Internship Report on Arif Habib Bank Limited Pakistan

SUMMER INTERNSHIP REPORT On

Submitted by Abdul Moeed Qureshi 01-122081-130 MBA-2(C) Submitted to Prof. Col. Imtiaz A Mohr Internship Coordinator

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Table of Contents 1.

Executive Summary

2.

Introduction

3

2.1

Company background information

2.2

Company background

Company’s Analysis 3.1

3.2

3.3

3.4

4

Operation Analysis 3.1.1

Business and Branch Network

3.1.2

Information Technology

Financial Analysis 3.2.1

Operational analysis

3.2.2

Balance sheet analysis

3.2.3

Ratio analysis

Human resource assessment 3.3.1

Board of directors

3.3.2

Management team

Marketing analysis 3.4.1

Electronic

3.4.2

Print

Environmental Analysis 4.1

Industry and market analysis 4.1.1

Major product lines market segments 4.1.1.1 Major product line 4.1.1.2 Market segments

4.1.2 4.2

Growth rate for the entire industry

Competitor analysis 4.2.1

Major competitors

4.2.2

Their market shares

4.2.3

Their goals their strategies 4.2.3.1 Askari bank 4.2.3.2 Faysal bank 4.2.3.3 KASB bank 3

4.2.3.4 Bank al-habib 4.2.3.5 Atlas bank 4.3

5

Technology analysis 4.3.1

Technical methods that affect the industry

4.3.2

Innovation

Brief on the department worked during internship and specific/leading contribution made 5.1

Brief Introduction

5.2

Department overview

6

Identification of a main problem

7

Findings

8

Conclusions and Recommendations

9

Appendix

4

1

Executive Summary

Banking sector of Pakistan has been transformed within a short period of 5 years (CY2000-05) from a sluggish and government-dominated sector to a much more agile, competitive and profitable industry. Speed and sequencing of banking sector transformation and its role in promoting economic growth is now a leading story of a sector success. Within Pakistan SBP offers a story of what effective leadership of regulator and change management and corporate governance can achieve and offer. Outside Pakistan it is serving to offer rich lessons in what difference governance of regulator can make and how bank restructuring and privatization can change the landscape of the industry. Arif Habib Bank Limited started operations in August 2006 and became a profitable entity within one year. AHBL had started off with a high capital base and is positioned to take advantage of the business synergies and complementaries afforded to it by its sponsoring group. The bank has a quality management team, a first-class technology platform, and commitment to global practices. Its business strategy is based on the "block-building" principle wherein profitable niches are tapped progressively. I did my eight weeks internship at Arif Habib Bank Limited F-6 Super Market Branch. This branch also serves as Regional Office of AHBL in Islamabad and Rawalpindi Zone. During internship I was rolled over in departments but my penetration was developed in CIBD (Corporate & Investment Banking Division). The work that I did during my internship primarily includes voucher checking, checking a/c opening pre-requisites, a/c opening backlog checking, analyzing inward and outward clearing at closing, making credit proposal, credit analysis of clients, ratio analysis of statements, preparing standard credit memorandum (SCM). The main problem that I identified during my internship period was the lack of awareness about exact job descriptions of employees, the inability of employees to approach higher officials easily, undefined job tasks in operations.

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Some of the suggestions in this respect were the introduction of compulsory weekly meeting of all staff at branch level to discuss the discrepancies in every regard, introducing job specific training to employees and adhering to the criteria laid out by the HR department for job advancements in complete faith and employee training sessions on regional level. 2

Introduction

2.1

Central Background Information

State Bank of Pakistan (SBP) which is the Central Bank of the country has been entrusted with the responsibility for an ongoing effective supervision of the banking sector. The relevant provisions of law which vest powers in State Bank of Pakistan (SBP) to carry out inspection of banks are contained in the Banking Companies Ordinance, 1962. Besides, State Bank of Pakistan Act, 1956 and the Bank’s Nationalization Act, 1974, The Financial Institutions (Recovery of finances) Ordinance, 2001, Companies Ordinance, 1984 and Statutory Regulatory Orders (SROs) are the relevant legislations, which cover the activities concerning the banking sector. The financial sector in Pakistan comprises of Commercial Banks, Development Finance Institutions (DFIs), Microfinance Banks (MFBs), Non-banking Finance Companies (NBFCs) (leasing companies, Investment Banks, Discount Houses, Housing Finance Companies, Venture Capital Companies, Mutual Funds), Modarabas, Stock Exchange and Insurance Companies. Under the prevalent legislative structure the supervisory responsibilities in case of Banks, Development Finance Institutions (DFIs), and Microfinance Banks (MFBs) falls within legal ambit of State Bank of Pakistan while the rest of the financial institutions are monitored by other authorities such as Securities and Exchange Commission and Controller of Insurance. Under the WTO (World Trade Organization) commitments the operational status of branch network of foreign banks operating in Pakistan as on 31-12-1997 has been protected and frozen. However, existing foreign banks having less than 3 branches can have branches to the extent of maximum number of 3 only. New foreign banks desirous of entering banking business in Pakistan will now be required to incorporate

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as domestic bank under the local laws. The branches of foreign banks operating in Pakistan can also be converted into a local commercial bank by incorporating under the local laws and subject to a minimum paid up capital of Rs.1 billion provided foreign share holding is restricted to a maximum of 49%. At present there are 41 scheduled banks, 6 DFIs, and 2 MFBs operating in Pakistan whose activities are regulated and supervised by State Bank of Pakistan. The commercial banks comprise of 3 nationalized banks, 3 privatized banks, 15 private sector banks, 14 foreign banks, 2 provincial scheduled banks, and 4 specialized banks. Under the Banking Companies Ordinance, 1962 the State Bank of Pakistan is fully authorized to regulate and supervise banks and development finance institutions. During the year 1997 some major amendments were made in the banking laws, which gave autonomy to the State Bank in the area of banking supervision. Under Section 40(A) of the said Ordinance it is the responsibility of State Bank to systematically monitor the performance of every banking company to ensure its compliance with the statutory criteria, and banking rules & regulations. In every case in which the management of a bank is failing to discharge its responsibility in accordance with the applicable statutory criteria or banking rules & regulations or is failing to protect the interests of the depositors or for advancing loans and finance without due regard for the best interests of the bank or for reasons other than merit, the State Bank is empowered to take necessary remedial steps. The State Bank of Pakistan can, interlay, exercise the following powers vested upon it under the Banking Companies Ordinance:•

Prohibiting the bank from giving loans, advances & credits.

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Prohibiting the bank from accepting deposits.

•

Cancel license of a bank.

•

Give directions to the bank as it deem fit.

•

Remove chairman, directors, chief executive or other managerial persons from the office and appoint a person as chairman, director or chief executive.

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Supersede the Board of Directors.

•

Direct prosecution of directors, chief executive or other officer.

•

Caution or prohibit bank against entering into any particular transaction(s).

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Require bank to make changes in management.

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Appoint its officers to observe the manner in which affairs of bank/its branches/office are conducted.

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Winding up the bank through high court.

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Apply to Federal Government for an order of moratorium in respect of a bank and to prepare scheme of reconstruction or amalgamation.

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Impose penalties including civil money penalties.

The State Bank has framed Prudential Regulations for banks and Rules of Business for DFIs that present a prudent operating framework within which banks and DFIs are expected to conduct their business in a safe and sound manner taking into account the risks associated with their activities. These regulations incorporate the spirit and essence of BIS regulations and are constantly watched for possible improvement so that their enforcement yields the best results to promote the objectives of supervision. The State Bank is empowered to determine Statutory Liquidity and Cash Reserve Requirements for banks/DFIs. Presently the Cash Reserve Requirement is 5% on weekly average basis subject to daily minimum of 4% of Time & Demand Liabilities. In addition to that banks are required to maintain Statutory Liquidity Requirement (SLR) @ 15% of their Time & Demand Liabilities. Similarly, DFIs are required to maintain SLR of 14% and Cash Reserve of 1% of their specified liabilities. Additionally, The Banking Companies Ordinance had been amended in 1997 which empowers the State Bank to prescribe capital requirements for banks. In exercise of these powers the State Bank has laid down Minimum Capital Requirements for banks based on Basle capital structure. The banks have to maintain a Capital Adequacy Ratio in a way that their capital and unencumbered general reserves are, at the minimum, 8% of their risk weighted assets, and effective from 1st January, 2003 banks are required to maintain a minimum paid up capital level of Rs.1 Billion. The State Bank of Pakistan announced over 50 percent reduction in minimum capital requirement (MCR) to facilitate the banking sector. This decision has been taken in view of the general global slowdown in growth and capital accumulation by financial institutions and representations from shareholders, the SBP said., “Now the banks are

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required to raise their minimum paid up capital (free of losses) to Rs 10 billion by December 31, 2013, instead of earlier set limit of Rs 23 billion”1 According to the circular, the banks will now be required to raise their minimum paidup capital (free of losses) to Rs 6 billion by December 31, 2009; Rs 7 billion by December 31, 2010; Rs 8 billion by December 31, 2011; Rs 9 billion by December 31, 2012; and Rs 10 billion by December 31, 2013. Scheduled Private Commercial Banks in Pakistani Banking Industry2 are as followed:

1

•

Allied Bank of Pakistan

•

Arif Habib Bank Limited

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Askari Bank

•

Atlas Bank

•

Bank AL Habib

•

Bank Alfalah

•

Barclays Bank

•

Faysal Bank

•

First Women Bank

•

Habib Bank

•

Habib Metropolitan Bank

•

JS Bank

•

KASB Bank

•

MCB Bank

•

My Bank

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National Bank of Pakistan

•

NIB Bank

•

Royal Bank of Scotland

•

Samba Bank

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Saudi Pak Commercial Bank

•

Soneri Bank

SBP BSD Circular No 7 of April 15, 2009

Source: http://www.sbp.org.pk/f_links/index.asp (Due to focus of this study on commercial banks, only private commercial banks incorporated in Pakistan are quoted) 2

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2.2

•

Standard chartered Bank

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United Bank Company Background

Arif Habib Group is among the largest, most innovative and fastest growing Business Group in Pakistan. In addition to Financial Services (Asset Management, Brokerage Services, Corporate Finance and Project Advisory, Private Equity and Commercial Bank), the Group has also interest in Fertilizer, Cement and Real Estate. This has been made possible by a strong brand franchise built on decades of first-rate services to clients. Managing assets in excess of PRs. 37 billion (US$ 617 million), the Group holds interests in the securities brokerage, investment and financial advisory, investment management, commercial banking, commodities, private equity, cement and fertilizer industries. The Group takes pride in its orientation towards client service. It believes that its key success factors include continuous investment in staff, systems and capacity building, and its insistence on universal best practices at all times. The holding

company of the Group. Holds controlling

interest in the enterprises listed below. The securities brokerage company. Member of all three stock exchanges and the National Commodities Exchange. The AM2 rated asset management company. Manages a number of mutual funds and investment plans. The commercial bank with the mission to be "The bank for everyone". The proposed private equity venture with the objective to develop a vast new industry in Pakistan. The upcoming commodities firm at the (DMCC).

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Arif Habib Bank Limited is one of the fastest growing Commercial Banks of the country supported by the strong sponsorship of Arif Habib Group. AHBL started operations in August 2006 and became a profitable entity within one year. AHBL had started off with a high capital base and is positioned to take advantage of the business synergies and complementaries afforded to it by its sponsoring group. The bank has a quality management team, a first-class technology platform, and commitment to global practices. Its business strategy is based on the "block-building" principle wherein profitable niches are tapped progressively. The Bank has an Authorized Share Capital of 6.0 Billion and Paid-up Share Capital of 5.0 Billion. The management intends to double it in a short period by injection of fresh capital which will strengthen the bank further. The Bank has a network of 35 Branches/Sub Branches3. The branch network covers Sindh, Punjab, NWFP, and Azad Jammu and Kashmir. The Bank plans to open further offices to better cover all four provinces within a short time span. All branches are Real Time Online providing customers the facility to deposit at or withdraw from any of our Branches anywhere in Pakistan without incurring any additional charges making banking with us a faster, reliable and a convenient experience. Objective: To be a Universal Bank in terms of providing products and services in all key segments of Banking. Vision

“We are committed to be recognized as the preferred supplier of financial services to the markets we serve” Mission: 3

AHBL Quarterly_Report_March_2009

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“To differentiate ourselves as an institution built on Trust, Integrity, Good Governance, and Commitment to deliver value to all stakeholders i.e. customers, creditors, employees, investors and the community at large. Reach out and provide financial services to under-served and un-served customer segment” Devotion “To be recognized as a preferred supplier of financial services to the markets we serve” Business Approach & Core Values It is their business objective to be a Universal Bank in terms of providing products and services in all key segments of banking i.e. Corporate, Wealth Management, Commercial Mid Market / SMEs and Consumer Banking. Branch expansion plan is carried out to have a network of 100 Branches by 2011. The projected Branch network is based on centralized processing centre (factory and boutique concept) with secure and Real Time IT capability. Hence the Delivery Channel configuration is dependent upon the potential in each location in terms of size, Product Delivery Template and Head Count for each Branch. In terms of Statutory Capital Requirement, they are determined to meet and in fact exceed the Minimum Capital Requirement-MCR benchmark via injection of Capital and retention of Retained Earnings. Mandatory allocation of 20% of after tax profit as Free Reserves until such time our free reserves are equal to MCR will further strengthen their equity base. 12

3

Company’s Analysis

3.1

Operation Analysis

3.1.1

Business and Branch Network

AHBL is currently operating with 35 branches throughout Pakistan (breakup is given in coming part). The Bank’s strategy is to establish a network of 100 branches during the next three to five years. Several new sites have already been identified at strategic locations. All branches are online, equipped with state of the art technology capable of providing Real Time banking services to the clients. A professional team has been developed to meet the expectations of demanding customers. This is in line with the Bank’s strategy to build an infrastructure of international standard to attract and retain a sizeable client base. The growth in the economy provided them numerous opportunities and they remained selective pursuing business through which strike a balance between growths and prudent like risk taking and diversification. AHBL’s performance in 2007 was a result of the pragmatic and well planned efforts of the management to attain present strategic goals aimed at providing quality services to their customers and at the same time enhance the shareholders value. Despite the high growth level, they continued to ensure that high customer satisfaction and service quality levels are maintained and they are appreciative of the trust and confidence that their customers place in them. Management firmly believe that the success of the Bank lies in expanding their way of financial services and seamlessly delivering innovative solutions to meet customer requirements across all the platforms. Accordingly, they work closely with their customers in order to understand their business needs and to address them with high quality tailored financial products so that they are viewed as a strategic partner in the business growth. Management is pleased and encouraged to receive a very favourable response to their endeavours from their respective customers. In all, management believes that the economic outlook for the coming year is bright with the right mix of products and services and their committed workforce; they can 13

deliver yet another superior performance in next year. Bank will continue to build infrastructure, leverage the cutting edge technology in plan, introduce products and services, manage risk efficiently and effectively and generate alternative revenue streams. Management has ambitious plans for the coming year and they are all ready to make it happen to the benefit of our stakeholders. Bank’s focus and energy for the coming years evolve around customer base and look to expand network of branches throughout the country. Arif Habib Bank has a network of 354 Branches/Sub Branches in major districts of Pakistan. The branch network covers Sindh, Punjab, NWFP, and Azad Jammu and Kashmir and details are as under: Sindh •

Head Office, Karachi (Arif Habib Centre)

•

I.I Chundrigar Road Brach, Karachi

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Boat Basin Branch, Karachi

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Gulshan-e-Iqbal Branch, Karachi

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Atrium Mall Saddar Branch, Karachi

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Karachi Stock Exchange Branch, Karachi

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Cloth Market Branch, Karachi

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Gulsha-e-Johar (Sub Branch), Karachi

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Korangi Branch, Karachi

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Adamjee Nagar (Sub Branch) , Karachi

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Bahadurabad (Sub Branch) , Karachi

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S.I.T.E (Sub Branch) , Karachi

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Dolmen City (Sub Branch) , Karachi

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Hyderi (Sub Branch) , Karachi

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Nooriabad (Sub Branch) , Karachi

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Khayaban-e-Jami Branch, Karachi

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M.A Jinnah Road Branch, Karachi

Punjab 4

AHBL Quarterly_Report_March_2009

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Yarn Market Branch, Faisalabad

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Liaquat Road (Sub Branch), Faisalabad

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GT Road Branch, Gujranwala

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GT Road Branch, Gujrat

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Y Block DHA Branch, Lahore

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Lahore Stock Exchange, Branch

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Multan Road (Sub Branch), Lahore

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Ferozpur Road (Sub Branch), Lahore

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Gulberg Branch, Lahore

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Abdali Road Branch, Multan

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Hussain Agahi (Sub Branch), Multan

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Bank Road, Rawalpindi

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Sadiqabad Branch, Sadiqabad

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Paris Road Branch, Sialkot

Federal Capital •

Super Market Branch, Islamabad

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Islamabad Stock Exchange (Sub Branch), Islamabad

NWFP •

Islamia Road Branch, Peshawar

Azad Jammu and Kashmir • 3.1.2

Mirpur AJK Branch, Mirpur Information Technology

The Management is committed to service excellence, cost efficiencies and sound risk management policies, which are closely integrated with business objectives and AHBL’s growth strategy. Furthermore, Bank’s planning process considers both current and further needs vis-à-vis emerging best practices and new technology. As they claim that, “we strive to design solutions for accelerated progress”

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The core banking application software hPlus5 is functioning successfully in all the branches. hPlus is proven, integrated banking application capable of generating standard and customised reporting system. All the branches are Real Time on line and have fully functional ATMs. In addition to a host of normal business activities, they are formulating an IT strategy roadmap to reach end-state vision designed to incorporate leading edge technologies and processes across all IT domains. Their implementation provides the framework and capabilities to better align business and IT, and support long term transformation initiatives for AHBL. 3.2

