Financial Analysis of Bank Al Falah Pakistan | Deferred Tax | Banks

Contents

CONTENTS.................................................................................... 1 INTRODUCTION.............................................................................4
History Overview..............................................................................................4

P R O D U C T S.............................................................................5
Car Financing....................................................................................................5 Home Financing.................................................................................................5 Rupee Travelers Cheques...................................................................................6 Credits Cards.....................................................................................................6 Debit Cards.......................................................................................................6 On Line Banking.................................................................................................6 Automated Teller Machine (ATM)........................................................................6 Islamic Banking.................................................................................................6 Corporate and Structured Financing ..................................................................7

SWOT ANALYSIS...........................................................................9 PEST ANALYSIS...........................................................................12 PORTER'S 5 FORCES ANALYSIS.....................................................13 MARKET ANALYSIS......................................................................14 MARKET SHARES.........................................................................16 BOSTON CONSULTANT GROUP MATRIX (BCG) MODEL....................17
Star:..................................................................................................................................17 Cash Cow:.........................................................................................................................17 Question Mark:.................................................................................................................18 Dog:..................................................................................................................................18

STRATEGIES................................................................................ 18

ACCOUNTING ANALYSIS...............................................................19 KEY ACCOUNTING POLICIES OF BANK ALFALAH.............................20 POTENTIAL RED FLAGS AND BAL’S COUNTER MEASURES...............29 HORIZONTAL ANALYSIS...............................................................36 VERTICAL ANALYSIS....................................................................39 VALUATION ................................................................................ 41 RESIDUAL INCOME MODEL...........................................................42 FREE CASH FLOW........................................................................43

VISION
“To be the premier organizations operating locally and internationally that provided the complete range of financial services to all segments under one roof.

MISSION
“To develop and deliver the most innovative products, manage customers experience, deliver quality service that contributes to brand strength, establishes a competitive advantage and enhances profitability, thus providing value to the stakeholders of the bank.

INTRODUCTION
History Overview
Bank Alfalah Limited was incorporated on June 21st, 1997 as a public limited company under the Companies Ordinance defined 1984. in Its the banking Banking operations commenced from November 1st, 1997. The bank is engaged in commercial banking and related services as companies ordinance, 1962. The Bank is currently operating through

235 branches in 88 cities, with the registered office at B.A.Building, I.I.Chundrigar, Karachi. Some of the main branches are located in all of the major cities including: Lahore, Kasur, Islamabad, Gawadar, Peshawar, Rawalpindi, Sukkur, Sialkot, Multan, Murree, and Faisalabad, Quetta, Attock District etc. Since its inception, as the new identity of H.C.E.B after the privatization in 1997, the management of the bank has implemented strategies and position for the bank in the market place. Dhabi Group and driven by Bank has policies to carve a distinct

Strengthened with the banking of the Abu

the strategic goals set out by its board of management, the and services.

invested in revolutionary technology to have an extensive range of products

The portfolio concentrates on all aspects of conventional banking as well as the financial needs of corporate sector. Dynamic and high value Home Financing, Rupee ATM Travelers and product includes Car Financing,

Cheques, Credits Cards, Debit Cards, On line Banking,

consumer Durables. In addition to this, Islamic Banking Division is a recent initiative, which operates as separate branch. It offers Shariah Compliant products through a network of five branches, which will bank is committed to combine all and satisfaction increase to 50 by the year 2007. The

its energies and resources to bring high value, security

to its customers, employees and shareholder. The Bank has invested in revolutionary technology to have an extensive range of products and services. This facilitates commitment to a culture of innovation and seeks and service providers to ensure uninterrupted out synergies with client services to it customers.

