ACKNOWLEDGMENT

All praises are for Allah almighty that is the supreme authority who knows the ultimate relations underlying all sorts of phenomenon going on in this universe and whose blessings and exaltation flourished our thoughts and thrived our ambitions in achieving the cherished fruit of our modest efforts. We also offer our humblest thanks to HOLY PROPHET HAZRAT MUHAMMAD (PBUH) who is the forever torch of guidance and knowledge for humanity as a whole. We think of it as our extreme pleasure to avail this opportunity to express gratitude and deep sense of obligations to our teacher Prof.Imran Shehzad for his Valuable and unprecedented guidance, Scholarly criticism Untiring help Compassionate attitude Kind behavior Moral support Through the project he helped us and guided us in every aspect, as that was a very new experience for us.

CONTENTS

Chapter 1 Financial Analysis of Habib Bank Limited y y y y y Application of the Six Step Approach of Financial Analysis. Identification of Purpose. Corporate Overview Company Profile Corporate Structure

Chapter 2 Financial Statements y y y y Statement of Financial Position Statement of Comprehensive Income Statement of Changes in Equity Statement of Cash Flows

Chapter 3 Ratio / Interpretation of ratios y y y y y Part 1: Activity Ratios Part 2: Profitability Ratio Part 3:Leverage Ratios Part 4:Liquidity Ratios Part 5: Stockholders Ratios

Conclusion / Suggestions

CHAPTER 1: FINANCIAL ANALYSIS OF HABIB BANK LIMITED

Application of the Six Step Approach of Financial Analysis: Following are the six steps which I am going to apply on HBL for its financial analysis; y y y y y y Identification of Purpose Corporate Overview Financial Analysis Techniques Detailed Accounting Analysis Comprehensive Analysis Decision or Recommendation

Identification of Purpose: The purpose of the analysis is to know the financial position of the Habib Bank Ltd. Either to invest in HBL is profitable or not and to know that after how much time the bank can pay return on the investments. This analysis will also show us the risky areas of the bank so that the auditors can audit the statements easily. This analysis will also show us the efficiency or the net earnings of the bank in comparison with the other banks. Corporate Overview: The corporate overview contains the following; y y y y y y Company Profile Mission and Vision Statement Corporate Structure Competitors Auditors Subsidiaries

Company Profile: HBL established operations in Pakistan in 1947 and moved its head office to Karachi. First international branch of HBL was established in Colombo, Sri Lanka in 1951. Habib bank plaza was built in 1972. HBLs domestic market share is of over 40%. It was nationalized in 1947 and continued the commercial banking sector with a major market share. International operations were expanding to include the U.S.A, Singapore, Oman, Belgium, Seychelles and Maldives and the Netherlands. In December 2009 the Agha Khan fund for economic development was formally granted to 51% of shareholding of HBL.
3

Mission and Vision Statement of HBL: Mission Statement: To make the investors of HBL prosper, the staff excel and to create the value for stockholders. Vision Statement: To enable people to advance with confidence and success. Corporate Structure: The corporate structure contains the y y y y y y y y Board Committee Audit Committee Risk Management Committee Human Resource Committee Chief Financial Officer Company secretary Legal Advisors Auditors

Board Committee: The board committee contains following directors;

Sultan Ali Allana Chairman Ahmed Jawad Director

Sajid Zahid Director

Sikandar Mustafa Khan Director

Mushtaq Malik Director

Moez Jamal Director

R. Zakir Mahmood President & CEO

Audit Committee:  Mr. Moeez Ahamed Jamal  Mr. Sajid Zahid  Mr. Ahmed Jawad Risk Management Committee:  Mr. Sultan Ali Allana  Mr. R. Zakir Mahmood  Mr. Mushtaq Malik Human Resource Committee:  Mr. Sultan Ali Allana  Mr. R. Zakir Mahmood  Mr. Mushtaq Malik Chairman Member Member Chairman Member Member Chairman Member Member

