Internship Report Sindh Bank

Pakistan Banking Sector INTRODUCTION Financial Sector Financial Sector in Pakistan owns a number of financial institutions -C o m m e r c i a l b a n k s , s p e c i a l i z e d b a n k s , n a t i o n a l s a v i n g s s c h e m e s , i n s u r a n c e companies, investment banks, stock exchanges, l e a s i n g c o m p a n i e s , m i c r o - f i n a n c e institutions and Islamic banks etc. They offer so many products and services of assets and liabilities side. Financial developing has increased during the l a s t s e v e r a l y e a r s i n s t e a d o f c o m m e r c i a l b a n k s . C ommercial banks (12 foreign and 20 domestic banks) hold 80Percent of the banking system assets. Facility policies for the foreign banks are same as the domestic banks and there is no superior treatment for domestic organizations. Not like several countries, in Pakistan foreign banks can have 100 percent ownership. Not only the foreign banks but the foreign companies are also provided the complete freedom a s t h e y c a n r a i s e f i n a n c e s o f a l l t y p e s a n d t e n u r e s f r o m t h e domestic banking system.

Banks Banks are the financial arbitrators or you can say the disinterested party. The role of a financial arbitrator is to sell its own duties and buy the duties of selling party. By granting its services with smart structures, an arbitrator can sell its duties/services for a good price as compare to the rate of other party, to whom it’s buying the obligations. And on the other hand, we can describe this thing as it can advertise its services at lower interest rate as compare to the rate at which it can grasp the services that it can buys. The return, of the participant in business of intermediary, is the net profit after deducting all other expenses during these arbitrators’ activities. Bank is an organization, which transacts the money deposited from the people, and invests it in the business activities. And it has to repay money at the demand of the depositors. Cheque, draft order, ATMs etc. are the sources to repay the money to the depositors. Here are the some types of Banks, i.e. Stock Exchange Bank, Central bank, commercial Bank, Industrial Bank, Islamic Bank, Investment Bank etc. but for depositors just central banks and the commercial banks are being used. There are following categories of banks located in Pakistan.

State Bank of Pakistan, Nationalized Scheduled bank, private scheduled banks, Foreign Banks, Development/Cooperative/Investment Banks, Specialized Banks The above mentioned categories are general categories in the Banking sector. Central Banking Central bank is the institute that controls the monetary policy of the c o u n t r y a n d p r o v i d e s p r o t e c t i o n f o r t h e financial steadiness. It holds the important reserves of the country people and also controls t h e p u r c h a s i n g p o w e r of nation in the form of credit or currency . PAKISTAN BANKING OVERVIEW PAKISTANFINANCIAL HUB

PAKISTAN

BANKING

SECTOR-

The Banking sector is a fundamental part of the country’s business services industry. According to this sector, in 2 0 0 1 - 0 3 , d e p o s i t s r o s e b y a l m o s t 1 0 0 % . T h e c o m p e t i t i o n i s very huge because, in Pakistan 11 foreign and 28 local baks are operating. One other occurrence of high copetition was started when the State bank of Pakistan set the capital sufficiency b e n c h m a r k t o s t a b l e t h e b a n k i n g s y s t e m . The competitive advantages for the banks are to capture the foreign investment and profitable c u s t o m e r s . In 2004 to 2005 the foreign banks got great opportunities in retail banking and consumer banking, that’s why banking sector experienced a growth rate of 21% in deposits and 36% in advances portfolio. The FINANCIAL YEAR OF 2009 was the transitional period for banking industry, in which it went from long traditional arrangements and rules to the great number of pressures and development chances. And what will define the banking groups if they make changes into the opportunities, using the strategies of change management. These are some of the scary questions which will bear a challenge to the prospective future banking intellects. In banking sector there are following ways to make diversity at a rapid speed pattern of operations, these are publicity, marketing tools, and use of latest technology. Now a day banks are being motivated t o s h a p e t h e i r o r g a n i z a t i o n s i n s u c h a w a y that each of them must look different from the other one. T h e s e s t r a t e g i e s a r e i n c l u d e d , following the contradictory and unique tactics, launching innovative products and services through product diversity. Here are some areas of banking industry, where the opportunities are quite visible from a long time. 1. G r o w i n g s t r e s s o f c o m p e t i t i o n Competition is coating new records related to the banking industry and it will increase more and more in future. There are a number of elements which are expanding the volume of competition . C o m p e t i t i o n f o r s a v e d i n v e s t m e n t

