Research Analyst
Jan 05 - 18, 2009

Royal Bank of Scotland Limited was renamed from ABN AMRO Bank Ltd AABPL) on 1st August 2008 as it was acquired by a consortium led by Royal Bank of Scotland in October 2007. Now as the Royal Bank of Scotland (RBS), the bank has a network of 79 branches, including 3 Islamic banking branches in Pakistan. The bank is principally engaged in retail banking, corporate banking and treasury related activities. RBS's assets stand at Rs 117.6 billion and it has about 5,000 employees. According to the PACRA, the bank's short term credit rating is (A1+) and long term credit rating is (AA).


INDICATORS 2006 2007 HY 2008
Return on Assets 1.93% -1.46% 0.07%
Return on Deposits -1.73% 0.09% 2.55%
Return on Equity 27.80% -30.89% 1.20%
Net Interest Margin 7.08% 3.76% 5.88%
NPL to Advances 2.81% 6.96% 8.03%
Non Performing loans 2,016,839 4,489,049 5,692,656
Provisions to NPLs 36.34% 74.35% 19.79%
Provisions to Advances 1.02% 5.18% 1.59%
Debt to equity 13.37 15.91 17.77
Deposit times capital 10.88 13.20 14.92
Debt to asset 0.93 0.94 0.95
Capital 8,612,441 6,839,118 5,995,896
Advance to deposit 0.77 0.74 0.75
Earning assets to assets 0.82 0.41 0.40
Yield on earning assets 0.11 0.06 0.05
Cost of funding earning Assets 0.05 0.07 0.03
Source: RBS


During HY08, the RBS earned a profit of Rs. 83 mn which was 74% lower than that earned during HY07. The bank's mark-up/interest earned during HY08 was Rs 9.28 mn lower than the interest earned during the same period last year. However, the interest expensed declined by 11% resulting in an increased net interest margin. However higher provisioning limited the impact of the increased interest income and net interest income after provisions was 30.5% lower than that of same period last year. The provisioning was almost double in H1'08 vis--vis H1'07. The interest spreads of the bank remained steady and the bank managed its funds prudently and the treasury performed well. Admin expenses rose considerably by Rs. 418 mn because the bank has spent considerably on growth initiatives, integration and alignment processes in the past months. Through a quarter-on-quarter analysis it can be seen that the bank has made a loss of Rs. 59.7 mn during 2Q 08 while it had made a profit of Rs. 142.8 mn in H1'08. RBS's net interest income for 2Q'08 was Rs. 44 mn higher than that of 1Q'08. However, the bank provisioned Rs. 12.5 mn against diminution in value of investments and therefore experienced a lower net interest income after provisioning in 2Q'08. The non-interest expenses were higher and dampened the effect of higher non-interest income that the bank earned during 2Q'08. The profit before tax fell by 53% and resulted in a loss during 2Q'08. The bank had made a loss in FY07 as well and PAT decreased gradually during the whole year, especially in the last quarter of 2007, when the merger became effective. However, the main reason the bank incurred losses for the year 2007.

The bank's NPLs increased during 2007 and have continued to do so during HY08. The total advances for the year 07 were Rs 64,468 mn of which Rs. 4, 489.049 mn was placed under non-performing advances status. The non performing advances for 2007 were 122.7%. The NPLs for HY08 have already reached 5,692.656 mn, 26.8% higher than that during the whole year 2007. The bank's earning assets-to-asset ratio has been falling. During HY08, the total assets of the bank increased more (9.4%) in proportion to the earning assets (4%). The bank's investments and lending to financial institutions have gone down.


The banking spread of the industry has remained high despite the SBP's tight stance on monetary policy. The lending rates increased following the tightening of the monetary policy, while the banks maintained their deposit rates. The increasing lending rates decreased the debt servicing capacity of borrowers (both corporate and consumers), leading to a higher level of NPLs in the second half of FY'08 leading to higher provisioning requirement for the whole industry, thus pulling down results. High lending rates subdued the credit demand by the private sector and resulted in slower advances growth. Also, the country's large scale manufacturing activity slowed-down. Due to this, the banks are shifting from advances to investments as the key source of funds. Banks were more prudent in lending. Likewise RBS also revised its credit policy. This trend was witnessed for the whole industry in FY07, but H1'08 show a decline in investment specially the held for trading securities element, due to a bearish trend in the stock market. There is a trend of growing consolidation in the banking sector. Many banks have or are expected to consolidate in order to meet the Minimum Capital Requirement set by the SBP.


RBS is expected to face tough competition from other bigger players in the industry and major foreign banks. The bank had made a strategic move by merging with and into Prime Commercial bank limited and had intended to enter the Pakistan's fast growing SME segment taking advantage of Prime Commercial Bank Ltd's strength and established client base in the SME segment. However, the tightening of the monetary policy, rising interest rates, inflation and increased fuel and commodity prices have reduced the debt serving ability of this sector. Small and medium enterprises are expected to find it difficult to cope with rising cost of production and at the same time pay interest. The bank's profitability may fall. Thus, RBS will need to implement rigid and strict credit policy in the future and improve its recovery lines. The bank can expect better results in the future by focusing on its Islamic banking as the Islamic banking sector is experiencing robust growth. RBS has three Islamic branches and it intends to open more. Thus, the future profitability of the bank will not be impacted so greatly in the future.