Chief Financial Officer:  Mr. Ayaz Ahmed Company Secretary:  Ms. Nausheen Ahmad Legel Advisors:  Mehmood Yousuf Mandviwalla (Bar-at-Law) Auditors:  The auditors of HBL are KPMG Taseer Hadi & Co (Chartered Accountants). Competitors: The competitors of HBL are y y y y Muslim Commercial Bank Allied Bank Askari Bank Bank Alfalah
5

y y y

Bank of Punjab Standard Chartered Bank Royal Bank of Scotland etc

Subsidiaries: Following are the subsidiaries of HBL y y y y y y y y y Habib Allied International Bank Plc., United Kingdome-Shareholding at 90.50% Habib Finance International Limited, Hong Kong-Wholly owned Habib Bank Financial Services (Private) Limited, Pakistan-Wholly owned Habib Currency Exchange (Private) Limited, Pakistan-Wholly owned HBL Asset Management Limited, Pakistan-Wholly owned First Habib Bank Modaraba, Pakistan HBL Stock Fund- Shareholding at 76.46% HBL Multi Asset Fund- Shareholding at 68.93% HBL Income Fund- Shareholding at 50.50%

CHAPTER 2: FINANCIAL STATEMENTS

Financial Statements: For the financial analysis techniques we first have to see the financial statements of HBL. These are the following     Statement of Financial Position Statement of Comprehensive Income Statement of Changes in Equity Statement of Cash Flows

Statement of Financial Position: Statement of financial position shows us the financial position of the company on a specific date. Following is the statement of financial position of HBL

Statement of Comprehensive Income: The statement of comprehensive income shows the total earnings and earning per share of the company. Following is the statement of comprehensive income of HBL

Statement of Changes in Equity: The statement of changes in equity shows us the change in the equity holders position after a specific period of time. Following is the statement of changes in equity of HBL

10

Statement of Cash Flows: The statement of cash flows shows the cash inflows and outflows of the company. Following is the cash flow statement of HBL

11

y y

Quantitative Financial Analysis Multiperiod Quantitative Financial Analysis

Quantitative Financial Analysis: A business or financial analysis technique that seeks to understand behavior by using complex mathematical and statistical modeling, measurement and research. Quantitative financial analysis can be done for a number of reasons such as measurement, performance evaluation or valuation of a financial instrument. It can also be used to predict real world events such as changes in a share price. Quantitative financial analysis include the following:  Common-Size Analysis  


Financial Ratios Growth Analysis Quarterly Analysis

12

CHAPTER 3: FINANCIAL RATIOS

Part 1:Activity Ratios: Activity ratios are ratios that measure a firm's ability to convert different accounts within their balance sheets into cash or sales. These ratios are measures of efficiency, generally the higher the better. Activity ratios contains       Inventory Turnover Ratio Receivables Turnover Ratio Payables Turnover Ratio Working Capital Turnover Ratio Fixed Assets Turnover Ratio Total Assets Turnover Ratio

Inventory Turnover Ratio: Inventory turnover ratio measures inventory management. Inventory should be turned over rapidly, rather than accumulating in warehouses. Inventory Turnover Ratio = Interpretation: We can not calculate the inventory turnover ratio for HBL because the COGS is equal to Rs 33088536 but the inventory is equal to 0. COGS/Average Inventory

Receivables Turnover Ratio: Receivables turnover ratio measures the effectiveness of credit policies and needed level of receivables investments for sales. It is also called the collection period. Receivables Turnover Ratio = Sales /Average Accounts Receivables

=74,751,375/31,140,35 =2.400 times

13

Interpretation: The Receivables turnover ratio shows that the account receivables are generated 2.4 times annually in cash in accordance with the sales.

Payables Turnover Ratio: Payables turnover ratio represents a financing source for operations. Payables Turnover Ratio = Sales/Average Accounts Payables =74,751,375/53,925,986 =1.386 times Interpretation: The payables turnover ratio shows that the account payables are generated 1.3 times annually in cash in accordance with the sale.

Working Capital Turnover Ratio: Working capital turnover ratio measures how much working capital is needed for sales. Working Capital Turnover Ratio= Sales/Average Working Capital =74,751,375/79,095,547 =0.945 times Interpretation: The working capital turnover ratio shows that the sales generated from the current assets/ working capital are 0.945 times.

Fixed Assets Turnover Ratio: Fixed assets turnover ratio measures the efficiency of net fixed assets (property, plant and equipment after depreciation) investments. Fixed Assets Turnover Ratio = Sales/Average Fixed Assets

14

=74,751,375/15,521,936 = 4.815 times Interpretation: The ratio shows that the sales are generated 4.815 times in accordance with the use of fixed assets.1 fixed asset generates 4.815 times sales.