w i l l a l w a y s b e g r o w i n g w i d e r a n d w i d e r. B u t i n t h e t e r m o f c o n s u m e r awareness, it will be the constant related to the distinctive markets; c o n d i t i o n s a n d substitutes will work to decrease the capacity of banks to collect savings at lower rates as compared to their destructive competitors. On the other hand, market pressures w i l l f o r c e t h e b a n k s t o m a k e l o a n s i n u n k n o w n a r e a s l o o s e n i n g t h e r o p e o f r i s k management. 2. P r o f i t t r e n d s i n b a n k i n g i n d u s t r y Current ratios point out a prominent growth in the banking industry with huge expansions in bank organizations, particularly during the decade of last half of 2009. The new technologies are also being common to maximize the profit. 3. R i s i n g l o a n l o s s e s Running for loan losses is increasing over the years. Loan to be s u b m e r g e d o r advances are regarded as a disease for banking industry. It can be said that only the working loan is good for the growth of banking industry. 4.

Merger mania

Merger game is going to take front sea t in the world. A craze for giant banks is developing to benefit effectively from the future market openings and to tame ever i n c r e a s i n g competition. But there are inherent constraints in this m a n i a . T h e economies of scale vanish automatically afte r a certain level of expansion in the banking industry. Structure of the Banking Sector Pakistan being a developing country and having a relatively low level of income, isrequired growth rate is low as there is hardly any savings. The standard of living along with the quality of life is the newer concept in Pakistan which emphasizes onindividual aspects of human nature. These have led to foreign aids which have beenthe holding force to bridge the gap for us between our savings and investments. Nevertheless, these aids have become the drowning force for our country. By virtue of being a member of the most western aid consortium, the famous IMF occupies a p i v o t a l r o l e i n o u r e c o n o m i e s

sphere by influencing our international f i n a n c i a l transactions and creates the pace of our development policies. IMF’s main objective for Pakistan is to ma inta in stable exchange rates, multi-la teral credit syste m andinternational liquidity so as to recover the country from its worst economic crisis. ButPakistan’s economic proble m can ma inly be aspired by internal development and avoidance of any major international role. Structure of the Pakistani banking sector has substantially changed in the last decade, particularly following the privatization of the state-owned banks. In 1990, the bankingsystem was dominated by five commercial banks which were all state-owned. The 1990 amendments to the Banking Companies Ordinance launched the process of financial sector reforms by allowing privatization of the state-owned banks. Duringthe first round of reform, two of the state-owned banks, Muslim Commercial Bank (MCB) and Allied Bank (ABL), were privatized between 1991 and 1993. The reforms process was subsequently delayed for several years and resumed significantly only inthe early 2000s. With the privatization of the third large bank, United Bank (UBL), in2002, the domination of the state-owned banks was ended. As of September 2003, the asset share of local private banks and public sector commercial banks was 47 percent and 41 percent respectively (Tables 1, 2, and 3). Anothe r la rge state owned bank,Habib Bank (HBL), completed its privatization n process in February 2004. As a result of this privatization, the share of banking system assets held by public sector commercial banks decreased to less than 25 percent. The largest bank in the country, National Bank of Pakistan (NBP), with a market share of approximately 20 percent,r e m a i n s state-owned and its privatization prospects are u n c e r t a i n a t t h i s s t a g e , although the government divested approximately 25 percent of its capital in 2001-03.The privatization of state-owned banks has been accompanied by the liberalization

