NATIONAL BANK — POISED FOR CONSOLIDATION AND GROWTH
By MUHAMMAD BASHIR CHAUDHRY
June 16 - 22, 2003
National Bank of Pakistan (NBP), established in 1949 under an ordinance, offers range of banking services and financial products to its customers. NBP also provides important agency and trusteeship services to public sector institutions. As agent to the State Bank of Pakistan, NBP handles treasury functions for the government of Pakistan. NBP also provides services as Trustee to the National Investment Trust (NIT) including safe custody of securities on behalf of NIT. National Bank, since amalgamation of NDFC, also administers government's Long Term Credit Fund for financing power generation and energy-related infrastructure projects.
The shareholders approved the audited accounts of NBP for the year ending Dec.31, 2002 in the 54th AGM held on May 13, 2003. NBP closed the year with a pretax profit of Rs 6.045 billion, which is 100 % increase over pretax profit for 2001 at Rs 3.016 billion. Pretax profit at Rs 6.045 billion is the highest by any Pakistani bank. This article is an attempt to explore the phenomenal increase in profitability in the prevailing conditions in the banking sector in Pakistan.
NBP profitability culminated during 2002 based largely on measures initiated during the past few years. NBP had shown pretax profit of Rs 2.135 billion for 1998. However, for 1999 the pretax profit dropped to Rs 0.311 billion which improved to Rs 1.032 billion in 2000 to Rs 3.016 billion in 2001 and Rs 6.045 billion in 2002.
It may be appreciated that NBP's profitability as shown above has been after making large provisions as well as amortizations of deferred costs. Total provisions and amortizations for 1998 were Rs 3.140 billion which were increased to Rs 5.008 billion for 1999. For years 2000, 2001 and 2002 the provisions/amortizations were of the order of Rs 3.792 billion, Rs 5.75 billion and Rs 2.625 billion respectively. Provisions were largely for loan losses and the amortizations pertained to the costs incurred by NBP in the implementation of special/voluntary separation schemes to rationalize staffing strength. The management wisely avoided the temptation of declaring higher profits during these years. Instead, by making larger provisions and the required amortizations, it acted prudently and initiated the process of consolidation.
Mark up/interest income for 1998 was at Rs 31.669 billion as against mark up/interest expense of Rs 22.915 billion. In spite of increase in advances, total assets and deposits, over the next three years, mark up/interest income for 2001 was Rs 31.291 billion whereas mark up/interest expense was reduced to Rs 18.877 billion. For 2002 mark up/interest income was Rs 27.519 billion as against mark up/interest expense of Rs 14.699 billion. The decline in the amount mark up income and expense is explained by the overall reduction in the lending as well as the deposit rates over the years. However, the decline in the mark up expense has been more pronounced. In relative terms, mark up expense at 72% of mark up income for 1998 declined to 53% for 2002. In the meantime, fees income also increased from Rs 2.805 billion for 1998 to Rs 4.817 billion for 2002. These factors largely contributed to higher margins.
Banks are taxed more heavily than the business concerns and industrial entities. NBP's after tax profit for 1998 was Rs 0.529 billion but for 1999 net profit dipped to an insignificant loss of Rs 0.177 billion. Since then, after tax profit has shown remarkable increase from Rs 0.461 billion for 2000, to Rs 1.149 billion for 2001 and to Rs 2.253 billion for 2002. As compared to shareholders' equity, after tax profit has risen from 3.49% for 1998 to 9.41% for 2002. NBP has declared a 12.5 per cent cash dividend plus 10 per cent bonus stocks for 2002 compared with 12.5 per cent cash dividend for 2001. The improved profitability was achieved due to a combination of higher net interest revenue, enhanced fee income and other measures adopted by the bank. NBP profits have risen gradually through improvement in the core business areas and are not result of one-off items such as capital gains in one particular year. The credit for this is due to the NBP management.
Total assets of NBP have maintained steady growth throughout the period 1998 to 2002. At end 1998, total assets were Rs 325.058 billion, which increased to Rs 432.803 billion by close of 2002 — an overall increase of 33%. NBP with total assets at Rs 432.803 billion is the largest bank in Pakistan.