Total Assets Turnover Ratio: The total assets turnover ratio represents the overall efficiency of assets to sales. Total Assets Turnover Ratio = Sales/Average Total Assets =74,751,375/769,131,678 =0.971 times Interpretation: This ratio shows that the sales are generated 0.971 times in accordance with the use of total assets. 1 total assets generates 0.971 times sales. Over all Analysis: The Activity Ratio shows a good efficiency level of HBL. All the ratios are positive and showing an increasing behavior of the turnover as the receivables are turned over 2.40 times annually. The payable turnover shows that 1.386 times the payables are turned over. The working capital turnover shows efficiency of the working capital in accordance to sales. The fixed assets turnover ratio also high that shows a strong position of fixed assets in the bank. The total assets turnover ratio shows that 0.971 times of the total assets has to generate 1 unit of revenue.

Part 2: Profitability Ratio: Profitability ratios is a class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well. Profitability ratios include  Gross Margin Ratio
15

    

Return on Sales Ratio Return on Assets Pretax Return on Assets Return on Total Equity Ratio Dividend Payout Ratio

Gross Margin Ratio: This ratio captures the relationship between sales and manufacturing (merchandising) costs. It is also called the gross profit margin. Gross Profit Margin =Gross Profit/ Sales =41,662,839/74,751,37 =55.73% Interpretation: The gross margin ratio shows that the gross profit is 0.5575% of total sale

Return on Sales Ratio: This ratio measures relationship of the bottom line to sales and thus captures sales to total costs of sales. Also called the net profit margin. Return on Sales Ratio =Net Income/Sales =12,298,643/74,751,375 =0.164% Interpretation: The ratio shows that the net income is 0.164% of sales.

Return on Assets Ratio: This ratio measures the firms efficiency in using assets to generate earnings. Alternatively stated it captures earnings to all providers of capital.

16

Return on Assets Ratio =Net Income/Average Total Assets =12,298,643/76,913,167 =0.159% Interpretation: This ratio shows that the asset used to generate the net income is 0.159%.

Pretax Return on Assets Ratio: This ratio measures earnings from operations on a pretax and pre-interest expense basis. Pretax Return on Assets Ratio =EBIT/Average Total Assets =41,993,313/76,913,167 =0.545% Interpretation: This ratio shows that the EBIT 1 rupee is generated by the use of 0.545% asset.

Return on Total Equity Ratio: This ratio measures earnings to owners as measured by net assets. Return on Total Equity Ratio=Net Income/Average Total Stockholders Equity =12,298,643/22,149,000 =0.555% Interpretation: The ratio shows that the 1% of total stockholders equity helps to generate 0.555% of net income.

Dividend Payout Ratio: This ratio measures the percentage of earnings paid out to common stockholders. Dividend Payout Ratios =Common Dividend/Net Income
17

=4,174,500/12,298,643 =0.3394% Interpretation: The ratio shows that for paying 1 rupee of dividend the net income is of 0.3394%. Over all Analysis: The profitability ratio shows the comparison of earning generated in a business to its expenses. The profitability ratios of HBL also positive. The gross margin ratio shows the relationship between the sales and the gross profit. The gross profit of HBL is 5.73% of the total assets. The net income is 16.4% of the total sales. The return on asset ratio shows that the average total assets are 15.9% efficient in generating income. The pretax return on asset shows that the average total assets are 54.5% efficient to generate pre interest income that is EBIT. This ratio shows that the stockholders equity gives the owner 55.5% of the net income. This ratio shows that 33.94% of the net income is paid to the common stockholders in the form of common dividend.

Part 3:Leverage Ratios: Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. A ratio used to measure a company's mix of operating costs, giving an idea of how changes in output will affect operating income. Fixed and variable costs are the two types of operating costs; depending on the company and the industry, the mix will differ. The leverage ratios include      Debt to Equity Ratio Debt Ratio Interest Coverage Ratio Long Term Debt to Equity Debt to Market Ratio

Debt to Equity Ratio: It is the direct comparison of debt to equity stakeholders and the most common measure of capital structure.
18

Debt to Equity Ratio =Total Liabilities/ Total Stockholder Equity =741,885,800/22,908,000 =32.385% Interpretation: This ratio shows that in accordance to pay 1 rupee of liabilities the shareholders equity is 32.38%.