Financial Analysis

Talking about AHBL specifically, this Bank is purely a fresh Bank with strong sponsors. Since Bank’s inception economic shocks were usual and banks are no exemption to these shocks. The instability in economy also affected the Bank’s performance for the year under review. Still the profit for previous years shows managements’ effective policies and viability. President of AHBL is recently changed and now the person who is holding the seat of President and CEO is highly experienced and known as the master of acquisition as he led a consortium of acquiring the small scale banks in Pakistan to make a single but highly strong bank. He is none of the other former MCB President & CEO Mr. Husain Lawai. So let’s see the financial results of AHBL. In analysis portion, this financial analysis is segregated in to: •

Operational Analysis

•

Balance Sheet Analysis

•

Ratio Analysis

3.2.1

Operational Analysis

In operational assessment we will mainly focus on advances, deposits, investments, earning per share, profit/losses and capital detail. These will be on primary focus and more detail will be discussed about their trend throughout the period given. 5

Linux based application software

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Financial Highlights of the Bank for the year ended December 31, 2008 are as follows:

Operational Highlights 2008 2007 Rupees in '000 (Loss)/Profit for the year before taxation Equity Paid-up Capital Deposits Advances (Net of Provisions) Investments Advances to Deposit Ratio Earnings per share No. of Branches

(347,274) 61,321,731 5,000,000 16,616,466 15,758,678 5,094,613 94.84% (0.38) 33

326,918 6,324,139 4,500,000 9,464,785 8,029,248 5,408,425 84.83% 1 12

The Bank continued its growth momentum on the operational front. The Branch network of the Bank expanded from 12 to 33 and 35 according to the 1H ending report 2009. While the deposits and advances increased by 96% and 76%, to Rs. 15,758 million and Rs. 16,616 million respectively, during the year under report. The Bank incurred a loss before tax of Rs.347.3 million as compared to a profit before tax of Rs. 326.9 in the preceding year. This was mainly due to provisions for classified advances, amounting to Rs.623.2 million. The Bank posted a loss after tax of Rs. 191.4 million during the year as against profit after tax of Rs.230.165 million for the previous year. The equity of the Bank stood at Rs. 6.133 billion as at end 2008, decrease of 3.03% over the previous year. Pursuant to the global financial and economic crises, coupled with the local problems, capital markets of Pakistan recorded a substantial decline in the last quarter of 2008. This decline triggered the impairment testing under the International Accounting Standard ‘Financial Instrument: Recognition and Measurement’ (IAS 39) and ‘Impairment of Assets’ (IAS 36) respectively. The State Bank of Pakistan vide BSD Circular No. 4 dated February 13, 2009 allowed banks to benefit from the Securities and Exchange Commission of Pakistan (SECP) notification vide SRO 150(I)/2009 dated February 13, 2009 allowing the impairment loss, if any, recognized as on December 31, 2008 due to mark to market valuation of listed equity investments held as “Available for

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Sale”, to be taken directly to equity. The amount taken to equity, including any adjustment / effect for price movements, shall be taken to profit and loss account on quarterly basis during the year ending December 31, 2009. The Bank accordingly decided to charge the impairment directly to equity, considering this as a temporary decline. During the year under review, the management has decided to charge the goodwill amounting to Rs. 60.79 million to the profit and loss account, which was recognized at the time of acquisition of Rupali Bank Limited – Pakistan Operations in the year 2006. During 2009, the Bank will have access to additional resources generated through a wider network of branches. These resources will be invested prudently to generate additional and incremental revenue streams to improve the profitability of the Bank. The cost of operations will receive particular attention of the management to keep it under control. Future Prospects of AHBL The Bank is improving its out reach by installing ATM machines at selected PSO petrol pumps in Karachi, Lahore, Faisalabad and Islamabad. This initiative will greatly facilitate the customers, and enable the Bank to win over new customers as well. Share Capital and Listing6 During the year, Bank's shares were listed on all the stock exchanges in Pakistan through offer for sale of shares by Arif Habib Securities Limited (AHSL- the holding company). AHSL disinvested 119,748,500 ordinary shares from their equity in the Bank. Further, shares amounting to Rs 500 million were issued as bonus to its shareholders in October, 2008 out of the share premium account of Rs. 1,500 million, thus increasing the paid up capital of the Bank to Rs 5,000 million. Credit Rating for CY2008 JCR-VIS Credit Rating Company Limited has assigned the Bank credit ratings of ‘A’ for the medium to long-term and ‘A-2’ for short term, with a stable outlook.7 6 7

AHBL Yearly report 2008 Annual Report 2007 AHBL

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3.2.2

Balance Sheet Analysis

A comprehensive 3 year trend is depicted in yearly form to see the decreasing/increasing trend in balance sheet of AHBL as under:

Comparative Financials of AHBL (03 years) 2006 ASSETS Cash and Balances with treasury banks Balances with other banks Lending to financial institutions Investments-Gross Advances-Gross Operating fixed assets Deferred tax assets Other assets Total Assets-Gross Provision against non performing advances Surplus/Deficit on revaluation of investments Provision held against other assets TOTAL ASSETS - NET OF PROVISIONS LIABILITIES Deposits and other accounts Borrowings Bills payable Sub-ordinated loans Deffered tax liabilities Other liabilities NET ASSETS / LIABILITIES

Rupees in millions 2007 2008

228.374 645.650 1,079.286 1,752.655 1,564.608 385.074

753.845 52.551 2,855.582 5,441.370 8,157.709 597.515

227.130 5,882.777 (140.239) (21.787) (24.372) 5,696.379

447.992 18,306.564 (128.461) (32.945) (24.372) 18,120.786

1,349.649 65.580 200.000 5,575.553 16,540.341 927.882 360.893 1,069.894 26,059.792 (751.663) (480.940) (24.372) 24,802.817

2526.271 3.899

9464.785 1748.603 384.603

16616.466 1869.94 75.963

0.105 93.328 3072.776

39.867 181.776 6301.576

420.328 5820.12

3000

5000 1000 64.828 250 (182.097) 6132.731 (312.611)

2471.982 1585.875 886.107

REPRESENTED BY Equity Share capital Share premium Statutory reserves General reserves Un appropriated profit Total Equity Deficit on revaluation of assets-net

75.179 3093.974 (21.198)

4500 1500 64.828 66.567 192.744 6324.139 (22.563)

RESULTS OF OPERATIONS Mark up / Returns / Interest earned Mark up / Returns / Interest expensed Net Mark up / Interest Income

142.802 23.309 119.493

617.854 252.338 365.516

18.795

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Total Non-Mark up / Interest Income Non Mark up / Interest Expense Profit before provisions Provision against Non Performing Loans and Advances Profit before taxation Taxation Profit After Taxation

21.214 90.654 50.053

345.904 384.502 326.918

262.905 776.959 (970.476)

0.024 50.029 (43.945) 93.974

326.918 96.753 230.165

(623.202) (347.274) (155.866) (191.408)

The total assets for 2008, amounted to Rs. 24,802,817 (‘000), advances of the bank, which include the loan and other services that the bank receives interest on, had the greatest share of Rs. 157,586,678 (‘000), followed by investments made by the bank, for Rs. 5,094,613 (‘000). The total liabilities for the year 2008 amounted to Rs. 18,982,697(‘000), of which deposits and other accounts amount to Rs. 16,646,466(‘000) setting 88% of the total liabilities for Arif Habib Bank. While talking about Equity of AHBL, it remained Rs. 5,000,000 (‘000) in 2008 after an increase of 11.11% of 2007’s equity. For the year under review, due to different reasons majorly the economic downfall AHBL faced an after tax Loss of Rs. 191,408 (‘000) a major setback of 16.8% as compared to FY2007’s profit after tax Rs. 230,165 (‘000). AHBL’s top squad must focus this major downfall seriously and must design efficient strategies involving regional quad also to cope up with 2008’s loss. 3.2.3

Ratio Analysis

In this portion we will analyze important financial ratios of AHBL, also the comparative results in yearly form are depicted in table to see the trend of ratios and reason for increase or decrease can be identified.

