FINANCIAL ANALYSIS OF ISLAMIC BANKS

MUHAMMAD SHARIQ (shariq_green@yahoo.com)
June 29 - July 5, 2009

The overall performance of the Islamic banks in Pakistan is gradually increasing in terms of market share, deposits mobilization, and financing portfolio. In Pakistan, six banks are operating as full-fledged Islamic banks. Two banks are listed in Pakistan while others are not listed. The listed banks are Meezan Bank and BankIslami while Emirates Global Islamic Bank, Dubai Islamic Bank, Dawood Islamic Bank, and Albaraka Islamic are operating as not listed at local stock exchanges.

According to State Bank of Pakistan report, as on December 2008 the profit after taxation stood at the level of Rs1.81 billion as compared to Rs1.58 billion as on December 2007. The main contribution came from markup income, recorded at Rs21.95 billion as on December 2008 while Rs12.70 billion in the same period last year.

On the flip side, mark up expenses almost doubled and reached at the level of R 11.32 billion as compared to just Rs6.80 billion. Similarly, net markup income stayed at Rs10.63 billion as compared to Rs5.90 billion, showing that performance of the IB's as compared to previous decade became more prosperous and customers opting for Islamic banking.

Operating expenses of the banks are gradually increasing because participants are in expansion phase and increasing their number of branches.

Analyzing the financial performance of the industry leader i.e. Meezan Bank, the profit for the period ended December 2008 dwindled by 36 per cent to Rs621 million (EPS: Rs1.26) as compared to Rs963 million (EPS: Rs1.96) in the same period last year and 35 per cent right shares were issued by the bank. Administrative expenses increased with the rate of 50 per cent to Rs2,626 million in CY08 while this was Rs1,755 million in CY07.

On the other hand provisions against non performing financing (net) stood at Rs428 million in CY08 as compared to Rs435 million in the same period last year, decreasing by 2 per cent YoY basis. Return on financings stood at Rs6,803 million as compared to Rs4,573 million in the same period last year, reflecting YoY growth of 49 per cent.

On the other hand return of deposits and other dues stood at Rs3,088 million as compared to Rs2,451 million, it hiked at the rate of 26 per cent. Net spread earned amount stood at Rs3,714 million while Rs2,121 million in the same period last year, realizing the net percentage gain of 75.

Doubling of administrative expenses eroded the income of BankIslami. The bank has posted loss after tax of Rs52.930 million (LPS: Rs 0.12) for CY08 as compared to loss of Rs37.023 million (LPS: Rs0.13) for CY07. Lower loss per share is mainly because of issue of 23.36 per cent right shares in September 2008.

A closer look at the figures indicate that total income of the bank increased to Rs804.743 million in CY08 as compared to Rs410.127 in CY07. Similarly, other expenses increased to Rs1,033 million in CY08 from Rs510 million resulting in Rs229 million loss before tax in CY08 as compared to Rs100 million loss in CY07.

Out of total of Rs1,033 million other expenses in CY08, Rs1,028 million pertained to administrative expenses. The amount under this head was less than half or Rs507 million during CY07. The hike in administrative expenses can be attributed to expansion in branch network.

Similarly, non-listed banks also posted decline in profit or declared loss for the period under review. The main factors were increasing administrative expenses, non-performing loans and return on deposits.

Dawood Islamic Bank for the period ended December 2008, posted an after tax profit of Rs32.7 million while the bank posted Rs51 million for CY07. The size of an overall balance sheet of the bank increased by Rs9.56 billion as on December 08 as compared to Rs6.8 billion in CY07.

Moreover the deposit base of the bank was expanded by 78 per cent to Rs5 billion as compared to Rs2.8 billion. While, the financings and investments stood at Rs5.64 billion and Rs2.0 billion, showing YoY increase of 51 per cent and 59 per cent respectively.

