KASB Bank Limited was consolidated on October 13, 1994 as Platinum Commercial Bank Limited. The name was accordingly adapted to KASB Bank Limited on February 21, 2003, when the greater part shareholding was procured by the KASB Group, one of the most substantial money related utilities assemblies in Pakistan with heading positions in value and indebtedness business and making solid types of progress in customer saving money and possession administration. The KASB Group secured by Mr. Khadim Ali Shah Bukhari in 1952 has been working adequately in saving money, securities, renting, innovation, research and community projects. The Group contains KASB Bank Limited and its several completely possessed subsidiaries; KASB Securities Limited, a full utility corporate element giving premium business, research, backing managing an account and report aids, KASB Technology Services Limited, an Information Technology stage giving IT explanation and KASB Funds Limited, a possession administration association that has as of late started its first fluid store in the name of KASB Liquid Fund. KASB Group gets a charge out of the dissimilar playing point of having improved a strategic connection with Merrill Lynch, a famous worldwide backing saving money solid, on the KASB Securities side of its business. [1]
KASB Bank Limited, with its presence in 13 urban communities, through its arrangement of 35 limbs, conveys an all out extent of keeping money aids in Consumer, SME & Middle Market and Corporate Banking. The working framework within the Bank has been patched up by redirecting assets towards sectioned business ranges which have been demonstrating enhanced operational actions. Likewise being given a necessity is the Human Resource infrastructure moreover giving careful consideration to the streamlining and upgrading the interior arrangements, methods and procedures. Information Technology infrastructure is also being recreated by acquiring solutions best suited to the Bank's requirements and to meet the envisaged growth strategy.
Vision
Partnering Success
ValuesMission
V
Ision
Customer Focus and Innovation
A
Ttitude
Passion and Quest that Drives Us
L
eadership
Sense of Integrity, Trust & Accountability
U
Pright
Commitment to Being a Credible Corporate Citizen
E
Xcellence
Distinction as a Habit
S
Ynergy
Ability to Harness the Power of Teams
*SOURCE: Official Website www.kasbbank.com
Associated Companies
The primary reason why I chose KASB Bank is that the KASB Group has had its presence in the Pakistani Markets since 1958 and it has been providing various financial services specializing primarily in Investment Banking, Research, Asset Management and Commercial Banking. This group has had close ties with the investor community of Pakistan and currently it is controlling four businesses i.e. KASB Bank, KASB Securities, KASB Funds and KASB Mudaraba. One of the main reasons for the inception of this bank was to facilitate the investors in their financial market trading transactions.
Currently the bank has 104 branches and its operating in 43 cities in Pakistan. It is offering solutions to large portfolio of investment, corporate and consumer banking. According to the financial reports of first quarter of 2012, the bank's assets have crossed Rs 100 Billion, which has double since December 31, 2010. Quite recently, KASB Bank was declared the Corporate Finance House of the Year in the category of Equity and Advisory (Banks) by a panel of senior industry experts, acknowledging the quantum and sophistication of investment banking deals executed by the bank during the year under review.
COMMERCIAL BANKING
Mahana Khazana
Mahana Khazana is a type of account that provides the features of both a savings account and a current account. This product provides the customers with monthly interest earned on their profits. It also provides various facilities such as unlimited deposits & withdrawals, running finance facility up to 90%, locker facility, free Visa Debit Card, real time online banking, utility bills payment facility through internet banking & ATM, free Pay Orders for balances above 1 million, and 24/7 phone banking facility
Maheena Asaan Plus
Maheena Asaan Plus is a one year term deposit account. The profit is directly credited to the depositors' Maheena Asaan Plus account, giving them extra cash to use every month. Minimum deposit required for this account is Rs.100,000 and maximum Rs.20 Million. There is a running finance facility of 75% of the amount investment. Also it provides free Cheque Book on minimum Rs. 1,000,000 invested, free Internet Banking, free ATM/Visa Debit card, and free Online Banking.
Business Flex
KASB Business Flex is a current account. It offers all businessmen and executives convenient and reliable banking solutions for all business dealings. It provides freedom and flexibility to transact wherever businessmen go. Some important features include free funds transfer facility to all KASB Bank Branches, Running Finance facility, no minimum Balance requirement, free unlimited Pay Orders & Demand Drafts, and utility bills payment through Internet & ATM.
KASB SAMAR Savings Account
This is a savings account for the senior citizens. This account can be opened by any individual of 60 years and above. In case of joint account one of the account holders shall be 60 Years or above. Some important features include, no minimum or maximum deposit limit, monthly profit payment, profit calculated on the minimum balance during the month, and unlimited number of transactions.
KASB SAMAR Term Deposit Account
This is quite similar to the KASB SAMAR Savings Account. Most of the features are same except for a few. For Instance, this is one year fixed deposit account which pays a monthly profit to the depositor. There is a minimum limit of Rs 50,000/- for this account.
Middle Market and SME Banking
KASB Bank offers Customized solutions for individual businesses. It also provides flexible financing to accelerate the growth. Another feature of this particular banking is One window financial solutions.
AGRICULTURE FINANCE
Various schemes such as "KISSAN SARMAYA" scheme has been designed and aimed at meeting all types of financial needs of agriculture sector. Farmers are eligible for "KASB Agricultural Credit" for each of the following purposes.