inthe financial system and the openness to dome stic and foreign competition. The number of commercial banks and various nonblank financial institutions grew rapidlyin the early 1990s (the number of commercial banks increased to more than 40 by theyear 1995). Worried by the health and soundness of the newly entering smaller banks,the authorities imposed a mora torium on the establishment of new banks in 1995,which still re mains in force. In addition, the authorities sought to consolida te the banking sector by increasing the minimum capital requirement from PRs 500 millionto PRs 750 million from end-December 2001 and to PRs 1 billion (around US$17million) from end December 2002.Efforts have been ma de in recent years to promote Isla mic banking services. In particular, the State Bank of Pakistan (SBP) exempted Islamic commercial banks fromthe moratorium on the establishment of new banks, and the first full-fledged Islamic bank, Meezan Bank, was licensed in 2002. Several conventional banks have also opened branches that provide only Islamic financial services. The size of these Islamic banking institutions 5.

Analysis of Banking Sector in the Present Decade The Banking sector, which was fully dominated by Nationalized Commercial Banks(NCBs) until a few years ago, has been opened up to the private sector. Four of outfive largest NCBs have been privatized. While the ownership and management of the b a n k s b y private sector is one pillar of the reforms, the other p i l l a r i s a s t r o n g regulatory environment. Private banks are prone to taking excessive risks in their lending as their own capital is much lower in relation to the depositors’ money. Theycan realize the large upside potential from high-risk asse ts while the defaults and losses in event of downside scenario are borne disproportionately by the depositors.It is the responsibility of the

central bank as a regulator to be extremely vigilant andtake prompt timely action to prevent the bank managers and owners from assumingexcessive risks. The Central Bank in Pakistan has strengthened its capacity byacquiring new skills, upgrading the quality of the existing human resources base, adopting technology and re-engineering business processes. The banking regulationand supervision are risk-based and are fully compliant with the international standardsand codes prescribed by Basle Committee. The risk management practices are beingmodified to conform to Basle II rules. The financial soundness indicators show ahealthy and sound banking system with high degree of financial stability.Along with strong regulation, supervision and enforcement, a number of measuresh a v e b e e n taken to put best corporate governance practices i n t h e s y s t e m b y prescribing ‘fit and proper’ criteria for Chief Executives, members of the Boards of Directors and top management positions. Accounting and audit standards have been brought to the International Accounting Standards (IAS) and the InternationalAudit Codes. External audit firms are rated according to their performance and track record and those fa lling short of the acceptable standards are blacklisted. These practices were put in place in Pakistan long before the scandals of Enron, World Calland Pramalat had shaken the corporate world.The banking sector has now diversified its product base and carried out a lotof innovation. They have expanded the ir out reach to agriculture, SMEs, mortgage financing and consumer financing. Not only that this diversified lending portfolio mitigates risks but it also raises the purchasing power of a large segment of population that was completely shut out from credit markets. Pakistan’s auto industry has expanded its car

production by a multiple of five times in the last four years as auto financing enabled a vast number of middle cla ss income earners to purchase the cars on monthly installments.The affordability of these new products by the middle class became possible as the prudent fiscal and monetary policies pursued by the Government left a lot of liquidityin the banking system. The healthy competition among banks, lower taxation andreduction in non-performing loans brought about a lowering of average interest ratefrom 14 percent to 5 percent. The Government, by reducing its fiscal deficit and public sector enterprises by making cash profits, freed up loan-able funds for the useof the private sector. The Central Bank by pursuing an accommodating monetary policy did not mop up excess liquidity and helped the businesses and consumersto access funds at historically record low levels.Pricing and remuneration for most of the financial services are now determined by banks on a competitive basis. There are no directions or interventions by the StateBank of Pakistan or the Government. Prior to the reforms, there were subsidizedlending rates for priority sectors and the rate paid by the Government on its borrowingthrough banking system was artificially pegged at below market rates. Banks ando t h e r f i n a n c i a l i n s t i t u t i o n s are free to set their own lending and deposit r a t e s . Government and public sector enterprises have to pay market based interest rates ondebt raised through the banking system. The Government has, however, extended theyield curve by raising funds for longer maturity i.e. up to 20 years. These bonds,called Pakistan Investment Bonds, act as the benchmark for corporate debt market.Insurance companies, Benevolent Funds, Pensions Funds, Provident Funds that havestrong appetite for investment in these long dated instruments can now find avenues

