I.I INTRODUCTION
A scrutiny of the business and financial performance of an organization which facilitates strategic decision making for the management is a key resource for investors in today’s world. It involves a comprehensive ratio analysis of different areas such as profitability, liquidity, activity, gearing etc. However, ratio analysis is only effective in the event that comparative data of either prior years for the organization itself or of organizations in similar industry are available. While for assessing the business performance, a SWOT, PEST or PESTAL analysis etc could be carried out with reference to the outside environment.
The rationale for choosing this topic i.e.for this dissertation is my keen interest in becoming a professional financial analyst in the future. Although, I don’t have any hands-on experience in carrying out such an analysis but I believe that the academic knowledge obtained as a result of completing the skills module of ACCA will be quite supportive for me to prepare this project, which will help me acquire my BSC (Hons) degree awarded by the prestigious Oxford Brookes University.
After being clear in my mind on which topic to work on, choosing an organization for carrying out a business and financial analysis was another hard but an important decision. The analysis could only be effective and made attractive for the reader if sufficient data was available for the organization chosen, so I chose Allied Bank Ltd. due to the most important reason, which is my father who is a senior executive personnel in the bank and has been associated with it for the last 25 years and could be a key resource for me in arranging meetings with the management as well as providing me with information regarding different business processes of the bank which could prove to be very effective and fruitful for my project.
v ALLIED BANK (www.abl.com)
Allied Bank was the first Muslim bank, to have been established on the territory that became Pakistan, established in December 1942 as the Australasia Bank at Lahore with a paid-up share capital of Rs. 0.12 million under the Chairmanship of Khawaja Bashir Bux, the Bank had attracted deposits, equivalent to Rs.0.431 Million in its first eighteen months of business. Total assets then amounted to Rs. 0.572 million. Today i.e as at Allied Bank’s paid up Capital & Reserves amount to Rs. 10.5 billion, deposit exceeded Rs. 143 billion and total assets equal Rs. 170 billion.
The Pre Independence History (1942 to 1947)
In the early 1940s the Muslim community was beginning to realize the need for the active participation in the field of trade and industry. Banking, in particular, was an exclusive enclave of the Hindus and it was widely believed, and wrongly so, that Muslims were temperamentally unsuited for this profession. Mr. Basher Bux decided to respond to the challenge and took lead in establishing this first Muslim bank on the soil of Punjab, known as Australasia Bank.
Australasia Bank (1947 to 1974)
Australasia Bank was the only fully functional Muslim Bank on Pakistan’s territory. After partition, new branches were opened in Karachi, Rawalpindi, Peshawar, Sialkot, Sargodha, Gujranwala and Kasur. Despite the difficult conditions prevailing and the substantial set back in the Bank’s business in India, Australasia Bank made a profit of Rs 50,000 during 1947-48. By the end of 1973 the bank had 186 branches in Pakistan.
Allied Bank (1974 to 1991)
In 1974, the Board of Directors of Australasia Bank was dissolved and the bank was renamed as Allied Bank. The first year was highly successful one: profit exceeded the Rs 10 million mark; deposits rose by over 50 percent and approached Rs 1460 million. It also opened three branches in UK.
Allied Bank (1991 to date)
As a result of privatization in September 1991, Allied Bank entered in a new phase of its history, as the world’s first bank to be owned and managed by its employees.
After privatization, Allied Bank registered an unprecedented growth to become one of the premier financial institutions of Pakistan. Allied Bank enjoyed an enviable position in the financial sector of Pakistan. In August 2004 as a result of capital reconstruction, the Bank’s ownership was transferred to a consortium comprising Ibrahim Leasing Limited and Ibrahim Group.
Today, the Bank stands on a solid foundation of over 63 years of its existence having a strong equity, assets and deposits base offering universal banking services with higher focus on retail and SME banking. The bank has the largest network of on-line branches in Pakistan and offers various technology based products and services to its diversified clientele through its network of more than 750 branches.
Allied Bank’s story is one of dedication, commitment to professionalism, adaptation to changing environmental challenges resulting into all round growth and stability, envied and aspired by many.