Farm Credit
Production Finance/ Working Capital
Quite similar to any viable business credit might be accommodated working capital needs of the agriculturists, for example seasonal necessities for products i.e. buy of seed, manure, pesticides and weedicides and so forth. by the ranchers. Moreover short term back could be accommodated sprayers, procured ranch work, power, diesel, oil for tractors and tube well operations, fuel wood for curing of tobacco, electric charges for Tube well operations and so forth. Short term fund for enlist charges for space and transportation, liabilities on promoting, cost of pressing and material and preparing cost, working capital for space of crude agribusiness/ ranch transform by ranchers from field just, is moreover given.
Development Finance
Credit could be given to buy of ranch hardware, supplies and partnered extras. Likewise it might be accommodated Land upgrade and leveling.
Non-Farm Credit
Non-homestead credit incorporates financing domesticated animals, dairy, poultry, fisheries, ranger service and whatnot. In term of time of money, non-ranch credit is separated into the taking after two classifications
Production Finance
Short term back for the things i.e. buy of nourishes, raining and veterinary overheads, manual sperm injection, employed homestead work, power, and so on.
Development Finance
Medium and lifelong fund for buy of animals, drain preparing and chilling plants, cruiser for milkmen, veterinary centers, compound food causing industry, poultry to be farming, dairy cultivating, marine fisheries, crisp space for fisheries, ranger service, apiculture, sericulture and so forth.
Horticulture financing offices are ready all through the nation at designated agribusiness giving limbs. Different sorts of financing are available for short, medium and lifelong hinging on farmer's prerequisite and the nature of fund.
CONSUMER FINANCE
GharAsaan- Home Loan
This is a Home Loan facility with installment plans for the customers. GharAsaan Variants have been designed in such a way that they are convenient and comfortable for customers with different needs.
Cash Asaan Personal Finance
Cash Asaan Personal Finance is a personal loan with affordable equal monthly installments. The customers can use Cash Asaan for everything that money can buy.
TRANSACTION BANKING
Correspondent Banking
KASB Bank offers a wide range of Correspondent Banking Services such as Credit, Deposit, Collection, Clearing, and Payment services to banks and financial institutions.
Trade Finance
The Bank offers an extensive range of trade products and services through its global correspondent banking network - which spans 69 countries. It aids importers and exporters find optimal solutions for their individual requirements for cross border trading. It provides all trade related services such as managing documentary collections, letters of credit and trade guarantees alongside the risk management and structured export finance.
Cash Management
The cash management services provide a wide range of innovative products, designed to facilitate the customers to efficiently manage their cash flows thus reducing their transactional and administrative costs, and efficient Accounts Payables and Receivables Management.
Alternate Banking
Call Centre - KASB ONE Phone banking
KASB Connect is a 24-Hour contact focus which fills in as a solitary access focus for all our clients all through the nation. With simply a solitary access telephone call, clients can have access to an extensive variety of tele-managing an account explanation and personalized saving money aids.
ATM Network
The Bank has a system of 94 ATMs countrywide, which keeps up the drive to broaden by the day. Additionally, KASB is in addition part of the 1 Link, MNET and VISA systems. This permits utilizing the KASB ONE VISA Debit Card opposite Pakistan at more than 4,000 ATMs countrywide and at more than 1.6 million ATMs worldwide. The KASB ONE VISA Debit card is in addition embraced on all VISA confirmed machines showing the VISA Plus mark.
Internet Banking
Online Banking lets the clients perform a mixture of budgetary transactions; for example, supports exchange, bill installments, check record articulations and requisitions for advances.
Mobile Banking and SMS Alerts
Mobile Banking allows the customers to perform various transactions, such as, fund transfer, bill payments, and balance checks. Also the Bank offers transaction based SMS Alerts service to all its account holders.
Home Remittances
KASB lets its customers receive their remittances instantly and absolutely free. It offers two options for receiving money in Pakistan; Cash Payments and Instant Credit of Funds for account holders. Instant credit of Funds facility is available for non-account holders as well through which they can receive funds on the same day.
CORPORATE BANKING
KASB Bank offers uniquely crafted features and utilities for corporate customers as the center of the bank is on client's needs and to meet their needs by conveying value utilities rapidly. Corporate Banking Unit is furnished with ability in furnishing fixes for all On/Off Balance sheet needs of our clients, through the ability of KASB Group's presence in a reach of money related utilities.
The bank provides various tools for the clients to cater to their needs such as:
Working Capital and Trade Finance solutions, including Imports, Exports, Guarantees, FOREX Options and Remittances.
Lifelong needs, through obligation financing. Tailor caused monetary record to be structuring is moreover offered through the Investment Banking unit's dexterity.
Off Balance sheet, explanations for derivatives are operated through a greatly skilled Treasury derivative unit.
Cash Management through a dedicated and innovative cash management unit.