Of any bank, advances and investments are the two core operational areas. These are financed through shareholders' equity and by mobilizing deposits. Advances at Rs 109.524 billion at end 1998 grew to Rs 170.319 billion by end 2001 but substantially declined to Rs 140.547 billion at end 2002. In relation to total assets, advances during 2001 were 41% but declined to 32% of total assets at close of 2002. Increase in advances during 2001 has been significantly large because for the first time NDFC advances in an amount of Rs 10.416 billion were included in NBP accounts during the year.
Of the total advances for 2002 at Rs 140.547 billion, 79% are in local currency while the rest 21% are in foreign currency. From maturity point of view, 70% advances are for short term while the balance advances 30% are for long term. Advances are almost evenly distributed between the public and the private sectors. Advances are spread in almost all industrial sectors but with high concentration in Textiles (17.82%), Oil/Gas/Energy (10.20%), Public Sector Commodity Operations (21.24%), Individuals (9.10%) and others (14.38). The NBP management might review the concentration risk and avoid over exposure to any particular sector.
The non-performing loans (NPLs) increased from Rs 20.708 billion in 1998 to Rs 43.706 billion at end 2002. In relative terms NPLs for 1998 were 19% of advances and have increased to 31% of advances in 2002. One plausible reason might be that now all NPLs are recognized on timely basis. Moreover, after every few years a bank or a financial institution has been entrusted to NBP. NPLs from these institutions also increase the overall NPLs' level. All the same, this rising trend in NPLs needs to be arrested at the earliest. Provision for NPLs at Rs 16.563 billion in 1998 has been increased to Rs 25.535 billion in 2002. In relative terms provision on NPLs has declined from 80% in 1998 to 58% in 2002. NBP claims to be making provision in accordance with the requirements of the SBP, despite that it is suggested that NBP adopts more conservative policy for provisions. Finding no realistic prospects of recovery, NBP has been writing off the advances. During period under review, NBP wrote off advances of over Rs3 billion. This policy has helped NBP consolidate its position.
NBP had investments in 1998 at Rs 102.969 billion which steadily decreased every year to Rs 71.759 billion by end 2001 but then doubled to Rs 143.525 billion during 2002. In relative terms, investments at end 2001 were 17% of total assets jumped to 33% of total assets at end 2002. This has been an unprecedented increase in a year and therefore calls for some discussion. NBP has been flush with liquidity and with limited opportunities for additional loan and advances. The capital market has been buoyant and promised handsome capital gains and therefore NBP went into investment in a big way. Larger additional investments in government securities particularly in Treasury Bills (Rs 58.171 billion) helped NBP earn handsome return, with little credit risk. Appreciation in the value of investments provided an opportunity to the bank to book Surplus on Revaluation of Assets and thus substantially increased shareholders' equity. NBP investment of Rs 143.524 billion comprise largely government securities of Rs 110.520 billion, which is 77% of total investments. The rest of the investments (Rs 33.004 billion) are in corporate shares, NIT units, TFCs, PTCs, Debentures, etc. NBP regularly makes provision for diminution in the value of securities, which at close of 2002 was Rs 1.625 billion.
The deposits at end of 1998 at Rs 273.391 billion increased steadily each year to reach Rs 362,865 billion at end 2002 — an overall increase of 33%. In relative terms however, deposits remained at around 84% of total assets throughout the period. At end 1998, foreign currency deposits at 32% of total deposits, reduced to 30% of total at close of 2002. As against substantial increase in the amount of deposits, the return paid to the depositors declined in absolute terms from Rs 22.915 billion for 1998 to Rs 14.699 billion for 2002. This reflects the general decline in rates of mark up/interest offered to the depositors.