I.II AIMS & OBJECTIVES OF THE RESEARCH REPORT :
The main objective of this report is to critically evaluate the past financial and business performance of Allied Bank and it’s future prospects through a detailed interpretation of accounting ratios as well as a comprehensive consideration of various internal and external factors onto the overall performance of the business.
The research was carried out in such a way so that, at least the following points could be fully addressed:
� An analysis of the company’s financial performance through a detailed ratio analysis.
� The key areas to be covered by ratio analysis :
o Profitability Ratios
o Liquidity Ratios
o Working Capital Ratios
o Investor Ratios
o Growth Ratios
o Gearing Ratios
� A study of the effect of external environment on the company’s performance through a SWOT analysis.
� An analysis of the competitive advantage enjoyed by Allied Bank as compared to industry peers.
PART II – Information Gathering and Accounting/Business Techniques
II.I DATA GATHERING TECHNIQUES :
Information is one of the fundamental elements for preparing an effective and purpose fulfilling research report on an organization because without adequate information, preparing a research report is nearly impossible. Information can be gathered mainly through two main sources i.e. either primary or secondary. Primary sources are sources that originate from first-hand knowledge of the person referenced in the data or from a first-hand witness while secondary sources are the ones which are simply second-hand i.e. not directly obtained from the person referenced or from a first-hand witness.
II.I (a) Primary Sources
Due to my father, I was able to set up a formal discussion session with the officials. I had close exchanges with Group Head (Financial Accounting and Reporting) & Group Head (Business Analysis and Planning) and discussed with them on current trends and future prospects of the banking industry. This also provided me the basis of SWOT Analysis.
II.I (b) Secondary Sources
Financial Statements of Allied Bank:
Writing a research report especially on a topic such as chosen, financial statements play a key role in providing essential information for analyzing the financial performance of an organization. The financial statements of Allied Bank were obtained from the financials section on their website.
www.abl.com:
This website contains not only the financials but is also a source of widespread information relating to the bank ranging from it’s history and credentials of board of directors to information of products’ offered by the bank and ATM locations all over the country.
Competitor’s (HBL’s) Financial Statements (www.habibbankltd.com):
Competitor’s financial statements were obtained from HBL’s website which was a source of information for carrying out ratio analysis for comparison with Allied Bank to make the financial analysis more meaningful and effective.
Research Reports by Independent Sources:
Equity Research Papers by AKD (Aqeel Karim Dhedhi) and Foundation Securities (PVT) Ltd:
As personally being a private trading customer of both of these securities’ trading houses, I was able to obtain these research papers from their customer’s portal. Professional financial experts of both the securities’ trading houses time to time prepare research papers on the hot-selling securities of each industry.
Newspapers/Journals/Magazines:
Sources such as magazines, industry journals and newspapers prove to be helpful in understanding the prevailing economic conditions which could be applied to the scenario only if the required information is extracted from them efficiently. I obtained these sources of information from different libraries and local newspapers.
II.II LIMITATIONS OF DATA GATHERING TECHNIQUES:
Primary Sources:
As having access to the concerned senior officials directly, in my case I don’t find any limitations faced by the primary data obtained by me as my direct questions were answered in detail by both the individuals whom I interacted with.
However, generally primary data has its limitations. The questions may be difficult to understand and they should be designed to establish a general lingo (understandability). Some respondents do not give timely responses. Sometimes, the respondents may give fake, socially acceptable and sweet answers and try to cover up the realities.
Secondary Sources:
It is easy to find and collect secondary data, however, you need to be aware of the limitations the data may have and the problems that could arise if these limitations are ignored.
� The information and data may not be accurate. The source of the data must always be checked.
� The data maybe old and out of date.
� The source publishing the data may not be reliable and reputable.
� Data obtained through different sources may contradict on different points; cross verification to obtain the most accurate data is necessary which is costly and time-consuming.