INVESTMENT BANKING
As the heading venture keeping money solid in Pakistan KASB has far reaching information of household businesses and commercial ventures and generally-created connections with neighborhood and worldwide moguls. KASB is the sole nearby speculation bank to be associated with a worldwide lump-section bank, i.e. Bank of America-Merrill Lynch. Our utilities incorporate prompting on:
Mergers & Acquisitions
Privatizations
Project Finance
Restructurings
Equity raising through IPOs/ SPOs and issuance of Global Depository Receipts
Debt raising through issuance of TFCs, Sukuk and Syndicate Finance
Structured Finance services through Quasi Equity and Securitization
KASB has been exceptionally dynamic in Pakistan and has finished up, right around alternates, the final 6 back to back cross outskirt transactions in Pakistan which have bring about a US$2.3 billion inflow of strange trade on account of 2006. KASB has created more private division nonnative inflow into Pakistan than anybody else and does whatever it takes to highlight transaction openings in Pakistan to universal companies and worldwide private equity/hedge supports.
KASB has shut a percentage of the most impressive transactions in Pakistan's history incorporating US$920mn Malayan Banking Berhad (Malaysia) financing in MCB Bank Limited, US$460mn procurement of Paktel Limited by China Mobile, US$650mn GDR for United Bank Limited, US$150mn GDR for MCB Bank Limited and US$109mn Lucky Cement GDR. [2]
TREASURY
MONEY MARKET
Products and Services
The KASB Bank money market desk furnishes its clients with a mixture of report and financing utilities. We award our clients focused quotes and speculation consultation dependent upon their particular needs. We in addition permit our clients to sink money into Government securities by opening an IPS (Investor Portfolio Services) record for their benefit with the State Bank of Pakistan.
The main types of Government securities that our customers can invest in are:
Treasury Bills (T-Bills)
Treasury bills are zero coupon instruments issued by the Government of Pakistan and sold through the State Bank of Pakistan by means of fortnightly barters.
T-Bills are issued with developments of 3-months, 6-months and 1 Year and are evaluated at a rebate. T-Bills are risk free, SLR worthy securities, that are actively changed in the auxiliary business and are in this way remarkably fluid.
They are issued with a least category of Rs.100, 000.
Pakistan Investment Bonds (PIBS)
PIBs are lifelong bonds issued by the Government of Pakistan and sold through the State Bank of Pakistan by means of intermittent auctions.
PIBs are issued with tenors of 3, 5, 7, 10, 15, 20 and 30 Years. Being upheld by the Government of Pakistan, they display a flat hazard lifelong venture choice.
The Pakistan Investment Bonds give a settled semi-yearly coupon and reimbursement of primary at maturity. They are remarkably fluid SLR worthy securities that are actively bartered in the secondary market.
The minimum denomination of PIBs is Rs.100, 000.
FOREX MARKETS
Products and Services
The KASB Bank FX desk offers its customers a vast variety of FX products including:
Ready Purchase/Sale
The KASB Bank corporate work area gives all corporate and business clients the most recent business sector rates for all transactions proportionate to US $5,000/-or more. For sums less than US $ 5,000/-, the rates said in the rate sheet are material.
Forward Sale
The outward send deal permits Importers with L/Cs to book rates on their destiny duties with a specific end goal to fence in opposition to any rate variances and volatility.
Forward Purchase
The outward forward buy permits exporters with L/Cs or contracts to book rates for their receivables keeping in mind the end goal to support in opposition to any fate rate vacillations.
Foreign Bill Purchase (FBP)
This office permits clients to display their fare bills and promptly accept rupee office. The bank buys and rebates the reports and gets the returns upon the development of the bill running from 12days to 180 days. The exporters can in addition introduce the bill in opposition to any forward booking for marking down, and change the returns of the forward contract through that bill.
Foreign Currency Financing (FCF)
The Foreign Currency Finance (FCF) office permits exporters to benefit different coin credits on LIBOR based investment rate for up to the most extreme of six months.
Foreign Currency Import Financing (FCIF)
The Foreign Currency Import Finance (FCIF) office permits shippers to benefit unfamiliar coin credits for up to six months in opposition to DA or sight L/C utilizing LIBOR based investment rates.
FINANCIAL PERFORMANCE
One very significant issue with the bank is that the bank has been experiencing losses since 2009, while its peers, in terms of balance sheet sizes and number branches, have been making profits. The overall industry is also doing fine as it can be seen in the exhibits provided at the end. The Net Interest Margin of the bank has been negative amplifying the losses of the bank. Despite the injection of Rs 13 Million in equity, the bank has been unable to cover the losses. Why this bank has been unable to generate income for its shareholders, will it be able to sustain itself and how can this situation be handled effectively are some intriguing questions and this is what I want find out by doing research on this bank.
After a preliminary analysis of the annual reports of KASB Bank, I found out that the bank' Liabilities (Deposits) are growing at accelerated rate as compared to past few years. Due to this there is a similar trend in the growth of the Assets of the bank but an interesting fact here is that the main assets (Advances) are not growing; in fact they are showing a declining trend since 2009. So the growth in Assets here is not because of Advances but because of Investments and other liquid assets. There has been a steady increase in Investments of the bank for past few years but in 2012, the investments figure has increased to more than twice of that of December 31, 2011. Similarly lending to other financial institutions has increased more than three folds. Furthermore there has been a substantial increase in Balances with other Banks. The Net Interest Margin is finally positive after three consecutive years but still the bank is producing losses.