As on 31st December, 2002 NBP had authorized capital of Rs 5 billion (500 million ordinary shares of Rs 10 each) of which paid up capital is Rs 3.730 billion (Rs 1.404 billion paid in cash and the rest Rs 2.326 issued as bonus shares). At present 20% shares are in the hands of general public, offered through the stock exchanges in two tranches under NBP privatisation scheme. Paid up capital is set to increase by Rs 0.373 billion to Rs 4.103 billion due to bonus shares announced in the AGM. NBP shares these days are trading on stock exchanges at about Rs 26.00 per share.
At the AGM, it was reportedly said that share holding by the general public was only 20% whereas the voting rights trigger at 26% holding. In this context, NBP management is urged to be pro-active and to approach the government for offering additional 10% shares, as a minimum, to the general public through the stock exchanges. Apart from triggering the voting right to the shareholders, this should broaden the shareholding base.
Shareholders' equity over the period has continued increasing. At end 1998, NBP's equity stood at Rs 15.149 billion comprising paid up capital and reserves aggregating to Rs 9.978 billion and surplus on revaluation of assets of Rs 5.171 billion. For 1999 and 2000 the shareholders' equity were Rs 15.963 billion and Rs 16.983 billion respectively. Paid up capital at end 2001 increased from Rs 1.464 billion to Rs 3.730 billion due to issue of bonus shares. Shareholders' equity in 2001 increased slightly to Rs 17.510 billion due entirely to retention of profits after payment of cash dividends at 12.5%. NBP closed the year 2002 with equity of Rs 23.936 billion due to retention of profits and large surplus on revaluation of assets securities. Larger equity gives comfort to the depositors/creditors and helps in meeting the capital adequacy requirements prescribed by the regulatory authorities.
During the period 1998-2002, shareholders' equity on average remained at 5% of total assets of NBP. At end 2002, the equity was 6% of total assets, whereas deposits were 15 times of the equity on this date, though during the period under review, on average the deposits were as high as 18 times of the equity. Further, as NBP's equity base includes large surplus on revaluation of securities. Taking a conservative look, shareholders equity is considered vulnerable to large fluctuation in share prices. From maturity point of view there is some mismatch in the advances and the deposits due to which NBP is further exposed. Therefore, the NBP management might take measure to further strengthen the equity base. The government as the largest stakeholders might be approached for increasing paid up capital by injecting additional cash, with a view to better support bank's existing as well as expanding operations.
At the start of 1998, NBP had 1,468 branches and 1,896 employees. Through implementation of rationalization initiatives, now there are 1,204 branches and 12,195 employees. With a view to improve customer focus, reduce decision making layers, and promote team-work, NBP has modified the organization structure and established new groups for focused attention on critical areas. Of special significance are the Risk Management Group (RMG) and the Asset Management Group (AMG). Pragmatic and extensive training of the officials can help minimize credit and other risks and thus contribute to better profitability and growth.
Consequent upon the NDFC amalgamation, NBP manages on behalf of the GoP, the Long Term Credit Fund (LTCF) established from the proceeds of loans disbursed by various international funding agencies for financing private sector energy development projects. NBP charges fees from the GoP in consideration of the services. LTCF assets are accounted separately from those of NBP and amounted to Rs 48 billion at end 2002 (2001: Rs 48 billion). NBP might consider expanding these operations by part financing the large infrastructure projects currently under consideration/implementation by the government. This is expected to partly resolve the excessive liquidity situation.
NBP in the coming years aims to improve earnings, through customer focus, and by enhanced efforts towards development of human capital and thus transform the institution to a fast paced, modern, and competitive bank. It has also been said that NBP would introduce fee-related products and would be focusing on small and medium enterprises and of the entire range of retail products. For overseas operations, focus would be on trade finance. Some other areas that the top management might consider include: (i) adopting of a pro-active approach for financing projects being promoted by credible sponsors; (ii) turning NBP into an apex bank providing credit lines to leasing companies and investment banks; (iii) assessing synergy of existing subsidiaries and associated companies for better profitability and growth; (iv) utilizing project finance expertise to earn fee income by providing advisory services; and (v) introducing financial products for the saving account holders to provide them reasonable profit after covering inflation, Zakat and Withholding Tax.