Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 1 Trends in Pakistani Banking Sector

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 2 Sector transformation  lower systemic risk  In the past 8 years, Pakistan’s banking sector has undergone transformation from a loss generating, state dominated, under- capitalized, poor asset quality and inefficient sector to a predominated privately owned, highly profitable, fast growing, leaner, well capitalized and cleaner balance sheet holding sector.  However, the sector is NOT insulated from weakening in the real economy.

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 3 Aggregate Post-tax Profits

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 4 Return on Equity (ROE)

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 5 Return on Assets (ROA)

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 6 Banking Deposit Growth CAGR: 12.6% pa

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 7 Advances (Loans) Growth CAGR: 15.3% pa

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 8 Higher interest rates  higher spreads

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 9 Net NPLs as % of Net Loans

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 10 Analyzing a Bank – Concepts & Application

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 11 Quantitative Analysis  FINANCIAL SOUNDNESS  Profitability  Solvency  GROWTH and FUNDING MIX  Deposits  Borrowings  Loans  Investments  RISK ASSESSMENT  Credit Risk  Market Risk  Liquidity Risk

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 12 Risk Assessment  CREDIT RISK  Concentration in fewer sectors.  How much of banks’ lending is to pro-cyclical sectors.  LIQUIDITY RISK  GAP Analysis: Difference between a bank’s liabilities and assets as both mature over time.  MARKET RISK  Exposure to equities, derivatives and bonds.

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 13 Non-Quantitative Factors  Ownership  Market Positioning & Strategy  Product Mix & Delivery Channels  Human Resource Quality  Internal Control Systems  IT Platform (Core Banking Solution, ATM Network, On-line networks, Internet banking, etc. )  Investor Relations

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 14 Profit & Loss Statement

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 15 Balance Sheet

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 16 Return on Assets (ROA)

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 17 Return on Equity (ROE)

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 18 Revenue Analysis

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 19 Net Interest Margin (NIM)

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 20 Non-Interest Income

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 21 Balance Sheet Growth - Liabilities

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 22 Balance Sheet Growth - Assets

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 23 Loan Book

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 24 Efficiency Ratio

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 25 Building a financial model

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 26 Key Assumptions – Macro/Sector  Translate economic/sector analysis in forecasts for:  M2 growth  Interest rates  Deposit growth  Advances growth  Sources of economic forecasts  Multilaterals: IMF/WB/ADB  State Bank of Pakistan  Consensus forecasts maintained by data services such as Reuters, Bloomberg, etc.

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 27 Key Assumptions – Bank Specific  Balance Sheet – Develop forecasts for:  Deposit Growth  Deposit Mix  Borrowing  Advances Growth  Non-Performing Loans (NPLs)  Investment Portfolio Mix  Cash/FI lending  Net Interest Margin (NIM) – Forecast based on:  Interest Yield = f (interest rates, portfolio mix)  Cost of Funds = f (interest rates, deposit/borrowing mix)

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 28 Key Assumptions – Bank Specific  Non-Interest Income  Fee income = f (trade, guarantees, advisory, etc)  FX income = f (exchange rate, trade, remittances)  Dividend/Capital Gains = f (equity portfolio)  NPL provisioning  NPL charge = f (credit risk)  Administrative Cost  Taxation Rate (35%)

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 29 Allied Bank – Key Assumptions

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 30 Allied Bank – P&L Statement

Security Analysis (Fall 2009)Asif Ali Qureshi, CFA 31 Allied Bank – Balance Sheet