Assets of bank have been growing but the advances are not. This means that the bank is relying lesser on its core business, and that would be justified somewhat if the bank were making substantial profits from its non-core activities. But that is not the case, so it really doesn't make sense why the bank has restructured its balance sheet in such a way. The growth in assets is due to increase in the liquid assets. Liquidity is always inversely proportional to the Profitability of any firm. So if the bank has increased its liquidity it means that the profitability of the bank is going to decrease automatically. Looking at the historical profitability of KASB Bank such a step is unadvisable but the bank is doing it anyway. The rationale behind this would be identified and discussed in detail in this project.
The above stated facts clearly show that there is a problem with KASB Bank's financial structure and it needs to be looked into. Why the bank is altering its balance sheet structure and the implications it has on the bank's performance have to be found out in order to identify the core problems and propose the best possible solutions.
LITERATURE/INDUSTRY REVIEW
The area of research for this study is the Profitability of KASB Bank. In simple words the business of banking is taking in deposits from various individuals with surplus resources at a specified rate and giving these out as loans to individuals with deficit in resources at a higher rate. The rate differential or the Spread is the main source of income for a bank. How well a bank manages this differential determines the income of the bank. Banks very rarely compete on competitive rates because that is a dirty game and it is discouraged through mutual understanding. So the margins for spread are quite similar in the industry.
Profitability is a reflection of how banks are run given the environment in which banks operate. In fact, profitability should mirror the quality of a bank's management and the shareholders' behavior, the bank's competitive strategies, efficiency and risk management capabilities, Herrero (2007). [3]
A bank is operating on a very thin window which means that it cannot bear substantial losses consistently. Any loss in any particular period means that the equity of the bank is being wiped out in that period. In banks the equity proportion is quite low as compared to other business firms, so in case of losses it is quickly wiped out, leading the bank towards default. To avoid such circumstances banks have to be revived with equity injections so that they do not default on depositors' money. [4]
Pakistan's financial sector consists of a wide range of commercial banks, specialized banks, insurance companies, leasing companies, microfinance banks and Islamic banks. All these institutes offer a wide range of products and services to facilitate their customers. NBP, HBL, UBL, MCB and ABL are the top 5 banks of Pakistan, and the share of these top banks is more than 50% of the total assets of the banking industry and exactly 50% of the total investments made by all the banks are contributed by these top 5 banks. Banks mostly prefer to invest in Government securities and approximately more than 83% of their investments are in this particular segment. This is because Govt. borrowing has increased manifolds over past few years and banks would obviously prefer lending to a default free entity, eliminating credit risk. Consequently the consumers or private entities suffer. [5]
During the past few years, financial markets and institutions have undergone many changes and witnessed more than 40 transactions of acquisitions and mergers of bank and non-bank financial institutions for the purpose of consolidation and diversification. Today, banking sector is significantly contributing in the economic growth of the country in accordance with the SBP rules and regulations. Currently, Pakistan has 5 public sector banks, 22 local private banks, 7 foreign banks and 4 specialized banks. The NPLs are 5.6% of the total banking credit, showing the employment of better banking practices and improved asset quality in the sector. [6]
In general, despite the apparent difference in tenors, NSS instruments have been a key substitute of bank deposits, particularly of fixed tenor. It is partly because NSS instruments offer early encashment facility without penalty. Typically, in the presence of significant interest rate differential, movement towards NSS instruments is understandable. However, it has not always been the case. For instance, while interest rate differential has been around 6 percent during FY02-06, flows towards NSS instruments have actually plummeted. This was largely on account of banning institutional investments in NSS, suspension of DSCs and SSCs sales through banks and disallowing banks to lend against NSS instrument. However, with removal of ban on institutional investment in late 2006, flow towards NSS instruments resumed. In recent years, upward revision of NSS rates has attracted strong flow of investments, though fixed deposits have revived as well, particularly in FY11 amid strong growth in overall deposits. [7]
Preceding the well known monetary emergency, the overabundance liquidity and rivalry right around the banks incited them to move at a distance from the time honored confined item extend of credit to the administration and general society segment endeavors, exchange financing, huge name corporate credits, and multinationals. The borrower base of the banks extended numerous crease as the banks expanded into agriculture, SMEs, customer financing, contracts, and whatnot. The white collar class which couldn't bear to purchase autos or houses/apartments as it did not have the monetary quality for money buys, has been the most gigantic beneficiary of these unique items and utilities.
Assets of the banking sector are growing at the rate of 15% whereas deposits are increasing with a rate of 14.5%. Advances have decreased by 0.2% and investments in securities have grown tremendously by 42.5%. Profit after taxes has also increased by 69.23% from last year. [8]
Asset quality of overall banking sector has improved. NPLs of the banking system are driven by a number of factors including economic activities, legal system, unexpected shocks, and credit evaluation ability of the banks. Apart from of the underlying factors, increase in NPLs has strong influence on the banking spread. It not only reduces the earning assets of banks, but also imposes a cost in the form of provisions. In case of Pakistan, the banks are required to provide for the amount of nonperforming loans after adjusting for permissible partial benefit of collateral. NPLs to total loans ratio has improved from 14.7 to 16.2 in Dec 2011 as per SBP calculations. Same effect has been observed if we look at this ratio by banking segments (commercial, foreign, specialized banks). Overall ratio of provisions to NPLs has remained the same. Banks have lent mostly to textile sector whereas agriculture sector remained comparatively neglected. Highest NPL ratio has been observed by electronics sector, but banks have not lent a significant amount to this sector. Textile sector has shown 28% infection level which is quite high among all other sectors. The NPL situation in consumer financing has improved if we compare it with previous years. [9]
Liquidity position of overall banking sector has improved if we check the liquidity position with total assets or total deposits as base. Total Advances have decreased, which has also caused the banks to invest excess liquidity in investments which are liquid assets causing the banks' overall liquidity situation to be better off. [10]
Distinct from other risks, market risk is an important risk for banks. Its distinction, particularly from credit risk, often gets blurred as market and credit risks may interact to reinforce each other and result in substantial losses if not managed jointly. Despite its significance, when measured in terms of current practices of calculating risk weighted assets, the contribution of market risk remains trivial in the overall risk profile of the banks.