PRODUCTS
COMPREHENSIVE AND DIVERSIFIED PRODUCT PORTFOLIO With the mission to provide all-encompassing banking services to the customers, Bank Alfalah has a uniquely defined menu of financial products. Currently it is one of the most comprehensive portfolios of personalized financial solutions that are custom-tailored to serve the requirements not only of conventional customers but also fulfill the needs of the corporate sector:         Car Financing Rupee Travelers Cheques Online Banking Credit Cards ATMs Home Financing Islamic Banking Corporate and Structured Financing

Car Financing Car Financing is one of the major renowned products of Bank Alfalah and can be utilized in terms of Financing of Used Vehicles, Loan against Car, Balance Transfer Facility, Refinancing Facility (only for Alfalah Customers) and it is characterized in terms of:  Lowest Mark up  Lower Insurance  Quick Processing  Lower Down Payment Home Financing Major features of Bank Alfalah Home Financing are Lowest Mark-up, Quick Processing, Multiple Repayment Options and Free Valuation. It has been bifurcated in terms of “Home Buyer, Home Construct, Home Improver, and Home Balance Transfer Facility”.  Financing Limit :  Tenure  Equity Participation up to Rs. 10,000,000/: up to 20Years : 30% Borrower / 70% Bank

Rupee Travelers Cheques Rupees Travelers Cheques are as good as cash and are accepted at the major shops, travel agents, hotels business establishments and all over the country and abroad. This service is being offered to facilitate instant fund availability to travelers and business people who used to carry a large sum of money with them. Credits Cards Bank Alfalah Visa Card is everywhere and globally accepted and welcomed at locations displaying the VISA logo. It is accepted at nearly 30 million merchants and 870,000 ATMs in more than 150 countries around the globe and over 10,000 establishments in Pakistan. Alfalah VISA pays for shopping, travel, entertainment, meals and much more. Debit Cards Bank Alfalah Limited presents Alfalah Hilal Card, the first Visa Electron International Debit Card which gives an unlimited access to current / savings account with a simple swipe, at millions of retail shops and ATMs, worldwide. The Alfalah Hill Card comes with a host of conveniences and benefits combined with the wide reach of Visa Network enabling it to be accepted at more than 840,000 ATMs and 13 million retail outlets around the world, making it the most acceptable Debit Card available in Pakistan. On Line Banking To provide enhanced and value added products to customer bank is constantly striving for additional facilities. Bank provide fully automated online telephone banking facilities to its customers enabling them to carry out banking transactions like balance inquiries, statement requests, product information and exchange rate. Automated Teller Machine (ATM) The bank offers 24 hours self service banking facilities to it customers on country wide basis through deployment of Automated Teller Machine. This system allows the banking facilities such as cash withdrawals, cash deposits, and funds transfer, balance inquiries, account statements. Electronic cash dispensing facilities are available in major cities of Pakistan. All ATMs are linked through a state-of-the-art Satellite Based Communication System which offers 24 hours real time service. Islamic Banking A separate division is a recently initiated, which operates as separate branch. It offers Shariah Compliant products through a network of five branches, which will increase to 50 by the year 2007. Islamic Banking has launched following products with the perception that these are in accordance with the Sharia Principles.  Alfalah Masharaka Homes  Murabaha Finance

 Alfalah Car Ijarah Corporate and Structured Financing The portfolio concentrates on all aspects of conventional banking as well as the financial needs of corporate sector including dynamic and high value product.  Loaning against securities  Letter of Credit  Letter of Guarantee  Demand Finance  Cash Finance

SWOT Analysis
This SWOT analysis of Bank Alfalah Limited takes into consideration the external as well as the internal environmental structure of the bank.

Strength
Bank Alfalah is considered to be a very successful bank in the financial circles. A bank is place where the customers can safely keep their money as long as they want. Some of • • • • • • • • • • • • • • • the major strengths of the bank:

Brand Name Goodwill and trust Islamic Banking Car Ijarah revenues Least Processing Time On-Line banking Comprehensive and diversified product portfolio Bad debt rate is low Excellent credit rating Phenomenal Growth Highly Professional and trained employees Crucial Location Of Branches Bank is financially strong and has a huge deposit reserve Bank Alfalah has a wide network of branches at the ideal locations, catering the financial needs of its clients. Foreign Trade is the focus of bank. It has become an ideal bank for the importers and exporters.

