4.1 the Group and Its Operations

FINANCIAL ANALYSIS:

INTRODUCTION

These section efforts have been made to cover all relevant aspects of the financial performance of UBL. Overtime comparison and Common Size analysis are carried out with the view to extract concrete conclusion to describe financial standing and performance of the bank.

4.1 THE GROUP AND ITS OPERATIONS

The group consists of

a)Holding Company

United Bank Limited, Pakistan

b)Subsidiary Companies

United National Bank Limited, UK

United Bank AG (Zurich), Switzerland

United Executers and Trustees Company Limited

United Bank Financial Services (Pvt) Limited

4.2 BASIS OF PRESENTATION

The purchase and sales of UBL are restricted to the amount of facility actually utilized and the appropriate portion of mark up there on. They strictly observe the rules and regulations as applicable and promulgated by the GOP and or SBP.

4.3 SIGNIFICANT ACCOUNTING POLICIES

• Revenue Recognition

Returns on advances and investments are recorded on accrual basis. Debts securities purchased at premium or discount are amortized over their maturity periods.

Dividend income is recognized on accrual basis of declaration of dividend up to the year-end. Returns on classified assets are recorded on receipt basis, rescheduled and restructured loans are treated in accordance to SBP regulations. Fees/commissions etc. on Letter of Credit and others are recorded on accrual basis.

Advances

These items are stated net of provisions against non-performing loans as per SBP PR – IIIV.

• Investments:

UBL classify its investments as stated below;

a)Held for trading

b)Held to maturity

c)Available for sale-other than the above two types

In the light SBP regulations quoted securities are shown at market values and any changes arising are taken to profit and loss account only upon actual realization.

Unquoted securities are valued at the lower of cost and break up value and difference is charged to income. Provisions for diminution in the values are made after permanent impairment, if any.

• Lending/Borrowing from Financial Institutions

a)Sales under Purchase Obligation: These are reflected as liabilities and the charges against these are recorded as an expense on pro rata basis.

b)Purchase under Resale Obligation: The differential of the contracted price and resale price is amortized over the period of their contract and recorded as income.

• Fixed Assets and Depreciation

1. Owned

Such assets are showed at their cost or revalued amount less accumulated depreciation and impairment loss, if any. No depreciation is charged on freehold land. During the year, amendment related to section 235 of the Companies Ordinance 1984, surplus on revaluation can now be reversed to the extent of incremental depreciation charged. As a result such differentials are now transferred to retained earnings/accumulated losses as per the Securities and Exchange Commission of Pakistan’s (SECP) clarifications.

Gains and losses on sale of fixed assets are included in income currently, except that the related surplus on revaluation of fixed assets is transferred directly to retained earnings/accumulated losses.

1. Leased

Assets under financial leases are stated at cost. The outstanding obligations are shown as a liability. The finance charges are allocated to accounting periods in a manner so as to provide a constant periodic rate of charge on the outstanding liability.

• Taxation

a)Current

Provision is based on the taxable income for the year or minimum tax computed on the basis of turnover, whichever is higher.

b)Deferred

The bank accounts for deferred taxation on major timing differences, using the liability method in respect of those timing differences, which may reverse in the foreseeable future. Deferred tax debits are, however, recognized only if there is reasonable expectation of realization of the amount.

1. Foreign Currencies:

Balances are translated into rupees at the applicable rate of exchange prevailing at the balance sheet date or where applicable at contractual rates. During year transactions are converted into Pak rupees applying the exchange rate at the date of respective transactions. Gains and losses are included in income currently.

d. Deferred Cost and Lease Payments

These are amortized over a period of five years. Rental obligations under operating leases are charged to profit and loss account as incurred.

4.4 RISK MANAGEMENT

The bank is primarily subject to interest rate, credit and currency risks. The bank has designated and implemented a frame work of controls to identify, monitor and manage these risks are as follow;

Currency Risk Management

For the purpose of efficient management of this risk, the group enters into ready, spot, forward and swap transactions in the inter bank market and with the State Bank of Pakistan in order to kedge its assets and liabilities and cover its foreign exchange position.

Credit Risk Management

Out of the total assets of Rs.183, 139.879M assets subject to credit risk amounted to Rs.178; 958.323M. The bank’s major credit risk is concentrated in textile sector. To manage it the bank applies credit limits to its customers and obtains collaterals. Credit risk in the portfolio is monitored by the CRM who formulate appropriated policies and procedures to ensure building and maintaining quality credits and efficient credit process.

The bank’s financial institution risk management unit assesses, recommends financial institutions and also controls cross border/country risk.

Interest rate Risk Management

The group is mainly exposed to mark up interest rate risk on its deposit liabilities and its loans and advances and investment portfolios. The asset liability committee of the bank reviews the portfolio of the bank to ensure that risk is managed within acceptable limits. Most of the loans and advances portfolio comprises of working capital, which are reprised on a periodical basis. The group’s interest is limited since the majority of customer’s deposits are retrospectively reprised on a six monthly basis due to the profit and loss sharing principles.