tomatch their liabilities. At the same time well reputed corporate with long gestation projects can now issue bonds to raise funds of preferred duration. These bonds arenot redeemable before maturity but are allowed to be traded freely in the secondarymarket. A number of multinational companies have raised long-term funds throughcorporate bonds. Anatomy of Banking Sector (Classification of Pakistan’s Banking Sector)

http://www.brecorder.com/market-data/stocks-a-bonds/0/1175377/ Sindh Bank Profile Sindh Bank Limited (SBL) is a newly born state-owned commercial bank, which came into existence in Sindh, towards the middle of the PPP regime. The bank's establishment was a bold step against difficult industry backdrop - dropping interest rates, shrinking spreads and the gloomy cloud of increased capital requirement looming over small banks. Sindh Bank was incorporated in 1995 as a provincial bank by the Sindh Assembly but could not take off. In 2008, the issue was taken up by Sindh Government with the State Bank of Pakistan for granting them a license for a scheduled commercial bank to operate all over the country instead of being a provincial bank restricted to Sindh province only. The SBP provided license to the bank in 2010. The bank commenced its operations with the inauguration of its first branch at Naudero on December 26, 2010. With SBL, the government aimed at executing its vision to spur economic activity enhancing small farmers' access to institutional credit in an effort to boost agricultural output specifically in Sindh. SBL also aspires to promote SME sector by providing unique financial solutions to small and medium entrepreneurs and empower women and providing banking in the untapped areas in an effort to trigger financial inclusion in the country. Two years down the road, SBL branch network stands at 160 branches in 80 cities across Pakistan with Sindh region being the hub where the bank has 100 branches while it has 48 branches in Punjab, six in Balochistan and five in KP. Development Projects Launched by Sindh Bank Limited: Besides general banking operations, SBL, since its inception, is a partner of Government of Pakistan and Government of Sindh in implementing all the development projects. Following are the brief descriptions of the projects instigated by the government in association with SBL: 1. Benazir Income Support Programme (BISP) is a non-conditional cash transfer programme that provides financial assistance to low-income families through bi-monthly cash payments. A health insurance scheme has also been launched under the programme to provide free medical treatment to deserving families. 2. Waseela-e-Haq extends small loans to females or their nominees to cater and eliminate chronic and extreme poverty. 3. Tractor Subsidies Scheme distributed 6,000 tractors to farmers in Sindh through computerised balloting. A total subsidy of Rs 1.6 billion was allocated for the plan. 4. Benazir Zarai Card allows farmers to avail loans up to Rs 0.5million to purchase quality farming products - seeds, fertilisers, pesticides etc. 6. Jhirk Mullah Katiyar Bridge Project involves designing, building and financing an approximately 25 km road including 1.2 km bridge with a speed limit of 100 km per hour connecting Jhirk to Mullah Katiyar.