Weaknesses
Bank Alfalah also has some weaknesses. But their number is much less than the strengths of the bank. Following factors need attention of the • • • • • • • • Lack of advertisement through electronic media Lack of innovative marketing No ATM Machine Islamic Banking Skill Set of Employees is not up to mark as there is no job rotation. Foreign Banks still are a little more prestigious Bank Alfalah Limited does not possess foreign network Most of the employees are overloaded with work. There is uneven distribution of work and promotions are not very timely • • • It is slow in the introduction of new services Employees feel over burdened It has only one oversea branch although it does a lot of foreign trade business. management.

Opportunities
Bank Alfalah has grown up its business with a very high pace and it has got tremendous popularity, even with in a very short span of time. There bank and by availing that it can stand are many opportunities for the amongst the top foreign banks. • • •

Extension of International network. Capitalizing on IT Introduction of innovative products.

• • • • •

Adopt E-banking Growth in deposits Growth in textile sector Tide down of money Expansion in branch network

Threats
• • • • • • • • • • Political Instability New branches in the same location Islamic Competition Increase in Competition with other banks Revolving policies of state bank of Pakistan Terrorist image of the country Uncertain economic condition Slow product development process Change in govt. policies. Internal audit system is not encouraging.

PEST Analysis
Political Environment
• • • • • • • • Lawyers’ movement Violence in Karachi The Lal Masjid debacle Militancy operation in FATA, NWFP and Swat its impact on other parts of the country The return of Benazir Bhutto’s and her subsequent assassination Unstable political situation affect bank’s policies Talibinization affected our repute in the world Investors hesitate investing in Pakistan

Economic Indicators
• • • • • • Gross Domestic Product (GDP) inflation Increased balance of payment debt of the government increased Decrease in FDI(Foreign direct investment) Financial crisis made it BAL management difficult to survive

Socio cultural environment
• • • low saving culture Religious culture and people hesitate to accept interest on deposits 70% rural population and very low literacy rate

Technological Factors
• • • Banks turning to heavy IT investments which differentiate their products provide response times improve customer satisfaction

products and services are gaining faster acceptance like ATM, Master cards, Telebanking, Internet banking and mobile banking

Porter's 5 Forces Analysis
Threat of New Entrants
• Person can't come along and start up a bank, but there are services, • such as internet bill payment, on which entrepreneurs can capitalize Threat is companies offering other financial services. e.g. an insurance company to start offering mortgage and loan services

Power of Suppliers
• • The suppliers of capital might not pose a big threat the threat of suppliers luring away human capital because larger banks are offer incentives and take away trained employees

Power of Buyers
• The individual doesn't pose much of a threat to the banking industry because of high switching cost of mortgage, car loan, credit card, and mutual funds with one particular bank • • corporate clients have banks wrapped around their little fingers Financial institutions can switch them by offering better exchange rates, more services, and exposure to foreign capital markets

Availability of Substitutes
• • there are plenty of substitutes in the banking industry there is a non-banking financial services company that can offer similar services like Insurance, mutual funds companies

n the lending side of the business, banks are seeing competition rise from unconventional sources of capital

Competitive Rivalry
• Banks must attempt to lure clients away from competitor banks. They do this by offering lower financing, preferred rates and investment services • • They compete on the best and fastest services Larger banks would prefer to take over or merge with another bank rather than spend the money to market and advertise

MARKET ANALYSIS
Four Price of Market
The marketing analysis of the bank focuses the promotional campaign, the four P’s of marketing are also in vision of the bank that it uses for its product, price, place (distribution) and explained briefly here. marketing (called 4 pillars) i.e., • Product • Price • Place Branches • Promotion Promotion of Services

promotion. For more lucidity they shall be

Service Provided by Bank Commission and Bank Charges Received Placement of Services i.e. Network of its

PRODUCT
The products at Alfalah include various banking services, which are its Deposits (PLS and Non-PLS), Remittances, and ATM & VISA Cards, Extension service. Lockers etc. Bank also provides Credit

PRICE
“The amount of money the customers pay for the product of a company”. BAL provides different products and services to its customers. Pricing of products/services means the commission to be paid by the customer in

return of

services provided by the bank. The commission paid for the • • • Mark up/ interest Bank charges Fees and bank commission etc. Charges". The prices at the bank are quite

services mainly includes:

The prices for various services of Bank are given in the booklet "the Schedule of Bank competitive with those of other banks working nationally.