Moreover, efficient management has introduced good services and products which really have attracted more customers towards banking. Number of branches has also been on the rise, which has definitely increased the total deposits. This excess liquidity has been invested in securities or extended as loans. Interest income from both advances and securities raised the net income level of overall banking sector. Although expenses have also increased by 10% due to extension in branch network and hiring of employees, they are controlled and income has increased by 17% as compared to last year. Along with interest income there is an increase in fee, commission and other service charges leaving a positive impact on net income. Profit after taxes has increased by 69%. NBP in particular has shown record profits too. [11]
More than 50% of the total advances extended to any sector are contributed by these top 5 banks. Therefore we can say that most of the banking business is concentrated around these top banks. Similarly these 5 banks have highest depositor base and enjoy more than 50% of total deposits. More than 75% of the profits of the banking sector have been earned by these banks. So, in order to remain in the market and continue doing business, the medium and small sized banks will have to remain committed to continuous improvement in service quality as well as product innovation. [12]
The literature on Profitability of a bank is vast and a great deal has been written about the determinants of the Profitability. It is evident from the studies that there are two types of factors determining the profitability of a bank; internal and external. Internal factors may be bank specific characteristics and external may be macroeconomic environment and market/industry characteristics; Ramlall (2009). [13]
Size, capital, efficiency and credit risk are considered as the most significant Internal determinants in most of the studies. Demirguc-Kunt and Maksimovic (1998) and Akhavein et al. (1997), all have identified that a positive relationship exists between size and profitability. As far as capital is concerned, if a bank has higher level of capital it can meet its regulatory capital requirement easily and may even have surplus funds to give out as loans in order for it to earn higher profits, Havrylchyk et al. (2006).Furthermore, if a bank has efficient operations it should be able to earn higher profits as it would be able to maximize its net markup/interest income, Molyneux and Thornton (1992). Finally, we know that in order to earn higher return one has to take higher risks. But if the credit risk is increasing it does not necessarily mean that the bank will be able to generate higher returns as more loan loss provisions would have to be kept aside, thus compromising profitability. This negative relation was found by Miller and Noulas (1997). [14]
The external factors can be divided into Macroeconomic Determinants and Industry Specific determinants. The macro-economic factors include; interest rate, cyclical output, the level of economic development and stock market capitalization. Cyclical output and the level of economic development usually represent the business cycles since banks' profits are expected to be related with the business cycles, being higher in case of boom and lower in case of bust, Demirguc-Kunt and Huizinga (2001) and Bikker and Hu (2002). Havrylchyk et al. (2006) found that stock market capitalization and banks' profitability are negatively related as equity and bank financing are substitutes of each other. A good example is the quality of managerial decisions (Berger and Mester, 1999). The quality of bank management is closely related to corporate governance (DeYoung and Rice, 2004). [15]
The industry-specific factors include, may be the regulatory environment and the market sentiments in which all the banks operate. Basically, a concentrated market will confer higher profits for banks as they are able to tap a higher market share relative to banks capturing only a small portion of the market. On the other hand, in case of a well-diversified market structure, banks are expected to enjoy low profits level on the back of a highly competitive market structure. [16]
During the recent global financial crisis, Liquidity has had a very important role. When the crisis hit, the surplus units who had provided the funds in the market started pulling out. This substantially increased the demand for liquidity. Banks all over the world faced problems and in some extreme cases they had to merge with other banks. As a result, in order to revive the financial stability local authorities had to step in and inject liquidity in many countries, Longworth (2010); Bernanke (2008). [17]
Later on, the authorities made it an obligation for banks that they increase their liquidity level in order to avoid inconvenience at the time of need. Policymakers have suggested that banks should hold more liquid assets than in the past, to help selfâ€insure against potential liquidity or funding difficulties. Since liquid assets such as cash and government securities generally have a relatively low return, holding them imposes an opportunity cost on a bank. If the regulation regarding liquidity is absent, the bank will only hold liquid assets until the point where it does not compromise the profitability of the bank. The reason for this behavior by banks is that liquidity compromises profitability. If one wants to increase liquidity, profitability will automatically be decreased and vice versa. However in time of need, the policymakers can regulate by ordering the banks to increase liquidity beyond that point, in order to ensure overall financial stability.
The analysis of liquidity holdings for firms has been done in a great deal of literature. However, literature regarding the impact of liquidity and its relation to the profitability of a bank is limited. This relationship is not the focus of this paper; it is one of the angles that we will be looking at.