Debt Ratio: Debt ratio is a broader definition, stating debt as a percentage of assets. Debt Ratio =Total Liabilities/ Total Assets =741,885,800/820,981,347 =0.903% Interpretation: Debt ratio shows that to pay 1 rupee of debt HBL has .903% of total assets.

Interest Coverage Ratio: This is a direct measure of the firms ability to meet interest payments, including the protection provided from current operations. Interest Coverage Ratio =EBIT/Interest Expense =41,993,313/22,507,572 =1.865% Interpretation: This ratio shows that in accordance to pay 1 rupee of interest the earnings are 1.865%.

Long Term Debt to Equity Ratio: A long term perspective of debt and equity positions of stakeholders.

19

Long Term Debt to Equity Ratio= Long term Liabilities/ Total Stockholders Equity =52,333,729/22,908,000 =2.284% Interpretation: This ratio shows that the total stockholders equity is of 1 rupee 2.284% in accordance to pay 1 rupee of the long term debt.

Debt to Market Equity Ratio: The market valuation may represent a better measure of equity than book value. Most firms have a market premium relative to book value. Debt to Market Equity Ratio= Total Liabilities at Book Value/Total Equity at Market Value =741,885,800/170,347,200 =4.355% Interpretation: The debt to market equity ratio shows that to pay 1 rupee of total liability HBL has 4.355 rupee in the form of market premium. Over all Analysis: The leverage ratio of HBL shows strong methods of financing. The debt to equity ratio shows a huge amount of the stockholders equity in accordance to pay the total liabilities. The debt ratio shows that in the total liabilities the debt is 90.3% in accordance with the total assets. The interest coverage ratio shows that to pay 1 rupee of interest expense HBL has 1.865 rupee of EBIT. Long term debt to equity shows that the total stockholders equity has 2.284 rupee against 1 rupee of the long term liability. The debt to market equity ratio that to pay 1 rupee of total liability HBL has 4.355 rupee in the form of market premium.

Part 4: Liquidity Ratios: Liquidity ratios are a class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts.

20

Liquidity ratios include     Current Ratio Quick\Acid Test Ratio Cash Ratio Operating Cash Flow

Current Ratio: Current ratio is a standard ratio to evaluate working capital. Current Ratio =Current Assets/Current Liabilities =318,508,647/58,162,852 =5.476% Interpretation: The current ratio shows the strong liquid position of the bank. It shows that HBL has 5 rupees of asset for each 1 rupee of current liabilities.

Quick Ratio: This ratio eliminates inventory. HBL do not have any inventory so the quick ratio for HBL will be same as the current ratio that is equal to 1.119. Quick Ratio =Current Assets Inventory/Current Liabilities =318,508,647 0/58,162,852 =5.476% Interpretation: The quick ratio shows the strong liquid position of the bank. It shows that HBL has 5 rupees of asset for each 1 rupee of current liabilities.

21

Cash Ratio: Cash ratio considers only cash and cash equivalents for the payment of liabilities. Cash Ratio = Cash + Marketable Securities/Current Liabilities =288,948,338/58,162,852 = 4.967% Interpretation: The cash ratio shows that for every 1 rupee of current liabilities HBL has 4 rupees in cash to pay.

Operating Cash Flow: The operating cash flow evaluates cash related performance, as measured from the statement of cash flows relative to current liabilities. Operating Cash Flow = Cash Flow from Operations/Current Liabilities =102,186,246/58,162,852 =1.756% Interpretation: The operating cash flow ratio shows that in accordance to pay 1 rupee of the liability the cash flow is also of 1 rupee. Over all Analysis: The liquidity ratios shows a strong liquid position of HBL. As the current ratio is 5.476% that shows the current assets are 5.476 % against 1% of the current liabilities. The quick ratio also shows the same results because the inventory is 0. The cash ratio shows that 4.967% cash and marketable securities are available against 1% of current liabilities. The operating cash flows shows that to pay out 1% of current liability HBL has 1.765% of cash from operating activity.

22

Part 5: Stockholders Ratios: Shareholders Ratio: Book Value Per Share=Total Equity/No. of shares outstanding =22,908,000/1,380,000 =16.6 per share Interpretation: The ratio shows that the book value is Rs. 16.6 per share in accordance to the outstanding share.