PLACE
“The activities a bank undertakes to make products and services easily available or accessible to the customers”. Bank Alfalah’s objective has been to expand its branch network to meet clients’ needs. Bank is well positioned and geographically poised, to cater for increasing business demands, from its existing potential clientele. During last year under review, BAL opened 8 new branches and presently it has 142 branches, spread all over Pakistan covering major business centers and cities. Bank plans to add more branches to its growing network.

PROMOTION
“All activities that a company undertakes to communicate and promote its products”. This is an age of competition. Numerous organizations are providing financial services to customers. In this world of growing competition, the adopt proper marketing and only way to prosper for a bank is to promotional techniques. Various promotional techniques such as advertising, personal selling (BDO) etc. are used are mostly used: • • • Advertising Various Information / Marketing Broachers Personal Selling by bank. The promotional strategies of the Bank vary conditions. However, the following techniques according to the market

These are some of the marketing techniques that the bank adopts in order to capture market and attract clients.

Market Shares
As such no financial organization in Pakistan is unable to determine the correct market share of the banking industry. Also banks do not disclose information to the general public and internees. Still certain confidential

generally foreign banks in Pakistan contribute to about 35% to the whole

banking industry. Out of which Askari, Citi,

Standard

Chartered

Grind

lays, Muslim Commercial, ABN-AMRO banks share the major market.

Boston Consultant Group Matrix (BCG) Model

Growth rate

Market share High Low
High
 Car    Online Banking Deposit  Cheque Rupee Islamic Banking ATM Debit Card Financing  Home Financing 

Low

 

Traveler

Investment  Credit Cards

Star:
In the star, we have Car Financing Home Financing Online Banking which show the high growth rate and high market share.

Cash Cow:
In the cash cow, we have Deposits Investments Credit Cards which show the low growth rate and high market share.

Question Mark:
In the Question Mark, we have Islamic Banking ATM Debit Card which show the high growth rate and low market share.

Dog:
In the Dog, we have Rupee Travelers Cheque which shows the low market share and low growth rate.

STRATEGIES
Bank Alfalah has formulated certain sets of strategies to enable it to achieve its goals and objectives. These strategies are mentioned below: • In order to achieve its goals of creating a sound base and presence of efficient modern banking system, Bank Alfalah has started operation of Automated Teller Machines in all the major areas like Karachi, Lahore, Islamabad and other cities of Pakistan. • Bank Alfalah is committed to building long-lasting relationships through an assertion to service excellence and providing innovative products to meet the changing needs of our valued customers. Although still in its infancy, compared to the exalted banking standards, Bank Alfalah backed by a strong Abu Dhabi Group and inspired by the vision of its Board and Management, has built up a strong customer base. The Bank provides a full range of banking services to corporate clients, while applying leading technologies. Today the Bank is well-positioned to provide appropriate banking services to customers. • The main focus is building relationships and being known by the way they do business. Management recognizes that a banking relationship requires compatibility, communication, and cooperation and that each customer deserves nothing less than full attention and available resources to meet their financial objectives.

Core value and corporate culture is based on the belief that superior personalized service is the most important product. Bank is in the process of getting to know customers by name and understand their business and personal financial needs. This one-on-one, personalized service quality has served as Bank Alfalah's unique signature since inception and continues to separate it from other financial institutions.

The Bank Alfalah team comprises of some of the most highly skilled and professional financial experts in banking industry. Managers, lenders and trust advisors offer the unique perspective of knowing and understanding in the local economy. The Management focuses its attention on making informed and feasible economic decisions, bringing better returns and more profitability for investors and customers.

Keeping in view the unrest among the Islamic Community on the Interest Bearing Banking the Alfalah is in the process of target marketing and gives its full attention to this segment of a large population over the world.

To acquire the reputation and status of bank which operates on international standard, Alfalah Bank was to get the credit rating of Pakistan Credit Rating Agency, which gave it the AA- and A1+ in the long term and short term respectively.