Comparative Financials Information of AHBL (03 years)

2006 FINANCIAL RATIOS Return on Equity - ROE Return on Assets - ROA Profit before tax ratio Gross spread ratio Advances to deposit ratio - Gross Advances to deposit ratio - Net

Rupees in '000 2007 2008

3.06% 1.65% 35.03% 83.68% 61.93% 56%

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3.65% 1.27% 52.91% 59.16% 86.19% 84.83%

-3.29% -0.77% -14.05% 35.85% 99.36% 94.84%

Income to expenses ratio - times Cost to revenue ratio Debt to equity ratio Total assets to shareholder's fund - times NPL ratio Capital adequacy ratio SHARE INFORMATION Weighted average of number of shares outstanding Earning per share - EPS Market value of shares Price earning ratio - PE Book value of shares NON FINANCIAL INFORMATION Non performing loans - NPLs Number of employees Number of branches

1 43.45% 81.65% 2 8.96% 56.22%

2 64.76% 177.31% 3 1.57% 45.03%

2 70.36% 301.44% 4 6.97% 20.85%

85.1 1.1

10.24

351.78 0.65 15570 67.65 14

459.59 (0.380) 2925 (15.280) 11.640

140.215 192 7

128.461 319 12

1150.46 541 33

Return on Equity Return on Equity for FY2008 remained negative 3.29% showing approx 200% down as compared to FY2007 3.65%. Where as in FY2007 20% increase was seen than previous year. ROE for the year under review shown low results because of the after tax loss born and also the 11.11% increase in paid up capital of AHBL. Return on Assets - ROA AHBL since its inception is in continuous cycle of expanding its branch network and hr side etc. In this scenario, assets of AHBL are also increasing proportionally to expansion. But the net income of AHBL is not meeting up the pace of growing assets of company. The assets and income are in similar trend up till 2007 and showing growth but mismatch of their increasing trend affected company’s ROA. After 2006 ROA from positive side 1.65 times deteriorated to fall by 23% at 1.27 times in 2007. In the year under review due to major setback in non performing loans and other aspects, AHBL faced loss and ROA further deteriorated by 160% to negative 0.77%. Non-Performing Loans Year 2007-08 remained very costly for every lender and they faced the inability of their customer to meet the obligation. In the year under review the NPLs stood at 7% which marked increase of 344% as compared to year 2007 1.57%. This area strongly affected AHBL profitability. Profit before tax ratio

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Negative 14.05% in year 2008, due to one or the other reason this ratio also got affected and it appeared in negative region. Till 2007 AHBL earned profit in almost double increasing rate but in year under review it faced before tax loss. Debt to equity ratio According to this ratio, AHBL is highly leveraged company because debt financing is exceeding the equity financing by almost 2 times i.e. 301% in year under review as compared to 2007 177%. So the company is efficiently using the debt financing tool to get leverage. Earning per share – EPS Surprisingly, the results in year 2007 remained in falling trend. EPS seems on continuous deterioration and stood at negative 0.380. Stock prices of almost all the companies in FY 2007_08 recorded major decreases in their share price due to stock exchange crashes and economic unstableness. Advances to deposit ratio – Net In today’s scenario if any bank’s advances are more than deposits, it is seemed to be burdened. So let’s take the insight of AHBL’s advances to deposits ratio. So for the year under review, the banks advances are 94.84% of the deposits and still a margin of 4% is left, it means there is still a breath taking space to continue in the industry. This ratio has shown an increase of 11.8% as compared to the year 2007 which depicts 84.83%. 3.3

Human Resource Assessment

Work force of AHBL is very few in number as compared to other banks but if we compare their qualification and diversified experience, they would surely be ahead of them. The leadership matters here, i.e. Arif Habib himself remained the Chairman of

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KSE and also the Chairman of AH group. So continuing the niche of experience, he has accumulated best top management people from Pakistan and abroad in his squad. 3.3.1

Board of Directors

Mr. Arif Habib

Chairman

Mr. Husain Lawai

President and CEO

Mr. Mirza Qamar Beg (Resigned)

Director

Mr. Asadullah Khawaja

Director

Mr. Md. Abdul Hamid Miah

Director

Mr. Nasim Beg Director The BOD is accountable to the shareholders for setting the board policy guidelines and strategic directions, and the creation and delivery of strong sustainable financial performance and long term shareholder value. The chairman is responsible for leading the board ensuring its effectiveness, monitoring the performance and supporting the Executive Management. The Board’s role includes the task of monitoring management in such a manner as to appropriate policies and processes are in place, that they are operating effectively and that Bank is meeting its plans and budget targets. 3.3.2

Management Team

The management’s worth speaks itself if we critically analyze the experience and banking integration of each personnel in this team headed by Mr. Husain Lawai. The brief detail of the whole management team is as under. Husain Lawai President and CEO Mr. Lawai is a seasoned banker having vast experience in the banking and financial services industry. He holds a Masters Degree in Business Administration from Institute of Business Administration, Karachi. Mr. Lawai worked as President & Chief Executive Officer at Muslim Commercial Bank; Director, Security Investment and Finance Ltd, UK. He established Faysal Islamic Bank, Pakistan Branches, first Islamic Sharia compliant Bank (now known as Faysal Bank Limited) in Pakistan and was General Manger, Emirates NBD Bank for Pakistan and Far East (now known as Emirates Bank Limited). He was nominated Director in the Board of Directors of PIA and is also serving as the Chairman of their Audit Committee.

23

Kalim ur Rahman Chief Operating Officer Mr. Kalim-ur-Rahman joined AHBL as the Chief Operating Officer (COO) in December 2008. He graduated with honours from Government College, Lahore, and is a Fellow of the Institute of Bankers in Pakistan and the Institute of Chartered Secretaries and Managers. He has International and Domestic banking experience of over 44 years to his credit, out of which 30 years has been with foreign banks. He has worked with Grindlays Bank, Middle East Bank, Union Bank and Askari Bank in senior positions. At Askari Bank, he was President & CEO for seven years. His last assignment was with Arab Emirates Investment Bank PJSC, Dubai as the General Manager. Syed Mohammad Anwar Lutfullah Head of Operations & Information Technology Mr. Anwar Luftullah has joined us as SEVP / Head of Banking Operations & Information Technology. Mr. Anwar Lutfullah has ample experience in the disciplines of Information Technology and Banking Operations. He has more than 25 years of rich international and domestic work experience. Prior to joining AHBL he was with Financial Technology and Consulting (pvt.) Limited holding the office of Chief Executive. He has worked at Faysal Bank as Executive Vice President/ Group IT and Operations Manager; at Chase Manhattan Bank, NA as Programmer and Systems Analyst & at Unilevers as Analyst/ Programmer. He is a Gold medalist and a graduate of N.E.D. University of Engineering and Technology, Karachi. He is also a Chartered Information System Practitioner, UK & a professional member of British Computer Society (BCS). He was selected by Marquis Who's Who in Finance and Industry 1998-1999 and 1999-2000 and Electronic Payments International as Who's Who in Middle Eastern Electronic Banking in 1994. Mohammad Zahir Esmail Retail/Branch Banking, Consumer, SME and Commercial Banking Mr. Esmail joined Arif Habib Bank as Head of Retail/Branch Banking, Consumer, SME and Commercial Banking. He has over 40 years of banking experience to his credit. He Graduated from Karachi University, did his Diploma in Accountancy and Post Graduate Diploma in Islamic Banking. Mr. Esmail has worked locally as well as internationally with Habib Bank AG Zurich at Dubai/Oman, HBZ South Africa (subsidiary of HB AG Zurich) as Executive Director and General Manager, South Africa operations; Habib Bank AG Zurich, Pakistan as Country Manager Pakistan Operations; Habib Metropolitan Bank as Chief Executive Vice 24

President, on deputations of HB AG Zurich, Zurich, Switzerland; BankIslami Pakistan as Head of Corporate and Retail Banking. Khurshid Zafar Head of Corporate and Investment Banking Division Mr. Khurshid Zafar has joined the Bank as Senior Executive Vice President in February, 2008. Mr. Zafar is an MBA from Quaid-eAzam University and has vast experience of over 17 years of Corporate and Investment Banking. Prior to his joining the Bank he was serving as Country Head Investment Banking Group at Faysal Bank Limited. He has also headed the Corporate and Investment Banking at Saudi Pak Investment Company. Mr. Zafar served on the Boards of various Companies representing various financial institutions. Asif Qasim Head of Treasury Division Mr. Asif Qasim has more than 14 years experience in Treasury and Capital Markets. Prior to joining AHB, Mr. Asif Qasim has worked as Head of Treasury Division in Pak Oman Investment Company Limited. He started his Banking career with Metropolitan Bank and played a key role in establishing and managing Treasury Division of Metropolitan Bank Limited for more than 12 years. Syed Asif Ali Head of Risk Management Division Mr. Asif Ali is a Business graduate and has done Masters in Management from U.S.A. He has more than 22 years of experience of working with national and multinational financial institutions. Prior to joining the AHB, he was heading Credit & Risk Management Department of Pak Oman Investment Company. Pervez Mobin Head of Human Resource Management & Administration Mr. Pervez Mobin holds Degrees in Business / Human Resource Management from Washington D.C. USA and MBA from University of Glasgow, UK. Pervez has almost 20 years of diversified experience in banking and industry. Prior to joining AHB, Pervez has been working at PICIC Limited, Meezan Bank and Islamabad Serena Hotel as Head of Human Resource & Development. He has also worked in managerial positions at ANZ Grindlays Bank, Standard Chartered Bank, United Bank Limited and Bankers Equity Limited - BEL in Human Resources Divisions.