II.III ACCOUNTING AND BUSINESS TECHNIQUES USED AND THEIR LIMITATIONS:
II.III (a) Ratio Analysis:
The main accounting technique used for a financial performance valuation is ratio analysis where ratios are calculated for identifying the trend and making meaningful comparisons, based on data collected from Financial Statements.
Limitations:
� Choices in accounting policies impact reporting of income and assets and affect ratios. Companies being compared won’t necessarily be using the same rules.
� Ratios don’t always tell about changes that are coming in the future as historical data is used.
� Ratios can be a good start, but won’t tell the whole story. There can be more than one cause of a ratio or change in ratio.
� Inflation renders comparisons of results over time misleading as financial figures will not be within the same levels of purchasing power. Changes in results over time may show as if the enterprise has improved its performance and position when in fact after adjusting for inflationary changes it will show the different picture.
� No two companies are the same. Businesses may be within the same industry but having different financial and business risks affecting financial figures and hence ratios.
II.III (b) SWOT Analysis:
SWOTanalysis is a key tool for evaluating an organization and its environment. It is the first stage of planning and helps marketers to focus on key issues. The SWOT analysis provides information that is helpful in matching the firm’s resources and capabilities to the competitive environment that the business operates in. As such, it is instrumental in strategy formulation and selection.
Limitations:
� Organizations may have difficulty determining whether something in their external environment presents an opportunity or a threat as it is based on subjective judgment. Moreover, the SWOT framework does not offer any set guidelines to distinguish them.
� A SWOT analysis often consists of one- and two-word phrases to identify the strengths, weaknesses, opportunities and threats and includes no details which are also a drawback.
� SWOT provides no guidance for organizations to rank each of the elements under these four headings or set priorities.
II.III (c) Non-Financial Performance Indicators:
Measuring performance plays a vital role in developing strategy, evaluating the achievement of organizational objectives and identifying the compensation levels of managers. Choosing effective performance measures can be challenging. However, many managers think that traditional financially oriented systems no longer work adequately which have led to innovations ranging from non-financial indicators of intangible assets and intellectual capital to balanced scorecards of integrated financial and non-financial measures.
Limitations:
� Development of non-financial performance objectives can consume considerable time and expense.
� Unlike accounting measures, non-financial data are measured in many ways, there is no common denominator, so comparison is very vague.
� Another problem with non-financial measures is the lack of statistical reliability – whether a measure actually represents what it purports to represent, rather than random “measurement error”.
� Implementing an evaluation system with too many measures (financial and non-financial) can lead to “measurement disintegration”. This occurs when an overabundance of measures dilutes the effect of the measurement process.
II.IV METHODS OF COLLECTING INFORMATION:
Internet Access:
Search engines proved to be very helpful in finding the requisite data from World Wide Web. Many web resources were employed for the preparation of this report.
AKD and Foundation Securities’ Trading (PVT) Ltd’s Customer Portal:
As discussed earlier, equity research papers prepared by AKD and Foundation Trading giving a detailed insight into the performance of Allied Bank were also a good source of data obtained from their exclusive customers’ portal.
II.V ETHICAL ISSUES:
Being ethical in business as well as in personal dealings, is the need of the day especially after famous business disasters such as Enron, WorldCom etc. Preparing a research report with most of the information obtained from publicly available secondary data, maintaining an ethical stance in line with the fundamental principles of ACCA was somewhat difficult as I was faced with a couple of threats such as replicating someone’s work, presenting falsified or manipulated information etc. To counter this, I prepared the bibliography section along with cross-referencing in the entire text where other’s work was referenced or replicated.
II.VI COMPETITIVE ADVANTAGE:
Cost Controls:
Lower costs leading to competitive edge: ABL’s operational efficiency has depicted
Sequential improvement to now rank 2nd amongst the Big-5 banks. 9MCY09
cost/income ratio of 50% for ABL is only higher than MCB (31%).(The largest bank in Pakistan.)
Comparatively better cost controls have provided ABL competitive edge during the ongoing elongated slow phase of economic recovery.