Accounting Analysis
Accounting Convention
Management of Bank Alfalah Ltd. prepares its financial statements by following historical cost convention of accounting. Instead of certain fixed on the revalued amounts and investments value. The amounts are assets which are stated

available to sale are valued at fair market

stated in the Pakistani currency which is bank’s presentation

and

functional currency. The figures are rounded nearest to thousand.

Key Accounting Policies of Bank Alfalah
1. Cash and Cash Equivalents
Cash and cash equivalents are comprises of the cash, balances with treasury bank and other banks and call lendings which are made for the sake of cash flow statements.

2. Sale and Repurchase Agreements
Bank Alfalah makes certain purchase/ (sale) investments under agreements of resell/ repurchase investments at a certain future date at a agreements which are purchased are not them while investments fixed price. The investment

recognized because bank has no control over which are sold are duly recorded.

The amount paid for purchase of agreements is recorded under lending to financial institutions and proceeds from sale of investment agreements are recognized under borrowings.

3. Investments
Bank has classified its investments under three titles and that are:

a. Hold

for

trading:

These

investments

are

short

term

investments which bank has kept for generating profit by the fluctuations in price of securities and interest rate etc.

b.Held

to maturity: These are the investments which have fixed

or determinable payments and bank has intention to keep them till maturity.

c. Available for sale:

These are the investments which do not fall

under the title of ‘Hold for trading’ and ‘Held for maturity’.

4. Advances a. Loans and Advances:
Bank states Loans, advances and lease investments net of provisions against non performing advances. Provisions of specific and general nature for operations in Pakistan are made in accordance to defined by the State the rules and regulations which have been

Bank of Pakistan. The advances to overseas customers are handled under the prevailing rules of the customer’s country.

b. Finance Lease Receivables:
In lease, Bank transfers the entire risks and rewards incidental to the owner of the assets. Bank recognizes the present value of the receivable and shows them under the balance sheet. lease payments under a

title of advances to customers in the

5. Fixed Assets:

Fixed assets are categorized into two classes. Accounting Policies regarding these classes have been discussed below:

a.Tangible Assets:
• Fixed assets except office premises are recorded at cost less accumulated depreciation and accumulated impairment losses, if any. Office premises are recorded at revalued amount less accumulated depreciation. • Depreciation on the fixed assets is charged on straight line method. Depreciation is estimated while keeping the amount of residual value of the assets (if any) in the mind. • Maintenance cost and repair charges are charged to the income and subsequent costs are stated as carrying value of the asset or under separate head whichever is appropriate, if their period of benefits extends more than one accounting period. • Office premises are revalued by the professionals so as to eliminate the effect immateriality from the fair value of the assets. • Surplus from the revaluation is stated as “surplus on revaluation of the fixed assets” and deficit is deducted from the previous value of the surplus on revaluation of fixed assets. The value which exceeds from the incremental depreciation charged to the assets is transferred to the unappropriated profits.

Gain and losses are transferred to income except those which are related to surplus. Those are directly transferred to unappropriated profits.

b.Intangible Assets
• Intangible assets which have finite life are stated on the balance sheet on the cost less accumulated amortization and impairment losses, if any.

Amortization on the intangible assets is charged on straight line method on a rate which is reviewed on the balance sheet in order to eliminate the factor of immateriality.

The other intangible assets which have infinite life are stated on the cost less impairment losses if any.

6. Impairment
• Value of assets is reviewed if there is any sign of the impairment. If indication of assets impairment exists then asset are revalued and resulted impairment losses are recognized on the financial statements. • Impairment losses are charged to the profit and loss account except those losses which arise from the revaluation of the assets. • Impairment losses which arise from the revaluation of the assets are adjusted against the value of the surplus on revaluation of the assets.