Financial performance since inception With over twofold growth in its earning assets, the bank's top line boasted a remarkable growth of 66 percent in CY12. This appears to be quite a notable accomplishment of SBL where its peers' top line is battered by dropping interest rates. However, the growth in top line is mainly propelled by the interest income earned on investments. Investing in government securities remained an industry-wide trend and SBL also succumbed to it with its IDR tallying 199 percent as of CY12. However, Bilal Sheikh, CEO, Sindh Bank, told BR-Research that since most of the investments of Sindh Bank are financed by repo borrowings from SBP, taking off the portion of borrowings from investments, the net IDR clocks in at 45 percent in CY12 as against 56 percent in CY11. Conversely, in case of advances, SBL didn't jump the bandwagon. While the entire banking sector shied away from advances, as evident by a stumpy growth of 12 percent in the cumulative advances of the banking sector in CY12, advances of SBL grew by a staggering 166 percent year-on-year in CY12. Nevertheless, it should be noted that a hefty proportion of loans advanced by SBL constitute commodity financing provided to the Food Department of Sindh Government which are inherently risk-free advances. Such risk-free lending avenues enable SBL to raise the proportion of its advances amid other banks deploying a conservative lending approach. Other lending activities include loans mainly advanced to sugar industry against pledging the commodity and to cement and steel industries. Besides, the bank disbursed an agricultural credit of Rs 537 million to 1,431 farmers for farm and non-farm activities and in this way played a laudable role in financial inclusion of the unbanked. Sheikh proudly divulged that the bank has not advanced any loan to any politician. Sheikh said that "All the advances of SBL are secured by either government guarantees or other liquid securities." Up till now, the balance sheet of SBL is clean from NPLs. However, the original capacity of SBL to shun away the toxic loans will be evident from third year onwards when its long-term loans will start to mature. In this regard, Sheikh informed that that bank has taken two major initiatives to avoid bad debts: 1. Sindh Bank will not advance any long-term loan on standalone basis. Rather, the bank will opt for syndication avenues, according to its size. 2. All the loans of the bank will either be secured by sugar/cotton pledge or land/property located at high-class areas of Clifton/Defence. During the year, deposits of SBL witnessed a not-so-impressive growth of 34 percent despite a huge branch network expansion. However, Sheikh disclosed that the mainstream branch expansion took place during 4QCY12; hence its impact on deposits will be visible from CY13 onwards.

Another factor worth mentioning is that the share of government in total deposits plunged from 78 percent in CY11 to 30 percent in CY12. Conversely, the share of general public grew to 70 percent which bears a testament to general public's confidence in the bank. However, with the shriveling government deposits, the CASA of SBL dropped. Sheikh said that in order to carry out its various projects via Sindh Bank, government maintains current accounts with the bank. As the particular expenditures take place from the account, the proportion of government deposits shrink with its direct impact on CASA.--------- Though, the bank is fascinating low cost securities from public through its well-paid deposit patterns. With the expansion of its branch network by 110

branches over the year, administrative expenses of SBL showed a massive growth, as evident by a jump in its intermediation cost. This also took its toll on the bottom line of the bank which could yield a stumpy 19 percent growth despite a staggering growth in its top line. With an EPS of Rs 0.89, the bank's directors approved a cash dividend of Rs 0.60 per share (on the basis of CY11 accounts), paid to the sole owner of the bank ie government of Sindh. Future Prospects Going forward, SBL aims at further enhancing its branch network by another 40 branches to improve its market reach for general banking operations. Sheikh told that as of February, the bank has further reduced the share of government in its total deposits to 24 percent with an aim to further cut it. With PPP government in place, the bank won the achievements. However, the end of PPP government will be the real test to gauge the efficiency of Sindh Bank and the intent with which it was established in the first place - spurring agriculture and SME growth, facilitating unprivileged masses, empowering women and banking the unbanked.

Sindh Bank Limited =================================================== =========== (Rs mn) Change (%) CY12 CY11 =================================================== =========== Markup Earned 66% 6141.20 3704.28 Markup Expenses 83% 4102.78 2241.35 Net Markup Income 39% 2038.42 1462.94 Provisioning -97% 1.07 31.38 Net Markup Income after provisions 42% 2037.35 1431.55

Non Mark-up/Interest Income 137% 526.72 222.18 Operating Revenues 55% 2564.06 1653.74 Non Mark-up/Interest Expenses 149% 1277.64 513.77 Profit Before Taxation 13% 1286.43 1139.96 Taxation 2% 398.66 390.40 Profit After Taxation 18% 887.77 749.56 EPS (Rs) 19% 0.89 0.75 Source: Company Accounts

========================================= Sindh Bank Limited ========================================= Indicators CY12 CY11 ========================================= Infection Ratio 0% 0% Coverage Ratio 0% 0% Spread Ratio 33% 39% Capital Ratio 12% 22% IDR 199% 111% ADR 61% 31% CASA 78% 89% ROA 1% 2% ROE 8% 7% Source: Company Accounts