Efficient management = Improving Financial Soundness: ABL’s financial
soundness indicators have shown consistent improvement since privatization in 2004. ABL’s capital adequacy ratios presently exceed regulatory requirements, asset quality deterioration has significantly slowed, liquidity position is improving and profitability margins have risen. Broad improvement in core operating metrics highlights the capability of the current management, which has spearheaded ABL’s financial turnaround. Like MCB (the largest bank in the country) sponsors of ABL are key players in the domestic textile industry. Considering the textile sector is the largest private sector borrower in Pakistan, we believe core sponsor strengths have allowed ABL to operate at an edge relative to other banks.
PART III – Results, Analysis, Conclusions and Recommendations
III.I FINANCIAL RATIO ANALYSIS:
Return on Average Shareholders’ Funds (RoE)
|
2009 |
2008 |
2007 |
Trend |
|
27% |
21% |
24% |
|
|
Explanation: |
|||
Source:Financial Statements of ABL
Return on Average Assets (RoA)
|
2009 |
2008 |
2007 |
Trend |
|
2.2% |
1.21% |
1.42% |
|
|
Explanation: |
|||
Source:Financial Statements of ABL
Earnings Per Share (EPS)
|
2009 |
2008 |
2007 |
Trend |
|
Rs.7.22 |
Rs.6.43 |
Rs.6.31 |
|
|
Explanation: |
|||
Source:Financial Statements of ABL
Income to Expenses
|
2009 |
2008 |
2007 |
Trend |
|
2.81 times |
2.16 times |
2.43 times |
|
|
Explanation: |
|||
Source:Financial Statements of ABL
Price Earning (P/E)
|
2009 |
2008 |
2007 |
Trend |
|
8.00 |
4.90 |
17.20 |
|
|
Explanation: |
|||
Source:Financial Statements of ABL
Dividend Yield
|
2009 |
2008 |
2007 |
Trend |
|
7.98% |
2.31% |
||
|
Explanation: |
|||
Source:Financial Statements of ABL
Dividend Payout
|
2009 |
2008 |
2007 |
Trend |
|
45% |
39% |
40% |
|
|
Explanation: |
|||
Source:Financial Statements of ABL
Total Assets to Shareholders’ Funds
|
2009 |
2008 |
2007 |
Trend |
|
39% |
40% |
||
|
Explanation: |
|||
Source:Financial Statements of ABL
Capital Adequacy Ratio (CAR)
|
2009 |
2008 |
2007 |
Trend |
|
39% |
40% |
||
|
Explanation: |
|||
Source:Financial Statements of ABL
III.II SWOT ANALYSIS
Strengths
� In an uncertain/tough interest rate milieu, ABL is focused on corporate banking which is “relatively” stable, easier to manage and less prone to asset quality deterioration.
Largest on-line branch network should help ABL effectively gain greater exposure to SME & consumer segments going forward as the economy improves.
Strong and experienced management, which has effectively led the profitability turnaround at ABL since 2005 and has been further bolstered by induction of senior bankers from MCB including the president/CEO.
Weaknesses
ABL’s low free float has limited investor interest in the stock.
Relatively higher percentage of non-interest income is constituted by dividends & capital gains from the equity investment portfolio. If the stock market weakens this might create drag on earnings.
Presently narrow focus on corporate banking could lead to lower profitability growth if corporate loan demand doesn’t pick up.
Opportunities
Strong corporate relationships should help ABL strategically adjust its loan portfolio and gain exposure to expanding sectors such as power and fertilizer.
At the same time, with textile sector beginning to show a turnaround, sponsor’s strong relationship base in that sector positions ABL attractively to benefit from changing fortune of its textile clients..
If consumer demand recovery continues, ABL can potentially ramp up its ongoing conservative consumer banking drive.
There is likely improvement in corporate deal flows as economic growth picks up.
Threats
An earlier than anticipated reversal in the ongoing monetary easing process would hinder ABL’s efforts to expand its consumer portfolio and raise the level of delinquencies.
ABL’s ongoing IT up-gradation might take more time than projected and negatively affect its relative operational efficiency.
Any regulatory change that impacts capital or liquidity requirement can potentially cause hurdles to growth.