7. Taxation
Taxation policies have been synthesized by classifying taxation into two categories i.e. current tax and deferred taxes.

a.Current tax
Current tax is recognized in the profit and loss account and estimated on the taxable income by applying stated tax rate and any adjustment of tax payable of the previous year.

b.Deferred Taxes
• Deferred taxes are stated by applying the balance sheet liability method on the differences which are resulted on the value of assets used for reporting purposes and the value which is presented for the tax estimation. • Deferred tax asset is only recognized to the extent to which future taxable income is expected and tax credit can be availed. • The amount of deferred tax is reduced to the extent to which it is not possible that tax credit can be availed. • Bank recognizes deferred tax asset/ liability that arise from the deficit and surplus on revaluation of the fixed assets and it is adjusted against the related deficit/ surplus in order to compliance with the IAS-12 Income Tax. • Deferred tax liability which results from the temporary

differences which are associated with exchange translation reserves of foreign branches and where the timing difference can be controlled, is not recognized in the financial statements.

8. Employee Benefits

a. Defined Benefit Plans
Bank manages an approved funded gratuity plan for eligible employee whose association with bank is five or more years. Contributions to the fund are made on actuarial recommendation valuation.

basis. Projected Unit Credit Method is used for actuarial

Actuarial gains and losses exceeding 10% of higher actuarial liabilities or plan assets are stated over the average life of the employees. of service. Gratuity is payable to staff after the qualifying period

b. Defined Contribution Plan
Bank is managing an approved provident fund scheme for permanent employees to which both employees and bank contribute 8.33% of the basic salary of the employees every month.

9. Revenue Recognition a. Advances and Investments
Mark up income on advances, investments and profits on Musharika and Mudaraba investments account are the recognized effective or discount on yield time on over proportion basis while taking into

instrument. Debt securities are purchased on

premium

and their discount or premium is amortized to profit and

loss

the period of its maturity by using the effective yield method. Dividend income is recognized at the time when bank’s right to receive has been established.

b. Leasing Finance
Bank uses the financing method for the accounting of the leasing and Ijarah financing.

10. Foreign Currency Translation a. Functional and Presentation Currency
Bank values the items included in its financial statements in term of Pakistani currency.

b. Transaction and Balances
Transactions in the foreign currency are translated into Pakistani currency by using exchange rate on the date of transactions. currency translation are settled to accounting period. Gains and losses due to foreign

profit and loss statement at the end of

c.

Commitments

Commitments respective maturities.

are

outstanding

forward

foreign

exchange

contracts which are translated at forward rates applicable to their

d.Foreign Operations
Assets and liabilities of foreign operations are translated into Pakistani currency at prevailing exchange rate at balance are stated in sheet date. Translation gains and losses the equity and their disposal is made in profit and loss.

11. Dividends and Appropriation to Reserves
Dividends and appropriation to reserves are reported as liability on the balance BOD. sheet when they are approved by the

12. Segment Reporting
Bank reports primarily in the segment format. Bank’s segments are those provide products or services and are subjected to risks and rewards the following segments: directly. Bank Alfalah has

a. Trading and Sales b.Retail Banking c. Commercial Banking d.Corporate Finance
13. Geographical Segments

a. Pakistan b.Asia Pacific (including south Asia) c. Middle East
14. Related Party Transactions
Parties are considered related parties when they have ability to control and BAL is executing the related terms. influence the decision of the other parties. party transactions on the same

Potential Red Flags and BAL’s Counter Measures
1. Credit Risk

Credit risk arises to due to borrower’s inability to repay the principal as well as the amount of the interest. BAL has considered it very seriously; it has migrated to BASE-II as per SBP check guidelines. Bank has developed procedural manual of cross

the figures in order to cop up with the credit risk. In order to make the risk management function more sophisticated in the future, bank is trying to improve the infrastructure. risk models and credit process

2. Credit Concentration Risk
Credit concentration risk arises due to concentration of exposure of credit under various categories. In order to eliminate the prescribed regulatory limits borrowers. BAL’s credit concentration risk, SBP has

of maximum exposure to single and group of

annual credit risk plan describes the maximum exposure to an industry which restricts the credit concentration risk of an industry. BAL has also developed an internal rating system that allows the RMD to monitor the risk by giving grades (which ranges from 1-12, grade 10-12 rating is for defaulters) to customers/ borrowers.

