Sep 03 - 09, 2007

The banking sector, comprised of 39 scheduled banks of 25 are listed with the Karachi Stock Exchange, has made its presence felt in the capital market on the back of their strong financial results for the first half 2007-08.

Cumulatively, the profit of Rs49.7 billion of the 23 listed commercial banks substantiates the depth of the market with an impressive growth of 42 percent during the first half 2007.

Actually, the performance of the financial sector in the arena of the capital market translates the robust economic growth with an outlook to achieve 7 % GDP growth in the financial year 2007-08, however the rally of growth is led by domestic consumption, the real contributor to the growth of the financial sector. Moin Fudda, former Director General of Karachi Stock Exchange while talking to PAGE however has sounded a note of warning that the low saving rates with higher interest rates on ever-increasing consumer market may prove a disaster at the end of the day if the financial sector did not come out with attractive products to develop saving rates in the country.

In a way it is amazing to see that Pakistan's external sector is less vulnerable to the current global credit squeeze, probably because of lower exposure to foreign portfolio investment compared to regional peers. However, the prevailing volatile conditions on the back of political happenings in the country could produce some unpredictable impact on the sensitive stock markets in Pakistan.

Coming back to the performance of listed banking companies it is estimated that they carry 91% and 94% of total banking sector assets and deposits as on Dec 31, 2006 with a profit share of 96 percent.


It is worth mentioning that net interest income (NII) of the listed banks was estimated at Rs88 billion during the first half 2007, which comes to a growth of 20%.

On the other hand, the non-interest income of the banks however witnessed an impressive growth of 74%. The banking sector made huge capital gains primarily because of bullish market during first half 2007, which lent a strong helping hand to the banks.


Having a glimpse over the performance of the Muslim Commercial Bank during first half of financial 2007 it appears that the earnings of the bank grew by 33% to Rs7.6 billion (EPS PRs12.2). The bank also announced cash dividend of Rs2.5 per share and total cash payout of the bank during the prevailing year has reached Rs5 per share.


The sharp increase in deposits of MCB has resulted in a 64 percent decline in terms of advances to deposits ratio (ADR) in 2007 as compared with 77% at the end of Dec 2006.

The reason behind the lower ADR was the sharp increase in deposits, depicting 17% growth to PRs301 billion at the end of June 30, 2007, which is inline with the industry deposits trend.

On the other hand, advances witnessed a declining trend in the fist half 2007 registered at Rs194 billion as on June 30, 2006 as against Rs198 billion at the end of Dec 2006.

The unusual increase in the deposits has also caused the cost of funds to move in upward direction. Sharp rise in deposits did not effect the composition of deposits sharply and fixed deposits remained stagnant at 12% when compared to end Dec 2006 deposits' composition. The cost of funds recorded at 2.8% in 2Q2007 versus 1.6% and 2.2% in 2Q2006 and 1Q2007 respectively. Consequently, the net interest margins (NIM) of the bank recorded at 7.3% in 2Q2006 versus 8.1% observed in first quarter of 2007.


It is interesting to note that United Bank Limited's (UBL) market share of consumer related loans stood at 14% at the end of December 2006, up from 10% at the corresponding time in 2005.

Actually, UBL has emerged as the leader in auto finance with the highest monthly bookings in the market currently. Though bank's spreads have come under pressure, consumer finance is likely to provide a cushion as these loans have much higher yields than other lending assets. In fact, the macro factors are very much in favor of strong growth in consumer finance in Pakistan.


The international operations of the United Bank accounted for 19% of pre-tax earnings for the group in 2006 and the bank is on track to reach its 25% target within the next few years. It is said that there were three factors underpinning the bank's

International expansion strategy, which includes UBL's international operations, enabled to diversify its earnings and asset base, thereby incrementally reducing the bank's country specific risk. This could potentially have a positive impact on the bank's credit rating. The bank's offshore branch network should supplement deposit gathering capabilities, as well as providing a powerful platform for servicing the non-resident Pakistani consumer market (i.e. 'Address Mortgage'). The bank is positioning itself to participate in the rapid growth in Middle Eastern and Central Asia banking markets, was another factor for diversifying its earnings resources.


Currently, the Bank of Punjab (BoP) is in the process of acquiring Punjab Provincial Cooperative Bank (PPCB), a specialized bank with 150 branches located in the province of Punjab will expand the branch network to 420 through out the country.

Actually, the bank currently endeavoring to lift its image and make its presence felt in the financial sector at national and international basis besides incorporating Islamic banking culture within its fold with the establishment of three branches exclusively operating on shariah compliant business.

The proposed merger with PPCB is in the initial stages and currently the consultants are doing due diligence for this. After completion of due diligence, exact terms of the merger will be settled down with the Government of Punjab.

The said acquisition will add 150 branches in the bank's operation. The management has a plan to relocate 50% network of PPCB outside Punjab provinces.

The Bank of Punjab has depicted exceptional performance during the last 4 years (2003-06) by comprehensively outperforming the overall banking sector growth during the same period.

In the said time period, advances of the BOP increased by 98% on average versus banking sector's advances growth of 26%. In order to capitalize the ongoing growth momentum, the management of the bank is now pursuing an aggressive but targeted expansion plan.

During the prevailing year, the management of the bank has initiated an expansion plan of its domestic branches by increasing it to 271; the additions were remained almost stagnant during the last couple of years at the level of 266 domestic branches.

The most important point of this expansion strategy is the countrywide additions of the branches, which previously were mainly targeted towards Punjab. This will not only enhance the customer base of the bank but also be helpful in building the national image and it's re-positioning in the banking arena of the country.

The bank has received encouraging response from public outside Punjab. So far, the bank has opened 5 branches in Karachi, 1 in Hyderabad and 1 in Sukkur. Furthermore, in Balochistan, the bank has established one branch in Quetta with an aim to open 1 branch in Peshawar (N.W.F.P) in the near future.

In addition, to cater the increasing growth in the Islamic banking, BOP is also planning to open 3 Islamic banking branches. So far, the bank has completed the required formalities in order to acquire Islamic banking license from the regulator. Moreover, the bank is also pursuing an overseas branches expansion, initially targeting Afghanistan, Central Asia and India.


The recent bearish spell at KSE has proved a blessing in disguise as it has brought Pakistan market at attractive levels especially for foreign investors.

It is said that the current slide has provided a good opportunity for the investors to take exposure in many fundamentally strong but undervalued scrips especially the banking stocks


The bank's attractive profitability outlook is expected to remain intact on the bank of steady volumetric growth. BAFL's Advance-Deposit Ratio (ADR) i.e. 66% is one of the lowest in the industry. The consumer financing of the bank has reached to 30% of the overall advances. SME represents 20-22% while rest is distributed among Corporate and other sectors. This volumetric growth is likely to be supported by the stable margins of the bank. The bank's exposure in high yielding consumer and SMEs are likely keep its margins favorable/stable. BAFL is also in the process of issuing TFCs as it counts 50% in the tier 2 capital of the bank for the purpose of capital adequacy ratio.