ABL’s has above average exposure to the cement sector which can be a potential asset quality risk.
III.III NON-FINANCIAL PERFORMANCE INDICATORS’ ANALYSIS:
Employees per Branch:
|
2009 |
2008 |
2007 |
Trend |
|
11.00 |
9.62 |
||
|
Explanation: |
|||
Source:Financial Statements of ABL
III.IV RECOMMENDATIONS:
Allied Bank was first Muslim bank to be established on Pakistan soil, today being one of the largest and prominent banks of Pakistan. Allied Bank is providing its customers with value, quality and distinctive level of service and high ethical standards in all dealings with them. But there is always need for improvement and need to identify any deficiencies if they are present. Some of these identified by me are stated below:
� As compared to other competitions of Allied Bank its deposits and advances percentage is less so there is a desperate need that to adopt such policies that will help to increase these deposits and advances attract more and more customers by winning their confidence.
� During some previous year such schemes and policies are launched by Allied Bank which are not needed by customers or perhaps these are not marketed properly and launched without any market research. That is why they got failure. So measures should be taken by top management to organize the marketing department. There should proper research before launching any product and proper marketing should be done for it to get success.
� There is a desperate need for Human Resource Development by hiring professionals and competent persons and training the existing force. It will contribute a lot more in progress of bank.
� Bank has not yet consumer project and commercial banking it is advised that bank should established 3 types of banking under specialized heads. These are
� Project financing
� Consumer financing
� Commercial financing
� All these three segments should be run separately by the competent persons to enhance performance and quality of work.
� There is also a need to provide facilities of house and car financing. The bank has an edge over newly established private banks of having a large branch network all over the country and entering this segment can prove to be quite fruitful.
III.V CONCLUSION:
The research and analysis conducted to analyze the financial situation of ABL has been productive in understanding the current standing of ABL in relation to its yearly performance as well as its position in the local banking industry.
The liquidity ratios were constant during the year and no major deviations were noticed. ABL was able to maintain its Advances to Deposit ratio and the Liquid Assets to Total Assets ratio improved considerably. This improvement is supported by the fact that considerable amount of the liquid funds is placed with credit worthy financial institutions.
The favorable economic environment complemented by strong branch network of ABL has helped generation of higher revenues, in spite of rising cost of deposits. This has resulted in significant bottom line profit growth during 2006. The after tax profit of ABL has rose to Rs.4,397 million, portraying an impressive growth of 42% over the last year. ROE and ROA show strong growth during the year. Profit Margin adversely suffered due to increase in the mark-up/return/interest expenses during the period. This increase was inevitable due to the rising interest rates in the economy. The same trend was followed by the local banking industry as a whole.
The Asset Quality Ratios also highlights cleaner portfolio and adequate coverage for the non-performing advances.
This current capital structure depicts the intentions of the management. The gearing (debt to equity ratio) indicates that ABL is trying to resolve the capital requirement under Basel II accord mainly through its equity. ABL tried to cover the maturity risk of its advances by raising sub-ordinated loan of Rs.2.5 billion.
The position depicted by ABL’s Valuation Ratios suggests that ABL is strongly progressing in the equity markets. The market value of ABL’s share has increased from Rs.86.50 as on December 31, 2005 to Rs.93.50 as on December 31, 2006. As per pecking order theory, retained earnings are the cheapest source of finance. This is what is being followed by ABL and the sharp rise in the share price envisages that the NPV of the future investments is high from investors’ point of views as well.
However, the Horizontal Analysis (HA) reciprocates the opinions formed by the Vertical Analysis. Vertical analysis concludes that ABL is progressing well in almost all areas whereas HA presents an opposite picture. The observations made in HA clearly show that ABL was an opportunist and took a part from the growth in the industry but was unable to match with peer banks.
So far ABL has been able to encash upon the strengths to transform the bottomline drastically. Serious measures taken to overcome the weaknesses and threats, may lead to a better position among the Top5 banks. The encouraging economic conditions and the ever increasing demand for banking services with a well established infrastructure, ABL has all that is needed for exponential growth in the coming years.