Berger (1995) looked into the statistical relationships between earnings of banks and capital for U.S. banks over the period of six years, from 1983-89. He found out that in perfect capital markets with symmetric information, [18] there is a positive relationship between capital and return on equity. These results, according to various scholars, are consistent with the "expected bankruptcy cost hypothesis". In other words, if the bank has higher level of capital, it will decrease the cost of funding and cost of issuing additional capital to such an extent that at some point it might even offset the costs completely. While Berger (1995) applies the concept of the "expected bankruptcy cost hypothesis" in the realm of capital, it is also conceptually applicable to the impact of liquid assets on profitability, whereby banks holding more liquid assets benefit from a superior perception in funding markets, reducing their financing costs and increasing profitability. [19]
According to Morris and Shin (2010), 'illiquidity risk' is one of the components of Credit Risk. The model gives a formula for "illiquidity risk" and the authors show that if the liquidity ratio of a bank increases it reduces the probability of illiquid default. If an increase in the relative liquid assets holdings of a bank decreases its probability of default, and if the "expected bankruptcy cost hypothesis" is indeed correct, then holdings of liquid assets should exhibit a positive relationship with bank profits. On the contrary, holding liquid assets means the bank will have low return relative to other assets, thereby having a negative effect on profitability. Thus, overall, we expect liquid assets to exhibit a nonâ€linear relationship to bank profitability in which increasing liquid assets would improve a bank's profitability through the "expected bankruptcy cost hypothesis", as long as the benefit of holding liquid assets is more than the opportunity cost of low return.
Interest spreads and margins play a very important role in determining the profitability of a bank. An exhaustive audit of determinants of investment spreads is offered by Hanson and Rocha (1986). That paper outlines the part that verifiable and unequivocal expenses play in raising spreads and goes ahead to discourse on a portion of the determinants of bank cost and benefits, for example expansion, scale economies, and business sector structure. Utilizing total investment information for 29 nations in the years 1975-1983, the creators discover a positive correspondence between premium edges and expansion. Brock and Suarez (2000), case in point, demonstrate a negative connection between bank spreads and NPLs over sum credits for most Latin American keeping money frameworks. [20]
The balance sheet structure of a bank is another determinant of the profitability of a bank. On the asset side, a larger share of loans to total assets should imply more interest revenue because of the higher risk. However, loans also have higher operational costs because they need to be originated, serviced and monitored. All in all, profitability should increase with a larger share of loans to assets as long as interest rates on loans are liberalized and the bank applies mark-up pricing. In this vein, Demirguc-Kunt and Huizinga (1999) report that banks with a relatively high share of non-interest earning assets are less profitable. In addition, government intervention can also affect the balance sheet structure. Fry (1994) shows that administered lending and deposit rates result in the misallocation of credit. On the liability side, a larger proportion of deposits should, in principle, increase profitability as they constitute a more stable and cheaper funding compared to borrowed funds. However, they also require widespread branching and other expenses. Such related costs seem to weigh more than the benefits in emerging countries (Demirguc-Kunt and Huizinga, 1999). [21]
Bank size is generally considered a relevant determinant of profitability but there no consensus on the direction of influence. On the one hand, a bank of a large size should reduce costs because of economies of scale. In fact, more diversification opportunities should allow to maintain (or even increase) returns while lowering risk. On the other hand, large size can also imply that the bank is much harder to manage or it could be the consequence of a bank's aggressive growth strategy. The empirical evidence is also mixed. Goddard et al. (2004), Garcia-Herrero and Vazquez (2007) show that very large banks in the industrial countries tend to be more profitable. Sitroh and Rumble (2006) found out that smaller banks are more profitable. [22]
Market power may also influence profitability, according to two well-known theoretical models. The first one is the structure-conduct-performance hypothesis, which asserts that a positive relationship between the interest rate margin and concentration (a proxy for market power) reflects non-competitive pricing behavior. The second one is the efficient-structure hypothesis, for which a bank's higher interest margin is attributable to more operational efficiency, better management or better production technologies. Since these banks will also gain a larger market share (another proxy for market power), the structure will become more concentrated due to efficiency gains (Berger, 1995). The policy implications of the two hypotheses go in opposite directions. Under the structure conduct theory, high profits stem from market power so that antitrust regulation is welcome to allocate resources more efficiently. By contrast, under the efficient-structure hypothesis, breaking up efficient banks, or forbidding them to grow, may raise social costs by leading to less favorable prices for consumers. The empirical evidence on concentration or market share and profitability is mixed. [23]
Finally, the macroeconomic environment may also influence bank profitability through many different channels. Credit risk, for example, is influenced by economic growth, inflation and the level of real interest rates as they affect the borrower's repayment ability and the value of collateral. Demirguc-Kunt and Huizinga (1999) show empirical evidence that rapid economic growth and high real interest rates increase profitability for a large number of countries. Inflation is generally associated with higher profitability as it implies additional earnings from float, which tend to compensate for the higher labour costs (Hanson and Rocha, 1986; Bourke, 1989; and Boyd et al. 2001). Higher real interest rates have also been found to foster profitability, especially in developing countries (Demirguc-Kunt and Huizinga, 1999). This may reflect the way that interest stores much of the time pay zero or underneath business sector rates, considerably more so in advancing nations. In the same vein, premium rate volatility usually intimates higher premium edges as banks ordinarily figure out how to exchange the higher hazard to their customers (Ho and Saunders 1981, Maudos and Fernández de Guevara 2004). [24]
COMPETITORS ANALYSIS
Just like any business, the competitors of a firm are the whole industry, but to make the comparison more realistic one has to identify the immediate competitors. The immediate competitors that I have identified for this research are JS Bank and Silk Bank. The rationale for selecting these banks as competitors is that both these banks are similar to KASB Bank in terms of their Assets and number of branches. To check the performance of KASB Bank in all respects, it will be compared to these two banks. From the preliminary analysis of these three banks, I found out that JS Bank and Silk Bank are producing profits for their shareholders regularly while KASB Bank is not. The following financial analysis will put light on the bank's standing as compared to its peers.
