushion to absorb 0.00

Arif Habib ind.Avg
the losses.

Capital Risk or Solvency

Ratios 2008 2007 2006 ind.Avg
Total Equity / Total Assets 0.23 0.18 0.15 0.19
Total Equity / Total Debt 0.30 0.21 0.17 0.23

Capital Adequacy Ratio:

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This ratio compares the capital to risk weighted assets i.e. investments and advances.
That is capital enough to absorb the loss if it happens?
The company adequacy ratio increase even though there was increase in weighted assets
whereas the capital by much percentage that resulted in decrease from 98.06%, 47.06%,
29.41% respectively in FY06, FY07 and FY08. Whereas the industry average was 29%
decrease.
Capital Adequacy Ratio 2008 2007 2006 ind.Avg
Capital / Risk Weighted
Assets 1.17 0.87 0.82 0.95

Operating efficiency ratio:

This is used to calculate the ratio between Interest expense and non interest expense to
interest income and non interest income. This is as good as minimum for the company in
the FY 06 it was .411 where as in the FY07 it decreased to .137 due to significant
increase in the interest and non interest income
Interest expanse and non interest expense and in the next increased to increase in the
expense more than the increase in income the so it again increased.

Operating efficiency
ratio 2008 2007 2006 ind.Avg
-0.31 0.14 0.41 0.95

Breakdown of ROE:
Break down of ROE 2008 2007 2006 Ind Ave
Tax management efficiency 0.551 0.704 1.878 0.563
Expense control efficiency -0.808 0.460 0.356 -2.966
Asset management efficiency 0.017 0.039 0.025 0.016
Funds management efficiency 4.044 2.865 1.841 5.562

Tax management efficiency:

It measures the efficiency of tax by comparison of net income after tax and income before
tax so as much it is good a sign for the bank or any financial institution. As in FY07 profit
before was decreased by and taxation was increased by almost 200% that decreased tax
managent and in FY08 there was again decrease in the tax management 13%.

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Expense control efficiency:

Its measures the efficiency of comparison between income before tax and Non interest
income. It was increased by 29% tax before income was also increase more than the
increase in the interest income so this increased the expense control efficiency while in
FY08 this efficiency was increased but the negative due to net income before tax was in
negative. Compared to industry average it was better because the industry was not only
loss but this ratio increased to 296%.

Asset management efficiency:

It measures that how efficiently the assets are utilized this decreased from .025 to .039
means 58% decrease in asset utilization where in FY08 it is decreased by 56% this
decrease was the result of the increase in FY07 by 218% whereas the profit was not
increased in such proportion and the asset utilization or management in the industry was
increased by 56% .

Funds management efficiency:

This ratio determines the ratio between the Total assets and equity that how many asset
have been created using equity how many are assets of equity. It increased in FY07 by
56% because the assets were increased by 218% but the equity was just increased by the
105% in the FY08 it was again increased by the 141% when it compared to industry
average it was better than because that was increased by 556%.

Advances to deposits:
It measures the ratio between the advances (assets) and the deposits (liabilities) .In FY it
was..564 means in there were 44% deposits were more than our advances where the ratio
increased by 50% and 11% in FY07 and FY08 respectively. The industry average for this
ratio was.
Advances/Deposits 2008 2007 2006 ind.Avg
0.95 0.85 0.56 0.62

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DU PONT Anaylsis:
Industry
Break Down OF ROE Average
2008 2007 2006
Net profit margin(Net Income /
Total Operating Revenue) 56.23% 66.71% 46.04% 56.33%
Asset utilization(Total
operating revenue to total
assets) -2.39% 0.66% -1.91% -1.22%
Equity Multiplier(Total Asset /
Total Equity) 404.43% 286.53% 184.11% 556.23%
ROE -3.12% 3.64% 3.04% -3.15%

The du pont analysis show that even though even the profitability of the in FY07 but its
leverage also

ROE

6
5
4
3
Arif Al Habib
2
Industry Average
1
0
-1
Asset ROE
utilization

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Financial Analysis of Arif Habib Bank Ltd.