3. Market Risk
Market risk is the risk of losses which results due to unfavorable fluctuations of the market prices. It arises due trading activities of the bank’s treasury. It also includes the investments this and risk structural positions of the banks. BAL has cop up data as well. of 2 years. Also bank’s RMD (Risk

by calculating ‘Value at Risk’ on daily basis while using historical Management market risk Department) calculate the capital charge for

4. Foreign Exchange Risk
Foreign exchange risk results due to unfavorable fluctuations of the exchange rate. BAL manages this risk by setting and monitoring the dealer, currency and counter party limits for on off balance

and off balance sheet financial instruments. On and outcome

sheet instruments are the contracts which are the resultant of the import and export transactions. BAL is risk against prescribed regulating and monitoring currency enforceable limits by SBP.

5. Interest Rate Risk
Interest rate risk arises due to fluctuations in the value of the financial instruments due to changes in the market interest interest rate risk due to asset-liability Management rate. Bank is exposed to

mismatch and maturity mismatch. In order to ensure that the BAL is managing risk within limits, Asset and Liability Committee (ALCO) is monitoring the re-pricing of assets and liabilities on regular basis. BAL’s interest rate risk is in prescribed limits due to re6.

pricing.

Liquidity Risk

Liquidity risk arises due to inability of bank to meet short term obligations. BAL’s ALCO is responsible for managing the liquidity the strategy and oversight of the BOD of bank has stipulates position and for formulation of

asset liability function on a regular basis. The

approved a comprehensive management policy which

the early warning indicators of liquidity risk and maintenance of various ratios. Bank is also maintaining contingency funding in order to cop up the unforeseen liquidity risk.

Ratio Analysis Liquidity Ratios:
Liquidity ratios are the measure of the firm's ability to meet its short term obligations.
Liquidity Ratio Current Ratio Sales to working capital Working Capital 2005 1.02 1.22 20,249,3 11 2006 1.06 1.38 15,276,5 29 2007 1.1 0.85 30,128,8 84 2008 1.06 1.57 19,741,3 02

Interpretation:
Bank Alfalah has managed very consistent liquidity ratios. It can be revealed by the ratios individually. Like current ratio of the bank is managed at an average of the 1.06. Sales to working capital ratio, has shown an inclining trend over the years except year 2007.

Leverage Ratios
Leverage ratios tell us about the capital structure of the company.
Leverage Ratios TIE ratio Debt to total assets Debt to Equity 2005 1.2 0.95 23.14 2006 1.16 0.95 24.91 2007 1.27 0.95 22.71 2008 1.08 0.95 22.72

Interpretation
TIE ratio of the bank is an average is at about 1.178 throughout the last four years. It reveals that banks operating income is 1.178 times more than its debt obligations. It is very evident from the leverage ratios that bank is using extensive leverage for its operations.

Profitability
Profitability ratios are the measure of the performance of the company.

Profitability Ratios Net profit Margin Operating income margin Return on assets Return on equity

2005 11.26% 0.74 1.41% 23.20%

2006 8.31% 0.69 1.27% 16.60%

2007 12.10% 0.59 1.01% 22.50%

2008 4% 0.54 0.04% 8.90%

Interpretation
Profitability ratios have revealed that the bank performance has inconsistent behavior and in 2008 it was at the worst position it ever had. The performance is badly affected in the last few years. And it is result of the extreme wave of the terrorism and changed political scenario.

Activity Ratios
Activity ratios tell about efficiency of the bank. . These ratios are also called asset utilization ratios. It tells us that how efficiently assets are utilized.

Activity Ratios Total assets turnover Sales to fixed assets Account receivables turnover

2005 0.06 2.19 11.79 %

2006 0.07 2.017 15.76 %

2007 0.07 2.16 16.05 %

2008 0.08 2.25 29.60 %

Interpretation
Activity ratios point out the worst efficiency of the bank. Our banks all the activity ratios are very low, which reveals that the bank is not utilizing its assets efficiently. The company has to improve or increase its sales, so that it can improve its asset utilization. MARKET RATIOS: Market measures tell the performance of the company in the market.