25

Syed Hasan Jafri Head of Information Technology Division Mr. Hasan Jafri has to his credit more than 22 years of comprehensive IT related experience in various organizations at senior levels. He has accomplished projects in terms of systems, software support, IT related communication and Networking. Mr. Hasan Jafri has worked on a number of credible operating platforms and system solutions. Gulrays Khan Head of Internal Audit Division Mr. Gulrays Khan has worked in State Bank of Pakistan since May 1994. His more than 12 years of experience is in Banking Supervision, Banking Inspection and Compliance. For his outstanding performance, he has received an achievement award from SBP in 2005. He has conducted audits/inspections of various foreign and local Banks in Pakistan. He has also been responsible for monitoring of assigned banks through a system of Institutional Risk Assessment Framework-IRAF. He has participated in various domestic and international seminars. Karim Sultanali Head of Credit and Credit Administration Mr. Karim Sultanali joined the Bank as an Executive Vice President in October 2007. He is an MBA from IBA and is a CFA charter holder from the CFA Institute, USA. He has over 19 years of Corporate Banking and Credit Risk experience. Prior to joining AHBL he was serving in Habib Bank Limited's Risk Management Division. He has also headed the Corporate Banking Division at Societe Generale Bank. Muhammad Amin Bhoori Head of Finance Division Mr. Bhoori is an Associate Member of the Institute of Chartered Accountants of Pakistan. He has over 9 years of diversified experience in the field of finance, audit and tax. He is in financial services industry for 4 years. He played vital role for the establishment of the Bank including its incorporation and takeover of Rupali Bank. Prior to joining Arif Habib Bank Mr. Bhoori has served Arif Habib Investment Management Limited in the capacity of Vice President Operations and Head of Internal Audit.

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Tasnim Beg Head of Wealth Management Ms. Tasnim Beg qualified as Chartered Accountant in 1975 from England and Wales. Earlier, she has acquired Bachelor of Arts Degree from Punjab University. She has almost 30 years of diversified experience. In initial stages, she was associated with Peat, Marwick in London and subsequently worked with A.F. Ferguson, PIA, Pak Saudi Fertilizers, UNICEF and World Bank. Aziz Morris Head Compliance Division Aziz Morris has 10 years of rich experience working with State Bank of Pakistan. During his stay at the central bank, he worked 6 years with Banking Inspection Department examining affairs of various commercial banks in the areas of Asset Quality, Management, Risk Management, Internal Controls etc. The other 4 years, he served at Banking Supervision Department looking after Off-site monitoring of banks and contributing towards various publications of SBP. His last assignment at SBP was overseeing implementation of Basel II Capital Accord in Pakistan. He attended a number of national / international seminars and trainings on banking and risk management during his stay at SBP. He was also an active resource person for trainings on risk management and Basel II for both commercial and central bankers. Farhan Faruqi Financial Institutions Division & Cash Management Farhan Faruqi joined the bank in June 2008 as Vice President in Financial Institutions & Cash Management Division. He is MBA in Banking & Finance & has a 9 years multidimensional banking experience in Correspondent Banking, Corporate Banking & Financial Institutions in various Foreign & local banks such as American Express, Mashreqbank, UBL, Emirates Bank International. Prior to his joining, he was working for Emirates Bank International in Dubai in Financial Institutions Division. During that period, he served as Relationship Manager for MENA & Asia Pacific regions. Sabeen Ibrahim Marketing Sabeen Ibrahim joined the Bank in June 2007. She holds a Bachelor of Science in Information Technology from University of West Virgina (London Campus), London, England. She has experience in Public Relations, Advertising and Marketing. Prior to joining AHBL she has been working in the capacity of a Public Relations Consultant for several well known local and int. companies.

27

Ehsan ul Haq Strategic Planning and Development Division Ehsan has been with AHBL since the Bank started its operations. He is a Commerce Graduate and an ACCA finalist. Being in SPD he has been dealing with many areas of the Bank including Business Strategies, Branch Expansion, Budgeting, Liability Management, Branch Expansion, Insurance, Deposit Analysis, etc.

Total No. of Employees for the period 2006-2008 6 600 500 400 300

o N lfE p m y s e

200

Total No. of Employees

100 0

Years

Benefits provided by AHBL to employees Some of the monetary and non monetary benefits that Arif Habib Bank provides to its employees are as follows: •

Attractive Salary Package

•

Employee Provident Fund

•

Gratuity Fund

•

Medical Insurance

•

Bonuses

•

Life Insurance

•

Promotions

•

Various types of Staff Loans

3.4 Marketing Analysis

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In today’s contemporary business world, marketing plays an important role and banks, such as AHBL, that has little penetration in banking industry with low market share, need to use their marketing plan and strategies effectively to attract customer loyalty for its customer. The major ways in which AHBL markets itself and its products are through the following ways: •

Electronic

•

Print

3.4.1 Electronic The major way in which today’s organizations promote its products and services is through television, not only because it’s economical but also because the visual and audio aids help in promoting its product. Television ads8 for AHBL mainly try to emphasis the ‘The Bank that talks with Everyone, A Bank that walks with Everyone, A bank that grows with everyone. Arif Habib Bank is truly the Bank for everyone” message in its advertisements, by showing how its services can help you everyday financial needs that you face in your every day life. Another major way in which Arif Habib Bank advertises its products electronically is through its website, which is designed in an effective manner with detailed information, so that visitors can effectively know about the different services that the bank provides. 3.4.2 Print Print advertisements are another major way in which Arif Habib Bank advertises its product to the masses. Print media advertisements are mainly printed in major English and Urdu newspapers across Pakistan. Another way it uses to market the products is little pamphlets which are colourful and have sufficient detail to attract a customer. An example of pamphlets of AHBL is as under:

8

http://www.youtube.com/watch?v=Rsf6UqcO2qc

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4

Environmental Analysis

4.1 Industry and market analysis 4.1.1

Major product lines market segments

4.1.1.1 Major Product Line Now Banking products has so much deepened that customers have to do an analysis before pursuing any product of a bank. Competition has gone very intense. So keeping the diversified range of banking product available in market, a very general product line of banks is presented as under: Deposits •

Term Deposit Receipts

•

Daily Product

•

Current Account

•

Saving Account (PLS)

•

BBA Account

Corporate Banking •

Deposits

•

Lending

•

Syndication

SME Banking •

Deposits

•

Lending

30

Trade Finance •

Letter of Credit

•

Letter of Guarantee

•

Bank Guarantee

Consumer Banking •

Auto Loans

•

House Loans

•

Personal/Individual Loans

•

Credit/Debit Cards

4.1.1.2 Market Segments There are different strategies for different banks as per their top management to target certain segments but If we have to draw a generalized segment format for bankers, the segments would be: •

Individuals

•

Salaried persons

•

Sole Proprietor

•

Retailers

•

Small and Medium enterprises

•

Corporate bodies

•

Trusts

•

NGOs

•

Autonomous and Semi-Autonomous Bodies

•

Partnerships

•

Clubs

•

Societies

•

Multinational Companies

4.1.2

Growth rate for the entire industry

Overview:

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The banking system effectively coped with several challenges emanated from the economic slowdown both at home and abroad due to strong resilience built over the years and effective regulatory and supervisory regime. According to the State Bank of Pakistan’s quarterly performance review9 of the banking system for the quarter ended December 31, 2008 released on Saturday, asset base of the banking system grew 2.6 per cent over the quarter to reach Rs 5,653 billion, well-supplemented by 3.6 per cent and 7 per cent growth in deposit and shareholders’ equity, respectively. The liquidity profile of the banking system remained constrained for most part of the quarter. However, post quarter statistics indicate a significant easing of the liquidity profile because of gradual increase in deposits and reduction in banks’ advances. The in line with the deterioration in macroeconomic indicators, the credit risk remained high during the quarter. However, satisfactory earnings enabled the system to cover these loan losses. The NPLs are covered by loan loss provisions to the extent of 75 per cent, but on account of these increased loan provisions in absolute amounts, earnings of the banking system came under pressure and remained lower than the last couple of years. Return on Assets (ROA) was 1.2 per cent for the year 2008 versus 1.5 per cent for 2007 and 2 per cent for 2006. Overall solvency position of the banking system showed an improvement. The Capital Adequacy Ratio (CAR) under Basel-II framework, which also accounts for the operational risk charge, improved to 12.2 per cent (12.6 per cent for commercial banks) due to fresh injection of equity and satisfactory earnings. The CAR improved to 13 per cent jointly for banks and development finance institutions (DFIs). “Banking system shows strong resilience to unusual shocks in major risk factors. This strength of the banking system largely came from the prudent regulatory and supervisory regime, strengthening of risk management and governance standards in banks as well as the improved solvency position,” “Going forward, due to constrained economic environment both at home and globally, the credit risk, earnings and growth rates of the banking system are likely to remain under some strain in coming quarters,” the report anticipated. The banking system has 9

The growth rate of entire banking industry is compositely gained from State Bank of Pakistan's Quarterly Performance Review of the Banking System for the quarter ended December 31, 2008 and the 1st Quarter ended March 31,2009. Also the Business Recorder Report of March 24, 2009.