KASB BANK
2011
2010
2009
PERFORMANCE
Spread
10.28%
-0.21%
-8.76%
Net Markup/interest Margin
-0.66%
-0.02%
-0.074
ROE
-0.027
-1.41
-0.99
ROA
-3.45%
-4.64%
-7.08%
Non Markup/Interest to TA
1.30%
1.65%
1.82%
Net Markup/Interest expense to total income
1.05%
-2.24%
-3.97%
Markup/Interest expense to Markup/Interest Income
110.28%
100.21%
108.76%
Admin Expense-to-Profit Before Tax
-0.89
-0.86
-48.00%
Non Markup/Interest to Total Income
57.49%
49.21%
49.07%
Admin expense to non-markup/interest income
2.94
3.08
2.52
Earnings per Share
-1.29
-2.87
-4.54
LEVERAGE RATIOS
Capital Adequacy Ratio
8.00%
-3.56%
3.53%
Total Deposits to Total Equity
6.59
24.07
10.04
LIQUIDITY
Cash & Cash equivalents to total assets
21.52%
6.17%
5.06%
Investment to total Assets
21.30%
21.85%
22.26%
Advances net of provisions to total assets
40.15%
51.34%
49.04%
Deposits to Total Assets
84.71%
79.36%
71.82%
Total Liabilities to Total Assets
95.18%
94.94%
91.12%
Gross Advances to Deposits
56.85%
76.07%
77.74%
Gross Advances to borrowing and Deposit
52.92%
66.60%
64.86%
LOAN LOSS COVERAGE
NPLs to Gross Advances
34.44%
27.08%
21.60%
Provisions against NPLs to Gross Advances
16.62%
14.95%
12.15%
NPLs to shareholder's equity
128.95%
495.69%
168.58%
NPLs write off to NPLs Provisions
4.86%
24.61%
47.64%
Provision against NPLs to NPL
48.27%
55.22%
56.26%
SILKBANK
2011
2010
2009
PERFORMANCE
Spread
22.31%
12.53%
0.98%
Net Markup/interest Margin
2.06%
1.17%
0.08%
ROE
0.04
-0.08
-14.74
ROA
0.77%
-1.56%
-4.23%
Non Markup/Interest to TA
0.93%
1.63%
0.96%
Net Markup/Interest expense to total income
4.96%
0.85%
-3.28%
Markup/Interest expense to Markup/Interest Income
77.69%
87.47%
99.02%
Admin Expense-to-Profit Before Tax
2.78
-2.55
-0.65
Non Markup/Interest to Total Income
43.20%
38.21%
40.50%
Admin expense to non-markup/interest income
4.46
2.66
4.15
Earnings per Share
0.26
-0.42
-3.22
LEVERAGE RATIOS
Capital Adequacy Ratio
6.65%
5.24%
0.56%
Total Deposits to Total Equity
3.41
4.15
251.95
LIQUIDITY
Cash & Cash equivalents to total assets
5%
4.82%
4.77%
Investment to total Assets
19.35%
18.15%
29.39%
Advances net of provisions to total assets
55.07%
61.04%
46.75%
Deposits to Total Assets
70.66%
76.66%
72.25%
Total Liabilities to Total Assets
93.78%
93.35%
97.43%
Gross Advances to Deposits
86.32%
95.01%
81.82%
Gross Advances to borrowing and Deposit
67.57%
80.71%
62.74%
LOAN LOSS COVERAGE
NPLs to Gross Advances
19.93%
23.35%
29.29%
Provisions against NPLs to Gross Advances
9.71%
16.19%
NPLs to shareholder's equity
58.63%
92.02%
6039.17%
NPLs write off to NPLs Provisions
48.94%
2.66%
27.19%
Provision against NPLs to NPL
48.74%
69.34%
71.43%
JSBANK
2011
2010
2009
PERFORMANCE
Spread
40.18%
31.66%
28.51%
Net Markup/interest Margin
3.18%
2.65%
2.19%
ROE
0.04
-0.06
-0.11
ROA
0.66%
-1.03%
-1.81%
Non Markup/Interest to TA
1.41%
0.85%
1.03%
Net Markup/Interest expense to total income
3.46%
2.31%
-0.16%
Markup/Interest expense to Markup/Interest Income
59.82%
68.34%
71.49%
Admin Expense-to-Profit Before Tax
3.93
-2.97
-1.2
Non Markup/Interest to Total Income
41.64%
51.31%
60.56%
Admin expense to non-markup/interest income
2.74
5.55
5.11
Earnings per Share
0.36
-0.50
-0.97
LEVERAGE RATIOS
Capital Adequacy Ratio
16.13%
17.64%
23.99%
Total Deposits to Total Equity
4.25
3.63
3.79
LIQUIDITY
Cash & Cash equivalents to total assets
7.42%
8.17%
10.90%
Investment to total Assets
42.03%
34.79%
28.99%
Advances net of provisions to total assets
33.08%
35.49%
35.54%
Deposits to Total Assets
73.71%
66.72%
64.79%
Total Liabilities to Total Assets
83.89%
85.18%
82.81%
Gross Advances to Deposits
46.16%
55.20%
57.09%
Gross Advances to borrowing and Deposit
42.78%
45.61%
46.17%
LOAN LOSS COVERAGE
NPLs to Gross Advances
14.97%
13.12%
7.04%
Provisions against NPLs to Gross Advances
2.77%
3.64%
3.93%
NPLs to shareholder's equity
29.38%
26.29%
15.24%
NPLs write off to NPLs Provisions
29.43%
25.88%
161.80%
Provision against NPLs to NPL
18.50%
27.72%
55.72%
PERFORMANCE / PROFITABILITY RATIOS
