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Presented To: Sir Waseem Ullah Project: Financial Pakistan
Analysis
of
MCB
Presented By: Group No: 14 Imran Khalid Reg#3414-FMS/MBA/S08
Khurram Iftekhar Reg#3422-FMS/MBA/S08 Reg#3422-FMS/MBA/S08 (19B)
Ismail Khan Reg#3415-FMS/MBA/S08 Reg#3415-FMS/MBA/S08 (19B)
M.Rizwan Bisharat Reg#-3427S/MBA/S08 Reg#-3427S/MBA/S08 (19B)
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(19B)
Table of Contents Strengths:................. ................................... .................................... .................................... .................................... .................................... ...................... ....6 6 Threats................ .................................. .................................... .................................... .................................... ............................... .................. ........... ......... ...8 8
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BANKIN BAN KING G INDUST IND USTRY RY In 2008 there is a financial slump in the world economy effects the solvency, liquidity and the profitability of the banking system and decline in the consumer spending.
Pakistan was already experiencing economic and financial problems before the world financial crises. Due to excessive money creation and excessive consumer lending’s in private sector, rising oil prices, food, electricity crises led to a sharp inflation in the country which effects the balance of payment due to which the foreign exchange reserve also effected. Pakistan make an arrangements with IMF which helps for short time to eased the inflationary pressure, this arrangement also released the banks to continue their businesses.
The stress emerged in usual timeframe, i.e., Eid-ul-Fitr deposit withdrawal and a number of global, domestic and industry specific factors further compounded it. The current account deficit was quite high and the real exchange rate had significantly appreciated to unsustainable levels, which ultimately put pressure on rupee/dollar exchange rate and led to capital outflows. outflows. On top of it, breakdown of capital market in Pakistan Pakistan and the series of news on the financial meltdown in advanced markets raised general public doubts about the financial strength of some Pakistani banks. By this time, due to relatively higher growth in advances, the liquidity profiles of the banks had already been burdened. In this backdrop, the usual post-Eid liquidity pressure in interbank market led to rumourmongering about the banks. The impact was severe in some banks especially the small banks
with
the
constrained
liquidity
profile
in
terms
of
ADR.
The The redu reduct ctio ion n in Cash Cash Rese Reserv rvee Requ Requir irem emen ents ts (CRR (CRR)) and and Stat Statut utor ory y Liqu Liquid idit ity y Requirements (SLR) in early weeks of October 2008 to manage the liquidity stress resulted in a significant decline in cash and treasury bank balances by the end of Decemb Decemberer-08 08 quarter quarter,, thus thus releas releasing ing funds funds for financi financing ng the growth growth of advance advances. s. State bank of Pakistan enabled the system by some regulations to over come the financial crises.
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MUSLIM COMMERCIAL BANK
MCB is among the oldest banks of Pakistan. It was incorporated in 1947. It was among those those privat privatee banks banks that that were were nation nationali alized zed in 1974. 1974. Nation Nationali alizat zation ion had drasti drastical cally ly impact impacted ed its perfor performan mance ce as it affect affected ed the qualit quality y of loan loan portf portfoli olio o and servic services. es. Eventually, it was privatized in 1991 and is currently owned by the Mansha group. Post privatization,
MCB’s
focus
has
been
on
aggressive
cost
reduction.
MCB has a network of over 1000 branches across Pakistan, of which, around 750 are automa automated ted.. The bank offers offers variou variouss servic services es to its consum consumers ers,, includ including ing person personal al banking, banking, corporate banking, virtual banking, Islamic banking and other services. services. In this rapid expanding banking sector, MCB has been performing well to compete with its rivals. MCB has won the "Best Bank of Pakistan" award for the 5th time from 2001 to 2006.
During the year 2008 the bank continued to make strong progress in spite of the difficult market market condit condition ions. s. Revenue Revenuess grew grew strong strongly ly and conside considerab rable le advance advancement ment due to expanding our assets base. A number of strategic actions have been taken ensured that MCB is having well position for the future and are able to excel in the year to come. In 2008 bank awarded best bank in Asia by Euro money.
Further the BOD of the bank taken steps to improve governance in the bank introducing good policies.
Bank Rating The bank has made an extraordinary effort to reduce its dependence on debt, as a source of finance. Debt management figures reveal that the bank has 96% of its assets financed by debt in 2003. However, it had reached a very high level and there is always a potential
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to fall back from heights, it has been the case with MCB as it had to reduce its dependence on heavy debts. Furthermore, debt to equity ratio suggests a tremendous recovery by MCB to improve its credit rating up to AA+ in long term and A1+ in short term.