Market Ratios DPS EPS P/E ratio Dividend payout ratio Dividend yield Book value per share

2005 0 2.56 3.21 0 0 2.43

2006 0 3.525 2.83 0 0 2.11

2007 0 4.815 2.07 0 0 2.11

2008 1.21 1.627 6.14 0.74 0.121 1.82

Interpretation:
If we see the DPS we can say that company is not announcing dividends consistently. Earning per share has increased from 2005 to 2007 but in 2008 it is quite low. Market performance of the bank is not quite promising. Book value is showing a continuous trend of declining. Bank has to work over its portfolio and has to diversify it.

Horizontal Analysis

Interpretation

Historical analysis has been done by using the historical data. In this estimation is done by dividing the present amount of the item with amount of the item in prior years.

Horizontal Analysis
Bank Alfalah Limited Income Statement Horizontal Analysis
(2005Description Net Sales (200607) (200708)

06)

20.41 73.04% 21.67% % 13.13
Other Income Total Revenues Cost of Goods Sold Provisions Total Direct Expenses Selling, General & Administrative

43.61% 87.26% 68.48% 30.33% 111.42 % 84.18% 110.06 9.11% 239.91 %

% 14.05 % 22.32 % 49.09 % 25.67 % 28.15 % 60.43 % 0.00% 0.00% 0.00% 0.00% 64.89 % 0.00% 58.43 % 71.86 % 0.00%

% 19.24% 36.23% 40.06%

Operating Income Interest Expenses Foreign Exchange (Loss) Gain Associated Company (Loss) Gain Other Non operating (Loss) Gain

0.10% 76.76% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Income Tax Expense Reserve Charges Income Before Extra Ordinary Items Provisions Brought forward Revaluation of assets

-6.73% 74.95% 0.00% 0.00%

3.56% 77.58% 119.32 % 49.62% 4.84% -5.71%

Minority Interests Net Income

0.00% 0.00% 42.07% 62.64%

0.00% 3.34%

Vertical Analysis

Vertical Analysis
Bank Alfalah Limited Income Statement
Vertical Analysis Description Net Sales Other Income Total Revenues Cost of Goods Sold Provisions Total Direct Expenses Selling, General & Administrative Operating Income Interest Expenses Foreign Exchange (Loss) Gain Associated Company (Loss) Gain Other Non operating (Loss) Gain Income Tax Expense Reserve Charges Income Before Extra Ordinary Items Provisions Brought forward Revaluation of assets Minority Interests Net Income

2005 100.00

2006 100.00

2007 100.00

2008 100.00 % 16.90% 116.90 % 65.49% 11.41% 76.90% 34.22% 5.78% 0.00% 0.00% 0.00% 0.00% -1.59% 0.00% 4.19% 15.63% 0.08% 0.00% 19.90%

% % % 18.33% 15.22% 23.42% 118.33 115.22 123.42 % 58.83% -3.10% % 71.88% -3.30% % 64.46% -9.22% -

61.93% 75.18% 73.68% 35.47% 20.93% 0.00% 0.00% 0.00% 0.00% -7.03% 0.00% 13.90% 7.02% 0.20% 0.00% 21.13% 27.93% 12.11% 0.00% 0.00% 0.00% 0.00% -3.79% 0.00% 8.32% 8.90% 0.12% 0.00% 17.34% 32.15% 17.59% 0.00% 0.00% 0.00% 0.00% -5.45% 0.00% 12.14% 10.95% 0.10% 0.00% 23.18%

Valuation Projected statements

Residual Income Model

Free Cash Flow

free cash flow model
Description cash flow from operating activities less dividend less capital expenditure Free cash flow 2005 34,877,8 85 360,000 1,799,19 5 32,718,6 90 2006 7,852,3 62 0 3,542,3 12 4,310,0 50 2007 39,645,3 25 0 969,185 38,676,1 40 2008 2,499,60 6 975,000 1,074,31 4 450,292

FV = pv(1+i)^n 450292=32718690(1+g) ^3 450292/32718690=(1+g )^3 g = -0.76 WACC= w1ke+w2kd(1tax) 3.7955

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