Pretax Earning Return: =Stock Price/Earning Per Share =123.44/13.50 =9.143 Rs Interpretation: This ratio tells us the earning per share in accordance with the stock price of the share on a specific date.

Dividend Yield Ratio: =Dividend Per Share/Stock Price =4.75/123.44 =0.038 Rs

23

Interpretation: This ratio shows that HBL can pay Rs. 0.038 on its stock price and dividend.

Earning Per Share: =Net Earnings/Outstanding Shares =12,298,643/1,380,000 =13.50 per share Interpretation: This ratio shows the earning per share of HBL Which is 13.50 per share.

Sale to Net Asset: =Annual Sales/Year Ended Share Equity =74,751,375/22,908,000 =3.263% Interpretation: This ratio shows that the net assets played 3.263% part in the sales.

Sale to Market Value: =Annual Sales/Total market Value =74,751,375/170,347,200 =43.88%

24

Interpretation: This ratio shows that the market value of the HBL share can play 43.88% part of the sales. Overt all Analysis: The ratio shows that the book value is Rs. 16.6 per share in accordance to the outstanding share. This ratio tells us the earning per share in accordance with the stock price of the share on a specific date.This ratio shows that HBL can pay Rs. 0.038 on its stock price and dividend. This ratio shows the earning per share of HBL Which is 13.50 per share. This ratio Shows that the net assets played 3.263% part in the sales. This ratio shows that the market value of the HBL share can play 43.88% part of the sale

Common-Size Analysis: Common-size analysis is also known as vertical analysis. Common-size analysis is used to compare financial statements of different-size companies, or of the same company over different periods. In common-size analysis all balance sheet items are stated as percentage of total assets and all income statement items as a percentage of sales or total revenues. Common-Size Analysis for HBL: Following is the common size analysis of HBL: 1. Common-Size Statement of Comprehensive Income 2009 Revenue Mark Up Cost Gross Profit SG&A Expenses Net Income 100% 41.7% 58.2% 12.8% 16.4% 2008 100% 44.2% 55.7% 15.1% 16.3%

25

2. Common Size statement of Financial Position 2009 Total Assets Cash & Marketable Sec Receivables Total Current Assets Fixed Assets Total Current Liabilities Total Liabilities Total Equity 100% 35.1% 14.4% 44.3% 55.6% 59.65% 90.36% 27.45% 2008 100% 25.6% 16.1% 35.7% 64.2% 60.97% 90.93% 25.47%

By looking at the common-size financial statements of HBL the common size statement of comprehensive income shows us that the mark up cost for the year 2008 is more than for 2009 and the gross profit of 2009 is more than 2008 but the net income is not affected so much because in 2009 HBL has to pay the deferred tax on revaluation of fixed assets which did not exist in 2008. The common size statement of financial position shows us that the liabilities cover a large part of the total assets. Over all Analysis: The common size Statement of comprehensive income shows that the mark up cost is 41.7% in 2009 and it decreased by 3.5% from the last year. The gross profit is increase by 3.5% as well. The selling general and administrative expenses are also decrease by 3.7%. but the statement shows that the net income is not much affected it is because of two factors which were not existing in the last year. The first is surplus on revaluation of fixed assets amounted Rs 1818705. The second is deferred tax on fixed assets amounted Rs 355586. The statement of financial position shows that the cash and marketable securities are 35.1% of the total assets in 2009which is increase by 10.5% from 2008. The receivables are 14.4% of the total assets in 2009 which is decreased by 2.3% from 2008. The total current assets are 44.3% of the total assets in 2009 which are increased by 9.4% from the last year. The fixed assets are 55.6% of the total assets in 2009 which are decreased by9.4% from 2008.The current liabilities are 59.65% in accordance with the total assets Which are decreased by 1.36% from 2008. The total liabilities a huge part in accordance with the total assets which is of 90.36% in 2009 decreased 0.63% from 2008. The total equity is 27.45% in 2009 which is increased by 2.2% from the last year.
26

CONCLUSION
This analysis shows that HBL is a profitable bank to invest in from the point of view of a small investor and also good for job peoples and according to the point of competitor HBL contain better competitor advantage.

27