Mark up income of the bank for the period ended CY08 realized growth of 242 percent and reached to Rs855 million. Similarly, commission income of the bank was augmented by 241 per cent and touched the level of Rs21 million. While other income including foreign currency income was boosted by 811 per cent to Rs26 million. Administrative expenses soared by 162 per cent to Rs434 million, due to vigorous branch expansion and development of human resources.

The equity of the bank YoY wise increased to Rs4.1 billion in 2008 as compared to Rs3.6 billion in 2007. This happened due to strong management support, sponsor's commitment to strengthen the bank.

Emirates Global Islamic Bank (EGIBL) for the period ended December 2008 posted loss after tax of Rs260 million while bank recorded Rs84 million as loss after taxation for CY07. The main factor behind this huge loss was administrative expenses because the bank was gradually increasing its branch network to increase customer base. The number of customers of the bank rose by 272 per cent to 13,502 as against 3,631 in 2007. In addition, administrative expenses were boosted by 140 per cent to Rs949 million as compared to Rs395 million.

Net spread earned realized growth of 80 per cent and reached to Rs462 million as compared to Rs256 million. Furthermore, return earned on financings, investments and placements grew by 178 per cent to Rs1,060 million as compared to Rs381 million in CY07. On the other side, return on deposits hiked by 378 per cent to Rs598 million as compared to Rs125 million during the same period last year.

The equity of the bank net of losses as on December 2008 stood at Rs10.9 billion as compared to Rs4.5 billion in 2007. Total asset size grew to Rs16.5 billion from Rs8.9 billion as at December 2007.

Size of the bank almost doubled in 2008, reached at the level of Rs10.9 billion as compared to Rs4.5 billion in 2007. Moreover, earning assets of the bank i.e. advance and investments increased to Rs9.9 billion and Rs2.7 billion respectively. While in 2007, advances and investments were of Rs2.6 billion and Rs2.2 billion correspondingly.

Albaraka Islamic Bank profit for the period ended December 2008 profit was converted into loss. The bank posted loss of Rs73 million for the period ended CY08 while bank recorded Rs245 as profit for CY07. An earning of the bank was mainly dented by the heavy provisions against non-performing loans and rising administrative expenses.

The NPL's against advances reflected manifolds increment and reached at the level of Rs141 million as compared to Rs17 million in CY07. Similarly, administrative expense also boosted by 71 per cent to Rs572 million as compared to Rs335 million.

The return on financings reached to Rs1764 million as compared to Rs1493 million, realizing growth of 18 per cent. While return on deposits reflecting net increment of 22 per cent and stood at Rs1333 million as compared to Rs1089 million in CY07. The net spread earned recorded growth of seven per cent and touched the level of Rs431 million as compared to Rs403 million.

The loss for the period did not include impairment loss of Rs34 million against 'Available for Sale securities'. The said impairment loss has been determined on the basis of valuation of such mutual funds using the net asset values as of December 31, 2008. This amount has been ejecting out from the balance sheet as "deficit on revaluation of assets".

Assets of the bank showed growth of 10 per cent and reached to Rs24 billion as on December 2008 as compared to Rs22 billion in December 2007. Deposits size of the bank grew by 8 per cent to 18 billion while Rs16 billion in the same comparable period of last year. The bank is gradually increasing financings portfolio and financings realized growth of 14 per cent and reached to Rs14 billion while Rs12 billion previously. Due to turmoil situation in the equity market investments of the bank slightly plunged by 2 per cent to Rs1.12 billion as compared to Rs1.15 billion in CY07.

The earning of the Islamic banking industry remained stable at the end of December 2008. The return on assets on (average assets) integral at 0.8%, growth in assets at 10%, growth in deposits at 17.7% and growth in financings stood at 1.8%. The profit before and after tax profits of the industry as compared to December 2007 realized growth. The profitability has been augmented by more than impartial increment in net mark up income, which effectively covered the negative affect of provisioning & loan loss charges. The coming period would be favorable for the Islamic Banks for better performance due to strong measures which have been taken by the state Bank of Pakistan to boost this industry. Moreover, on individual basis all banks are increasing their net work, attracting customers and making their management more professional and dynamic.