SWOT Analysis Strengths: •
Mainly operated by Mansha's group.
•
Offers a wide variety of services to its customers and has a customer bank of round about 4 million.
•
The bank has efficient and experienced management making significant
•
The bank has efficient IT infrastructure and network of on line branches.
•
Brand image because of "Muslim" word in the name in an Islamic country.
•
MCB is working in Pakistan over 60 years of success.
•
Musli Muslim m Commer Commercia ciall Bank Bank (MCB) (MCB) falls falls under under the categor category y of 'big 'big five' five' domestic commercial banks.
•
Rapidly its performance is going up and it has above 10000 employees and it has 1000 branches network in which 700 are online branches.
•
The culture of MCB is strong and employees are professional and committed to their work.
•
Bank is continuously focusing on developing a new and innovative products to attract their target market.
•
Strong customer relationship.
•
Asset utilization is very good.
•
GPRS enabled banking.
•
At present it has the largest ATM network in Pakistan.
•
Thee la Th launc unch h of MC MCB B sw swit itch ch al allo lows ws ot othe herr ban banks ks to ut util iliz izee MC MCB' B'ss AT ATM M network . -6-
Weaknesses: •
Less job satisfaction of employees.
•
Cust Custom omer er faci facing ng probl problem em of NADR NADRA A veri verifi fica cati tion on while while openi opening ng thei their r accounts because its process is time consuming.
•
To give everyone equal protocol is lacking among employees Customers having account with small amount are not given same services like dealing to others who have high account.
•
Actuarial gains lead to boost the administrative expenses due to decreasing discount rate.
•
Lack of decentralization. Banks is planning to restructure its departments and is going to be centralized very soon.
•
Lack of organizational loyalty among employees.
•
Promotions generally on seniority basis.
•
Attitude of senior managers at head office has to change towards junior staff
•
Competent staff unwilling to serve in the audit due to an absence of firm rotation policy.
•
As most of the employees are young they have more tendencies to switch the organization and to seek more opportunities.
Opportunities: •
To go global fully.
•
Low exposure to consumer consumer banking providing providing opportunity opportunity to explore the
segment. •
Emergence of Islamic banking in the country and MCB is increasing its
Islamic Banking operations. •
SBP policy to allow Islamic banking business separately.
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•
Bank has earned a good name by introducing innovative products like car
financing home financing credit cards these products can easily enhance the market share. •
Bank introduces Islamic banking in country that attracts large number of
people. •
Free staff training facilities offered.
•
Greater profitability can be achieved through strong internal control
•
Profit and deposit of banking industry have shown an increasing trend
because of better marketing environment. •
Elimination of risk of fraud through professional training
•
Opportunity to open branch in ruler area to increase its branch network
and gain more profit. •
The bank can earn more profit by advancing to farmers and industrialists
at low rates. •
New schemes for deposits and finances should be introduced regularly.
Threats •
Current economic crunch.
•
Political instability.
•
Strong competition.
•
Rising deposit rates.
•
Foreign banks in market having more marketing budgets.
•
People losing trust in banks.
•
Decline in private and public sector credit due to tight monetary policy.
•
Participation of foreign banks in local market that can hurt the market share.
•
Growing NPL's of the industry which may hurt MCB also.
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•
Merger Mergerss & acquis acquisiti ition on activi activitie ties, s, consoli consolidat dating ing the bankin banking g
sector and MCB is also vulnerable to it.
•
The market is already saturated 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.`
Michal Porter Analysis Bargaining power of the Buyers The banking industry is confronted with diversified customers. Keeping in view the customer customer needs and differenti differential al customer customer oriented products and services, services, polic policies ies have been been design designed ed in a way that it meets meets the requir requireme ements nts of the 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 dealin dealing g with. with. Its
is importan importantt for bankers bankers should should keep his custom customers ers wellwell-
informed regarding their offerings because on the basis of which customer decides that which bank should be chosen with regards to interest rate and mark-up etc.
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Bargaining power of suppliers The depositors perform the function of suppliers for the bank as they keep their money with the bank whereas on the other hand it enhances the banks lending ability which is then invested in some other business activities like providing personal and business loans etc. The profit earned from these is then paid back to the customers in the name of interest. The bargaining power of the suppliers is high because they move where they find the maximum interest rate. The banks need to concentrate on devising and making policies so as to draw and grab more customers.