32

gained stability over the last couple of years through sustained growth in asset and customer-base. Currently, a decline in the demand for credit from different sectors was witnessed. Banks, as a result, had to divest their asset mix from loans towards investments. Similarly, further tightening of monetary policy squeezed the surplus liquidity from the market. (SBP 1HFY08) In-Depth Banking Industry Growth rates, credit risk and earnings of the banking system are likely to remain under strain in future due to constrained economic environment both at home and global fronts. (SBP’s Quarterly Performance Review of the Banking System for the quarter ended December 31, 2008) Pakistan's banking system effectively coped with several challenges emanated from economic slowdown, both at home and abroad, due to strong resilience built over the years and effective regulatory and supervisory regime. However, going forward, the impending economic slowdown may dampen the growth rate of the banking system in coming quarters of CY2009. Low demand for banks' advances will shift asset mix away from advances to government papers, and deposits are likely to grow at a steady pace. This respite in liquidity may have positive bearing on interest rates. The latest post quarters statistics of March 2009 also vindicate these trends. Since the last week of December 2008, the asset base over these weeks has grown by 2.3 percent with 1.8 percent and 11.3 percent increase in deposits and investments, respectively, while advances declined by 2.3 percent. The present tough economic environment will also heighten the credit risk and affect the earnings due to increased loan loss charges and constrained incomes. The system is expected to remain profitable in the coming quarters, though this phenomenon may not be widely shared across the market players. Though the concerns about the solvency of top banks of the world are weighing on the investor confidence across the globe, the banks in Pakistan are still maintaining their resilience. 33

The strength of the banking system largely comes from the prudent regulatory and supervisory regime strengthened risk management and governance standards in banks as well as the improved solvency and earning capacity of banks. Asset base of the banking system grew 2.6 percent over the quarter to reach Rs 5,653 billion, well supplemented by 3.6 percent and 7 percent growth in deposit and shareholders' equity, respectively. The liquidity profile of the banking system remained constrained for most part of the quarter. However, post quarter statistics indicate significant easing out in liquidity profile because of the gradual increase in deposits and reduction in banks' advances. According to SBP, in line with deterioration in macroeconomic indicators, the credit risk remained heightened during the quarter. Non-performing Loans (NPLs) of the banking system increased to Rs 313 billion (Rs 278 billion in September-2008) giving infection ratio of 9.1 percent and net infection ratio of 2.5 percent. However, satisfactory earnings enabled the system to cover these loan losses. NPLs are covered by the loan loss provisions to the extent of 75 percent, but due to these increased loan provisions in absolute amounts, earnings of the banking system came under pressure and remained lower than last couple of years' levels Overall solvency position of the banking system registered an improvement. The Capital Adequacy Ratio (CAR) under Basel-II framework, which also accounts for the operational risk charge, improved to 12.2 percent (12.6 percent for commercial banks) due to fresh injection of equity and satisfactory earnings. The CAR improved to 13 percent jointly for banks and Development Finance Institutions (DFIs). "Banking system shows strong resilience to unusual shocks in major risk factors. This strength of the banking system largely came from the prudent regulatory and supervisory regime, strengthening of risk management and governance standards in banks as well as the improved solvency position," During the quarter under review, the banking system successfully weathered a liquidity stress. The stress emerged in usual timeframe i.e. Eid-ul-Fitr deposit withdrawal and a number of global, domestic and industry specific factors further

34

compounded it. Specifically, the news of failures of some global financial giants burdened the liquidity profile of banks that together with closure of capital market raised concerns about the strength of the Pakistani banks. The situation aggravated by the intensive rumour mongering, leading to deposit withdrawal from the banking system and severely affecting some banks. However, strong capacity developed by the banks and regulators over the years and the offsetting measures taken by the State Bank of Pakistan (SBP) enabled the system to avert this transitory stress from converting into a financial crisis. This temporary liquidity stress however decelerated growth of the system, which had already been showing the signs of stabilisation for the last one-year or so. The quarter under review, which is historically characterised by acceleration in economic activities and strong growth in bank credit and deposits witnessed a passive growth. Despite slight increase in credit risk and some relapse in the earnings, key financial soundness indicators of the banking system remain within satisfactory ranges, though challenged considerably. The stress testing results also substantiate strong resilience of the banking system towards the major risk factors, as capital base of the system remains strong. Loan growth also remained low i.e. 3.7 percent with a significant portion of these additional loans going to public sector enterprises (PSEs). Building vulnerabilities in the credit risks and constrained liquidity profile increased the banks' interest in shortterm government papers. However, the liquidity profile of the banking system remained constrained during most part of the quarter. Relatively stronger advance growth in the recent quarters had significantly increased Advances to Deposit Ratio (ADR) of the system by the inception of December-2008 quarter. Further, due to the shift in asset mix away from marketable government papers, the fund-based liquidity of the system had also contracted. However, the post-quarter figures indicate a reversal in trend and gradual improvement in liquidity of banks.

35

Due to slower growth in advances, which carry higher risk weights, Risk Weighted Assets (RWA) remained stable at the previous quarter's level. Further, fresh injection of equity and satisfactory earnings improved Capital Adequacy Ratio (CAR) of the banking system under Basel-II framework to 12.2 percent (12.6 percent for commercial banks), while the CAR improved to 13.0 percent jointly for banks and Development Finance Institutions (DFIs). The composition of the risk-based regulatory capital also improved with contraction of the supplementary capital due to write down in revaluation surpluses, thus improving the core capital to RWA ratio of banks to 10.2 percent. The report said that the worsening business and economic environment somewhat increased the credit risk, which compelled banks to adopt cautious lending strategy, particularly in consumer sector where the advances have been decreasing since the start of CY08. The banking system maintained its strong earning capacity and posted a profit after tax (PAT) of Rs 63 billion, though lower than last couple of years, the report said. The aggressive asset loss recognition strategy of some banks, additional provisions for the loan loss charges and the proportionately higher increase in operating expenses has to some extent affected the profitability and brought the key earning indicators under pressure over the past quarter. "The pre-tax ROA deteriorated to 1.7 percent (2.0 percent in September-2008 and 2.2 percent in CY07). The SBP, keeping in view the present depressing environment, has devised a comprehensive strategy and contingency plan for effectively managing troubled banks and coping with any liquidity stress, burgeoning NPLs and solvency issues, the report said. This together with a multifaceted approach developed for the resolution of solvency issues provides SBP with host of options for tackling problem banks. 4.2

Competitor analysis

4.2.1

Major competitors

The augmentation in the banking industry of Pakistan has directed to an increase in the number of banks both domestically and internationally to be established and create a competitive industry. For Arif Habib Bank its competitors come in the form of domestic commercial banks established in Pakistan 36

Private Local Commercial Banks in Pakistan Allied Bank of Pakistan Limited, Karachi Arif Habib Bank Limited, Karachi Askari Commercial Bank Limited, Rawalpindi Atlas Bank Limited, Karachi Bank Al Habib, Karachi Bank Al Falah Limited, Karachi BankIslami Pakistan Limited, Karachi Samba Bank, Karachi Dawood Bank Limited, Karachi Faysal Bank Limited, Karachi Habib Bank Limited, Karachi Habib Metropolitan Bank, Karachi JS Bank KASB Bank Limited, Karachi Meezan Bank Limited, Karachi MCB Bank, Islamabad MyBank Limited, Karachi NIB Bank Limited, Karachi Saudi Pak Commercial Bank Limited, Karachi Soneri Bank Limited, Karachi United Bank Limited, Karachi

Arif Habib Bank feels that its major competitors are as follows: •

Askari Commercial Bank

•

Bank Al-Habib

•

Faysal Bank

•

KASB Bank

•

Atlas Bank

4.2.2

Their market shares

There are many criteria on the base of which we can assign market shares of Banks in Banking Industry. Second thing is that on which data we can declare Bank’s market share? So keeping this thing in view, the data provided be regulatory bank i.e. State Bank of Pakistan is felt reliable for this calculation.

37

The report published by SBP “Quarterly Performance Review December 2008” is used for overall values of banking sector. There can be different criteria for this calculation but I am considering Bank’s Deposits and Bank’s Advances both for this purpose. According to latest figures released by the central bank at December closing of 200810, advances of the sector stood at Rs 3.15 trillion, total customer deposits of the banking industry reached Rs 3.8 trillion. Bank

Deposit

% age

Advances

%age

Askari Bank Bank Al-Habib Faysal Bank KASB Bank Atlas Bank

167,676,572,000 144,340,496,000 92,327,158,000 35,087,477,000 18,646,412,000

4.2% 3.7% 2.3% 0.9% 0.4%

128,812,242,000 100,217,408,000 91,341,492,000 32,240,196,000 20,549,869,000

3.3% 2.5% 2.3% 0.8% 0.5%

4.2.3

Their goals and strategies

4.2.3.1 Askari Bank

Askari Bank was incorporated in Pakistan on October 9, 1991, as a public limited company. It commenced operations on April 1, 1992, and is principally engaged in the business of banking, as defined in the Banking Companies Ordinance, 1962. The Bank is listed on Karachi, Lahore and Islamabad Stock Exchanges. Askari Bank has expanded into a network of 200 branches / sub branches, including 20 dedicated Islamic banking branches, and a wholesale bank branch in Bahrain. A shared network of 2,991 online ATMs covering all major cities in Pakistan supports the delivery channels for customer service. As at December 31, 2008, the Bank had equity of Rs. 12.97 billion and total assets of Rs. 206.19 billion, with 816,629 banking customers, serviced by our 6,496 employees. Vision To be the bank of first choice in the region Mission

10

SBP Quarterly Performance Review Dec 2008 (www.sbp.org.pk)

38

To be the leading private sector bank in Pakistan with an international presence, delivering quality service through innovative technology and effective human resource management in a modern and progressive organizational culture of meritocracy, maintaining high ethical and professional standards, while providing enhanced value to all our stakeholders, and contributing to society. Thinking Consolidation and creating opportunities with innovation Values The intrinsic values, which are the corner stones of our corporate behavior, are: •

Commitment

•

Integrity

•

Fairness

•

Teamwork

•

Service

Objectives •

To achieve sustained growth and profitability in all areas of business.