The Profitability ratios of the competitor banks i.e JS Bank and Silk Bank, show that they are much better off than KASB Bank. Both these banks are generating profits at an increasing rate while KASB Bank is producing consistent losses for past three years. The negative ROE suggests that the losses are wiping out the equity of the bank. The ROE of JS Bank and Silk Bank is increasing steadily whereas The ROE of KASB Bank declined further in FY10 and then increased but remained a negative figure. The Return on Assets for KASB Bank has also been negative throughout showing that not enough return is being generated either because of the poor management or poor asset quality. The competitors' for the three years ROA are more than KASB Bank, which means that they are utilizing their assets better.
Net Interest Margin ratio is the difference between interest income and interest expense as a percentage of assets. The NIM ratio is negative for KASB Bank, it shows that the bank has been doing poor asset liability management. Non-interest income as a percentage of total assets is roughly the same for all banks. The ratio of interest expensed to interest earned shows that the interest expenses of KASB Bank are more than the interest income can cover which is an alarming situation. The competitors' ratios suggest that their interest incomes earned are well above the interest expenses they have been incurring.
Earnings before taxes have been negative so all the ratios associated with EBIT come out to be negative. The Administrative expenses as a percentage of non-interest income, as compared to peers, show that the bank has not been spending as much money as it should have on its human resources which can be reason for poor management of the bank. EPS has also been decreasing consistently.
CAPITAL ADEQUACY RATIO
Capital Adequacy Ratio is fundamentally used to ensure contributors and advocate the solidness and proficiency of money related frameworks far and wide. Two sorts of capital are measured: tier one capital, which can assimilate misfortunes without a bank being needed to stop bartering, and tier two capital, which can assimilate misfortunes in the occasion of a winding-up and so furnishes a lesser level of assurance to contributors. The ratios calculated for these banks show that KASB Bank has had lower ratios than required by BASEL II and III. Silk Bank has even lower ratios than the required. Only JS Bank has had capital well above the required by the BASEL III.
LEVERAGE RATIOS
Total Deposits to Total equity ratio indicates the level of leverage in the Bank. The ratios show that KASB Bank has taken quite a lot of debt with respect to its equity. JS Bank has reasonable leverage. Total deposits are lesser times equity than other banks. It shows that KASB Bank has been taking on quite a lot of debt in past few years then it can handle.
LIQUDITY RATIOS
Liquidity is always inversely proportional to Profitability. We have seen in the ratios that the profitability of KASB Bank has been decreasing in past few years, it means that its liquidity has been increasing, and this notion is easily backed by the ratios that have been calculated. JS Bank has had an opposite trend over the years; the liquidity has been decreasing steadily. Silk Bank on the other hand has been maintaining the level of its liquidity.
KASB and Silk Bank have a similar percentage of total assets in securities investments while JS Bank has been increasing the investments during past few years. Also in KASB Bank, the proportion on total assets being financed by deposits has been increasing and it has reached 84.71%, while the other two peer banks have kept it near 70%. Increasing the reliance on deposits to finance assets is not advisable after a certain extent and KASB Bank is taking substantial risk by doing so.
LOAN LOSS COVERAGE
Looking at the financials of all three banks, it is clear that KASB Bank has the highest proportion of NPLs with respect to total advances. In FY11, the NPLs as a proportion of total loan has reached 34.44% which is quite alarming especially when the bank is already in losses. Silk Bank has been reducing its NPLs and it has been successful in doing that. JS Bank has the lowest NPLs but they have been increasing over the years, although still quite less than both peer banks. However, if we look at the Provisioning for NPLs, KASB Bank and Silk Bank have been doing a better job than JS bank to cover their loan losses. Non-Performing Loans to Shareholder's equity also gives us an interesting picture. KASB Bank's NPLs are substantially more than the shareholders' equity, thus wiping out the equity of the bank.