Threat of new entrants
Market always has a room for new entrants. Different Islamic banks have entered the market market claimi claiming ng that that their their bankin banking g syste system m is accor accordin ding g to the sharia sharia’h ’h comp compla lain intt solu soluti tion onss comm common only ly know known n as Isla Islami micc Bank Bankin ing, g, cert certif ifie ied d by a distinguished sharia’h board. Along with this their infrastructure deals with all kinds of solutions for the customers such as consumer banking and corporate banking. If the culture, norms and religious values are given consideration then they can attract a considerable percentage of target market, which believes that the existing banking system is against sharia’h.
Threat of substitute products or services
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The leasing companies and other financial institutions (e.g. Adamjee Insurance etc) currently operating are also dealing in consumer products providing them on different terms and conditions. These can act as a substitute for the customers.
Therefore it is important to keep an eye on these companies and revise the policies accordingly.
Intensity of Rivalry among Competitors In traditional banking system, competition among rival banks turns down the profit, but competition is not perfect and banks are not unsophisticated passive price takers. Rather banks strive for a competitive advantage over their rivals. The intensity of rivalry among banks varies according to products and services they offer to their target market, whereas strategic analysts are interested in these customer oriented differences.
Financial Analysis of statement of financial year 2006, 2007 and 2008
Risk
1) Credit Risk:
Annual provision for loan losses to equity ratio was 0.065 in FY06
but in FY07 and FY 08 it decreased to 0.026 and remain constant in both the Financial years, which is positive sign for bank because it means that borrowers are repaying their loans properly, and the Peer group average is 0.079. Total loans to Total deposits ratio
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was 0.770 in FY 2006 and in FY 2007 it decreases to 0.750, and in current FY it is 0.795, and peer group average is 0.677.
0.900
Credit Risk
0.800 0.700 0.600
otal Loans To Total Deposits
0.500 0.400
nnual Provision Pr ovision for Loans Losses To Total Equity
0.300 0.200 0.100 0.000 2006
2) Liquidity Risk:
2007
2008
Peer Group
MCB Advances have grown by 19 percent in FY 2008 as compare
to FY 2007. Cash and due-from balances held at other financial institutions to total assets ratio was pretty low in FY 2006 (0.56) it increased to 0.72 in FY 2007 and now in FY 2008 it is 0.108 which is still high with its peer group ratio which is 0.144. This means that MCB is having low liquidity risk as compare to Peer Group.
0.900 0.800 0.700 0.600 0.500 0.400 0.300 0.200 0.100 0.000
Liquidity idity Risk Earning Assets To otal Assets
Cash & Balance due rom other financial financial Institutions To Total ssets 2006
2007
2008
Peer Group
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3) Interest Rate Risk: Interest rate fluctuated in the last three years in the country, but the banks interest rate risk ratio remain same in FY 2006 and 2007, some how it is
increased .03 in 2008, this is because the ratio of increase in deposits is too much than MCB’s investments and other return portfolio. And the Peer Group av erage is 1.28.
PROFITABILITY The profits of FY08 are lower than profits for the last two years, but MCB is still profitable. The overall profitability is affected due to increase in operating expenses and provisioning for loan losses. In absolute terms, expenses increased by about 50 %in FY08 as compare to previous year, which affected the overall profitability of the bank. Non-interest income decreased by 3.1 % as compare to previous year. And interest income also decreased by 3 % as compare to previous year this was due to slump in economy. ROA also decreased by 4% to 3 % this year and the reason was same. 0.40
Profitibil Profitibilty ty Ratios
0.35 0.30 0.25
Return on Equity capital
0.20
Return on Asset
0.15
Net operating margin
0.10
Net non-interest non-interest margin margin
0.05
Net interest interest margin margin
0.00 -0.05
2006
2007
2008
Peer Group
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As a whole all the profitability ratios decreased but as compare to Peer group MCB is in profit and earning more than its competitors.
Return on Asset
0.07
BreakDown of ROA ROA
0.06 0.05 0.04
Net interest i nterest margin margin
0.03
Net non-interest non-interest margin margin
0.02
ROA
0.01 0 -0.01
1
2
3
4
-0.02
DuPont Analysis
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16.000
Dupont Analysis
14.000 12.000 Net Profit Margin Margin
10.000
sset sset Utiliza Util ization
8.000
Equity Multiplier
6.000
ROE
4.000 2.000 0.000 2006
2007
2008
Peer Group
INVESTMENTS The investments, especially the government papers, which declined in both absolute rupee terms as well as a proportion of total assets during the first nine months of CY08, registered a slight increase during the last quarter. Actually, the heightened credit risk on account account of deteri deteriora oratio tion n in macroe macroecon conomi omicc fundam fundament entals als and alread already y constra constraine ined d liquidity profile induced the banks to shift their preference towards risk-free . The banking system is marked with a high concentration as a few number of banks hold a major major share share of the system systemss total total assets assets and deposi deposits. ts. This This concent concentrat ration ion has been been following an overall declining trend as the medium sized banks gradually gained market share. share. However However,, due to unusual unusual liquid liquidity ity stress stress that that affect affected ed mainly mainly the small small and medium sized banks, the market share of five large banks inched up to 52.4.