•

To build and sustain a high performance culture, with a continuous improvement focus.

•

To develop a customer–service oriented culture with special emphasis on customer care and convenience.

•

To build an enabling environment, where employees are motivated to contribute to their full potential.

•

To effectively manage and mitigate all kinds of risks inherent in the banking business.

•

To maximize use of technology to ensure cost–effective operations, efficient management information system, enhanced delivery capability and high service standards.

•

To manage the Bank’s portfolio of businesses to achieve strong and sustainable shareholder returns and to continuously build shareholder value.

•

To deliver timely solutions that best meets the customers’ financial needs.

•

To explore new avenues for growth and profitability.

Strategic Planning

39

•

To comprehensively plan for the future to ensure sustained growth and profitability.

•

To facilitate alignment of the Vision, Mission, Corporate Objectives and with the business goals and objectives.

•

To provide strategic initiatives and solutions for projects, products, policies and procedures.

•

To provide strategic solutions to mitigate weak areas and to counter threats to profits.

•

To identify strategic initiatives and opportunities for profit.

•

To create and leverage strategic assets and capabilities for competitive advantage.

Credit Ratings Long Term: AA Short Term: A1 + by PACRA as of 02-03-2009.

Faysal Bank

Faysal Bank started operations in Pakistan in 1987, first as a branch set-up of Faysal Islamic Bank of Bahrain and then in 1995 as a locally incorporated Pakistani bank under the present name of Faysal Bank Limited. On January 1, 2002, Al Faysal Investment Bank Limited, another group entity in Pakistan, merged into Faysal Bank Limited which resulted in a larger, stronger and much more versatile institution. Faysal Bank Limited is a full service banking institution offering consumer, corporate and investment banking facilities to its customers. The Bank's widespread and growing network of branches in the four provinces of the country and Azad Kashmir, together with its corporate offices in major cities, provides efficient services in an effective manner. Major Shareholding The majority share holding of Faysal Bank Limited is held by Ithmaar Bank B.S.C an investment bank listed in Bahrain. Vision

40

Excellence in all that we do. Mission Achieve leadership in providing financial services in chosen markets through innovation. Credit Rating The strength and stability of Faysal Bank Limited is evident through the Credit Rating assigned by JCR-VIS Credit Rating Company Limited of "AA" (Double A) for long to medium term and "A-1+" (A One Plus) for short term. 4.2.3.2 KASB Bank The KASB Group, established by Khadim Ali Shah Bukhari in 1958, has a long-standing tradition of excellence in financial services in Pakistan, known primarily for investment banking, research/trading and asset management. In 1993, KASB became the local partner for the international investment banking firm, Merrill Lynch. Recently, Merrill Lynch acquired an equity stake in KASB Funds. The Group is now made up of KASB Securities, KASB Funds, KASB Direct and KASB Bank, added in 2002, and recently, KASB Modarba to complete its financial services portfolio. The group has also diversified its interest with investments in real estate, technology, and oil and gas, while solidifying its leadership in financial services. Our continued success and growth are a reflection of our innovative approach to business and commitment to customers and community V A L U E S

ision ttitude eadership pright xcellence ynergy

Client Focus Proactive, Based on Commitment & Respect Based on Integrity, Trust & Teamwork Integrity In Services Quality In Team Performance

Mission Committed to achieve excellence in service quality, dedicated to building long term relations based on trust and prudent practices, generating sustainable growth in profit whilst making a contribution to the community. Vision

41

To be a strong and profitable institution known for its service excellence, innovative products, maximizing the KASB Group synergies and Corporate Citizenship Strategies The way we interact with society has an impact on our business and on our reputation. As a firm and as individuals we strive to give back to society by contributing our time and resources through four key initiatives: 

We train our employees to be leaders in their field



We help shape policies of the country through active exchange of views and ideas



We are committed to social welfare projects



We promote development of sports and culture

4.2.3.4 Bank Al-Habib

BAHL’s sponsors are members of the Habib Family, the oldest and a distinguished name in Pakistan’s banking circles. They are active in the management of the Bank and are backed by a team of experienced professionals most of which have been with the bank since its inception. Dawood Habib Group, which is the sponsor of Bank AL Habib Limited, have a very long track record of banking which dates back to 1920s. They were among the founder members of Habib Bank Limited which played a major role in meeting the financial and banking needs of Pakistan, and which was nationalized along with other Banks in Pakistan on December 31, 1973. Under the privatization policy of Government of Pakistan, the DAWOOD HABIB GROUP was granted permission to set up a commercial bank. Bank AL Habib was incorporated as a Public Limited Company in October 1991 and started banking operations in 1992.

42

(Late) Hamid D. Habib, grandson of the founder of Habib Group, was the Chairman of Bank AL Habib Limited. He was the Director in Habib Bank Limited form 1954 and it's Chairman from 1971 until nationalization. After the death of Mr. Hamid D. Habib in May 2000, Mr. Ali Raza D. Habib, who was Director on the Board, was appointed the Chairman of the Bank. (Late) Rashid D. Habib, who was the Managing Director of Habib Bank Limited in 1953 till it's nationalization, was appointed as the Managing Director & Chief Executive of Bank AL Habib Limited which post he held till he expired in 1994. After his death, Mr. Abbas D. Habib who was the Joint Managing Director and closely associated with the bank since it's inception 1991 was appointed as the Managing Director & Chief Executive of the Bank. The bank’s main activities are short-term lending, mainly trade finance related and seasonal running finance. Its future strategy envisages growth through further expansion of branch network, while maintaining the Habib hallmark of a constructive risk profile. BHAL continues to strengthen its technological platform and human resource base. Vision To be a quality financial service provider maintaining the highest standards in banking practices. Mission To be a strong and stable financial institution offering innovative products and services while contributing towards the National economic and social development. Credit Ratings PACRA has rated BAHL as A1+ in short term and AA in long term as of 02-03-2009. 4.2.3.5 Atlas Bank

Atlas Bank Limited is supported by the trusted equity of Atlas Group, a leading manufacturing, financial services and trading group that has been at

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the forefront of country’s economic development since 1962. Atlas Bank began its journey back in the year 1990 when Atlas Group and the Bank of Tokyo-Mitsubishi Limited entered a joint venture as Atlas Investment Bank Limited. Later in 2002, the Bank established a merger with Atlas Lease Limited and acquired Dawood Bank Limited in December 2005 and renamed it as Atlas Bank Limited and merged Atlas Investment Bank in to Atlas Bank in 2006. Atlas Capital Markets (Private) Limited was also incorporated in 2006 and is currently a wholly owned subsidiary of the bank. Envisioned to operate as a progressive and dynamic banking entity, Atlas Bank today stands as a firm reality with a futuristic approach to help manage personal and commercial finances with ease and convenience. Poised to offer an extensive range of commercial banking services, lucrative assets and liability products, Atlas Bank will be catering to satisfy and exceed the needs of its valuable customers. With a devoted and professional team endeavouring to top off the satisfaction of the customers, Atlas Bank will provide leasing, financing and trade finance along with export re-finance and wealth management services. In addition, brokerage and corporate advisory services will also be offered through its wholly owned subsidiary. The wide range of asset and liability products being designed will not only suit the needs of customers but will also make financial management convenient for them through innovative deposit schemes that will provide most favourable profit and security with monthly, quarterly, semi-annual and term income options or alternatively nest eggs for long term planning. It will provide solutions for multiple requirements of clients of diverse financial nature on both institutional and individual levels through its array of funded and non-funded products and services. Atlas Bank, having a futuristic approach, is positioned to improvise with the changing trends of the modern day financial market. Operating through a growing network of branches across Pakistan, the entire retail network is real-time online, providing banking convenience, especially for those on the move. Enjoying the privilege of having diverse groups as its valued customers, Atlas Bank serves through its strong network of branches, backed by advanced computerized and control system, positioning its priorities in accordance with the needs, convenience and satisfaction of its customers and stakeholders.