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Investment Portfol ortfoliio 1% 1% 1%
0%
0%
3% 1%
Federal Govt. Securities
9%
Overseas Govt. securities Provincial Govt. Securities Subsidiari Subsidiaries es and ssociated undertaking undertakings Fully Paidup Ordinary Share hare / Certificates
84%
DEPOSITS The deposit component is a indicator of strong growth, foreign remittances, is the main factor behind the recent years strong growth in deposits, and grew by 13.07 percent over CY08.
In the current year trend shows the shift in d eposite from saving to term deposite. It is due to in response to SBPs policy incentives to encourage long term deposit However, the SBPs policy drive to increase the CRR and SLR in last week of Jun-08 and exemption of long-term deposits also from SLR requirements during the last quarter and other factors like general rise in interest rates and innovative deposits scheme have also increased depositors preference for terms deposits.
ADVANCES
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Advance is the one of the big asset in balance sheet of financial situation in year 2006 to 2007 there is a 10% increase increase but with respect respect to the FY 2007 in FY 2008 it is increased increased by 19.90%.
Advances witnessed a significant slowdown in sharp contrast to industry established patte patterns rns for the last last quarter quarter.. The worsen worsening ing busine business ss and econom economic ic environ environmen mentt somewhat increased the credit risk, which compelled the banks to adopt cautious lending strategy, particularly in consumer sector where the advances have been decreasing since the start of CY08. Some new loans have been issued, of which, a significant portion disbursed to public sector enterprises (PSEs). FY08 however, observed a deviation in the growth pattern of advances. Slackness in the demand for bank credit during FY07 coupled with slowdown in economic activities and tightening of the monetary regime, forced the bank s to reposition their lending strategy and asset profile. The asset mix of the banking system gradually shifted from lending to investments during the first three quarters of FY07.
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A dvances dvances Por Portfolio tfolio 2% 2%
Loans Cash Credits
Finances Lease
Bill Discounte Discounte d and
96 %
Purchased
Non Performing Loan
Rise in NPLs observed across all the banking groups except specialised banks, where NPLs have actually decreased. NPLs have been on the rise mainly due to poor economic performance of the economy.
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Total provisions for NPLs surged to Rs 53 billion in 2008 as against Rs 42 billion in Rising inflation and contained disposable incomes coupled with increasing lendin lending g rate rate have reduced reduced consume consumers rs appeti appetite te for credit credit as well well as their their repaym repayment ent capacity, resulting in increasing defaults rate in the consumer finance. Interestingly, in the wake of econom economic ic slowdo slowdown, wn, banks banks seem seem to facil facilita itate te the busine businesse ssess through through rescheduling/restructuring of loans, the textile sector being the major beneficiary. Latest
banki banking ng indust industry ry numbers numbers show show an effort effort to keep balance balance sheets sheets clear of NPLs NPLs by recognizing and providing for NPLs on criteria that are more stringent. This approach might look costly in the meantime but in the long run it will definitely benefit banks by providing a cushion to withstand losses.
FUTURE OUTLOOK
The global financial crisis has badly effects banking systems. The financial sector is facing problems but its better than other neighbouring countries due to regulations and the role of SBP to take timely corrective measures. Measures include relaxation of CRR and SLR in phases. The banking b anking sectors spread continues its rising trend after witnessing a dip to the level of 6.78% in June 2008 that has being taken as an after effect of minimum profit payment of 5% on saving accounts. The profits show that long term investment in Pakistani banking system will be lucrative, as the assets quality is quite satisfactory.
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 o f 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 a nd 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 b een given to all stakeholders across the board to achieve the desired results.
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Some of the market expectations are that current discount rate at 15% is likely to be on a slope by at most 400bps (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 programme. Trade e xperts 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 and are least likely to be affected by the economic slowdown.
Challenges faced by the economy, in general, and the banking sector, in specific, include restrained liquidity, slowdown of economic activity, and high inflation. Despite these issues, MCB has been able to maintain its profitability and only concern is of higher NPLs, which have to be checked as it has surpassed to alarming levels. Besides this, the bank is equipped to face challenges with its dynamic management and trained workforce.
In this situation the MCB is growing day by day and is going to acquire the RBS bank, which shows that the MCB is the market leader and management is doing work in this crunch and getting the benefit of this and purchasing the banks to expand the business.
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