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'With equity of over Rs.4.25 billion and assets base of over Rs.28.97 billion, Atlas Bank is determined to expand within and contribute aggressively to the growing economy of Pakistan and its flourishing banking sector. To stand out in the market through competitive positioning as its prime objective, Atlas Bank will always be committed to deliver consistent quality services and customer satisfaction The Pakistan Credit Rating Agency (PACRA) has assigned a long-term rating of “A-” (A minus) and a short-term rating of “A2” (A Two) to Atlas Bank Limited (ATBL). These ratings denote a low expectation of credit risk emanating from a strong capacity for timely payment of financial commitments. 4.3 Technology Analysis 4.3.1

Technical Methods that Affect the Industry

Technology is having a major impact on the banking industry. Direct deposit allows companies and governments to electronically transfer payments into various accounts. Debit cards, which may also be used as ATM cards, instantaneously deduct money from an account when the card is swiped across a machine at a store’s cash register. Electronic banking by phone or computer allows customers to access information such as account balances and statement history, pay bills, and transfer money from one account to another. Advancements in technology have also led to improvements in the ways in which banks process information. The use of check imaging allows banks to store photographed checks on the computer instead of paper files. Also, the Some of the technical methods that are used and affect the banking industry are as follows: •

Availability and growing use of credit scoring software allows lending departments to approve loans in minutes, rather than days (already in use of American Bankers). It is a perfect example of electronic decision maker, it can give relief to credit department personnel by way of auto calculating the manual calculation by single click of mouse.

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•

Computer networking within branch level and all of the branches through WAN. SBP is certainly networked with banks for different purposes e.g. ECIB report. This creates better performance from bank employee in less time.

•

Technological improvements, such as digital imaging and computer networking, are likely to lead to a decrease or change in the nature of employment of the “back-office” clerical workers who process checks and other bank statements. Employment of customer service representatives, however, is expected to increase as banks hire more of these workers to staff phone centres and respond to e-mails (European Approach)

•

Internet as a distribution channel is also eroding traditional barriers between financial service providers (Banks) and technology firms which are ultimately boosting revenue for banking and telecom industry.

•

Banks are increasingly providing technology services, such as account reconciliation software and "web-enabling" assistance, while technology firms are making inroads into services once the domain of banks and brokerage firms, such as financial planning and bill payment. Indeed, many banks are beginning to think of technology firms as competitors – or are contemplating ways to partner with them.

•

Today, information of all kinds is transmitted easily, inexpensively and instantaneously around the world, providing finger-tip access to anyone with a laptop computer, cellular phone or PDAs (Personal Digital Assistant).

Such technologies, and the innovation they enable, have reduced the costs of financial transactions, improved the allocation of financial resources, increased the competitiveness and efficiency of financial institutions and markets, and opened new avenues through which individuals and institutions can better diversify and hedge their risks. 4.3.2

Innovation

Innovation is a necessity in contemporary times, as it is becoming one of the reasons of competitive advantage in banking industry. It helps banks to compete in today’s highly technologically driven industry. Some of the innovations that the banking industry is looking forward are:

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•

Advanced means of connectivity between branches through better and advanced software and hardware to maintain connections within banks in remote areas and during natural calamities in Pakistan. This includes better connection through WiFi or WiMax.

•

Credit scoring software which allows lending departments to approve loans in minutes, it will provide a major edge to credit officers in Pakistani scenario

•

Information systems in banks that are more protected than prior to eliminate any probability of fraud and which are even more users friendly to help employees to use them not only to make key decisions but also satisfy customer need in a more well-timed manner.

•

Advancements in online transfer from inter branch to an even more helpful inter bank transfers.

•

Automation of simple operations task that will not only improve efficiency but also reduce costs like stationery and courier services, like automation of check books etc.

•

Digital imaging of cheques will also be an innovative technology for Pakistani Bankers to follow and introduce paper free environment.

•

Banks in Pakistan are trying internet, mobile and telephone banking in its operations to major extent so that customer driven banking can be implemented.

5

Brief on the department worked during internship and specific/leading contribution made

5.1

Brief Introduction

I did my eight weeks internship at Arif Habib Bank Limited F-6 Super Market Branch. This branch also serves as Regional Office of AHBL in Islamabad and Rawalpindi Zone. During internship I was rolled over in departments but my penetration was developed in CIBD (Corporate & Investment Banking Division). The work that I did during my internship primarily includes voucher checking, checking a/c opening pre-requisites, a/c opening backlog checking, analyzing inward and outward clearing at closing, making credit proposal, credit analysis of clients, ratio analysis of statements, preparing standard credit memorandum (SCM). 5.2

Department overview

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CIBD (Corporate & Investment Banking Division), this was the department which attracted me the most and due to my interest in finance I started penetrating in CIBD. A very brief overview of this department is that it tends to focus on corporate lending and somewhat syndications also; indeed it covers the lending modes in corporate sector. Hierarchy of this specific department is as under: •

Relationship Officer

•

Relationship Manager / AVP I

•

Relationship Manager / AVP II

•

Regional Head / SVP

•

Zone Head / SEVP

•

Country Head

This department is totally dependent on some other departments for the sake of client’s verification and legal provisions. The lending case is started at the lower level i.e. R.O or R.M. The case is then forwarded to Regional level and then Head office level for final approval. The final decision is held to the discretion of Country Head. Currently this department is led by Mr. Khurshid Zafar who occupies his office in Arif Habib Centre (H.O). Documents to be acquired from prospective client while request of lending is received: Proprietor Ship/Partnership Companies •

Quotation (s) Invoices(s)

•

Bank Certificate for Proprietorship or Partnership deed/

•

Copy of NIC(s) of Proprietorship/Partnership deed/Directors.

•

Audited financial statements for three years along with cash flows (If Applicable).

•

Bank Statement for the last six months.

•

Copy of NTN certificate/Assessment Order/Tax returns/

•

Company profile

•

Bio-data of the directors along with NIC of directors

•

Details of finance requirement

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•

Request letter

•

Names of financial institutions dealing with the company along with addresses

•

Borrowers Basic Fact Sheet (BBFS)

•

Feasibility/projections

Private/public limited Companies •

Certificate of Incorporation

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Memorandum and Articles of Association

•

Form-29

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Form-A

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Bio-data of the directors along with NIC of directors

•

Tax Return Copies of directors

•

NTN of the company

•

Company profile

•

Audited accounts of the company for the last three years

•

Audited accounts of group companies

•

Details of finance requirement

•

Justification/Request letter

•

Names of financial institutions dealing with the company along with addresses

6

Identification of a main problem

The main problems that I identified during my internship period were: •

The lack of awareness about exact job descriptions among employees

•

The inability of employees to approach higher officials easily (lower level of centralization)

•

Undefined job tasks in CIBD and Operations department

•

Lack of IT specialist at branch level

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•

Lack of amenity and common room

•

Incentives like study scholarships, performance awards etc

•

Unhealthy product line

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Findings

Now coming towards the most crucial part of internship report, the findings limited to my opinion are: •

AHBL is backed by high level corporate giants

•

AHBL to some extent enjoyed the encashment of parent company’s market leadership

•

Top management is highly qualified and as per my assessment the most highly paid individuals of private commercial banks in Pakistan.

•

AHBL has failed to penetrate in market due to: o No consumer products (consumer banking) o Continuous expansion o Economic instability o SBP’s regulatory requirements

•

In recent findings, due to suspect of fulfilling the capital requirement, AHBL is in deal of being acquired by Lawai led consortium to take more than 51% shareholding and also Mybank to be now operated under AHBL line.

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Conclusions and Recommendations

Some of the suggestions in this respect were •

The introduction of compulsory weekly meeting of all staff at branch level to discuss the discrepancies in every regard

•

Introducing job specific training to employees

•

Adhering to the criteria laid out by the HR department for job advancements

•

Employee training sessions on regional level led by Regional Heads to take insight of their employees

•

There should be a prayer room developed in all branches as many employees want to pray, but do not have the proper place to do it.

•

There are some departments in the bank that do not have enough employees, while some have more than needed like CIBD

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•

Their should be a common room, so as to give employees a relaxing environment when they have a break

•

New and innovative products should be introduced by AHBL, like other bank such as Citibank and Standard Chartered Bank develops for their customer. For this purpose, special teams should be developed that include professional from all departments of the banks to come with ideas. This process will increase the number of ideas generated and even produce innovative products for the bank that might give them the edge

•

Incentive schemes should be developed for the employees that can help motivate them, which might include: o Scholarship programs for all employees for further study. o Introducing employee awards at branch and regional levels. o Job rotation programs to enhance the skills of employees.

•

A proper IT department should be established in all branches, with professional having the knowledge to maintain a secured connection with other banks. Also scheduled backups of data should be done with in the bank.

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Appendix

Web References •

www.arifhabibbank.com

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www.sbp.org.pk

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www.brecorder.com

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www.garp.com

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www.dailytimes.com.pk

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www.nation.com.pk

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www.bmacapital.com

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www.ibp.com.pk

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www.pba.com.pk

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www.research.bmacapital.com

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www.nytimes.com

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www.investopedia.com

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•

www.arifhabibltd.com.pk

Documental References •

Annual Report 2006 (AHBL)

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Annual Report 2007 (AHBL)

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Annual Report 2008 (AHBL)

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Quarterly Report 2009 (AHBL)

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Annual Report 2008 (Askari Bank)

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Corporate Profile 2009 (Askari Bank)

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Annual Report 2008 (Faysal Bank)

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Annual Report 2008 (Bank Al-Habib)

•

Annual Report 2008 (KASB Bank)

•

Annual Report 2008 (Atlas Bank)

•

SBP Quarterly Performance Report of Banking Industry for 4Q 2008

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