4.5 CONCENRATION OF CREDIT AND DEPOSITS[1]

The major class of business for UBL related to advances is the textile and private sectors. UBL is advancing 27.2% to textile and 74.5% to private sector. Majority of the depositors fails in the category of individuals, contributing 65% of the total deposits.

4.6 INVESTMENT PORTFOLIO[2]

UBL employs diversified investment portfolio. The bank invests its funds both in risk free assets as well as in risky assets. This enables it to minimize its unsystematic risk to a great extent.

UBL values its security holding on market value, in accordance with the guidelines given in SBP circular. Any unrealized surplus/deficit arising on such revaluation is taken directly to “Surplus/Deficit on revaluation of securities” in the balance sheet. Where an active market is not available, securities continue to be stated at cost. Provision for diminution in the value of these securities is made after considering permanent impairment, if any, in their value.

Where securities are sold subject to commitment to repurchase them at a predetermined price, they remain on the balance sheet and a liability is recorded in respect of the consideration received in “Borrowing from Bank” or “Deposits” as appropriate. Conversely, securities purchased under analogous commitments to resell are not recognized on the balance sheet and consideration paid is record in “lending to financial institutions” or “loans and advances” as appropriate.

4.7 PROFITABILITY[3]

The operating profit before provisions and write offs increased by 80%, where as the profit before tax and extraordinary items increased by 62% as compared to last year. The increase is mainly attributed to 14% increase in the net revenue from funds (NRFF), 10% increase in fee and brokerage income and 75% reduction inn write offs/provisions for non-performing assets as compared to year 2002.

Performing advances increased by Rs. 2 billion as compared to 2002 while NPAs decreased by 53%. Presently NPA constitutes 7.4% as compared to 14.6% in 2002 of the total loan portfolio. The branches reduced to 1077 from 1112. The bank handled over Rs. 96 billion of import and export business during the year, an increase of 24.7% as compared to last year.

4.8 FINANCIAL ANALYSIS

Financial statements are the principal means of reporting the financial condition and results of operations of a business entity. These statements are meant to assist various parties in decision making who are interested in the activities of the business. These statements are means to an end of helping stakeholders in decision-making. To improve the quality of decision making proper analysis of these statements helps a lot. Financial statements analysis helps in determining the financial conditions at any particular points in time and effectiveness of operations of a firm during a specific period.

The various stakeholders of business are interested in the analysis of financials statements. But the focus of interest of all is not the same. For example, creditors and credit reporting agencies are interested in finding out the credit worthiness of the firm to which they have extended credit or intend to extend credit. Short term creditors are interested in short term liquidity of the business and long term creditors are interested in the long term cash flow which the firm can generate over the long period of time. Investors are interested in the firm’s ability to sustain profitability over a period of time. Government agencies analyze financial data for tax purposes. The internal users of financial statements like management also analyze financial data for planning and control.

4.8.1 COMMON SIZE ANALYSIS OF BALANCE SHEET

Common size analysis is an analysis of financial statements where the total assets divide all balance sheet items of asset side and all credit side balances divided by all liability items, and all income statement items are divided by net sales/revenues. Common size analyses are extremely helpful to highlight changes over the time in financial performance and financial conditions of the company. The table shows common size analysis of the balance sheets for the years 2001, 2002 & 2003.

The common size analysis given in the table shows that there have been improvements in the current assets in 2003 as compared to 2002, about 17%. But there has been decrease in fixed assets of about 16%. The main reason for this change is increase in short term investment showing a constant increase as a percentage to total assets. This implies that the bank is concentrating now more on non-interest income and the interest rates are constantly falling.

Short-term advances have shown a significant change of 15% whereas total advances show a total change of only 6.3%. This is very significant to note that major decrease has occurred in long-term performing and non-performing advances.

There is decrease in long term assets of about 17% which mainly cause the decrease in long term advances which are about 13% and 6% decrease in long term investment.

On the liability side the total current liability has shown change of about 4%. The main reason for which is increase in current deposits, which are about 6%. The long-term liability of the organization is also decreased by 4%. The main reason for this is that fixed deposits of organization are decreased by 6%, which shows that there is a slight change in the organization’s position by decrease in fixed deposits.

Table:4-1 Common size analysis of consolidated Balance Sheet

Rs in '000 / Common size (%)
assets / 2001 / 2002 / 2003 / 2001 / 2002 / 2003
Cash/Bal. With Banks / 3609108 / 70463707 / 35591280 / 21.5 / 17.93 / 15.79
lending to F.Is / 4370006 / 3627557 / 19050791 / 2.6 / 1.89 / 8.45
Investment (ST) / 9190430 / 33883311 / 29580252 / 5.5 / 17.66 / 13.12
Advances-Performing (ST) / 39489369 / 43632117 / 89292490 / 23.4 / 22.75 / 39.61
Other Assets / 8641263 / 2641471 / 3509351 / 5.1 / 1.38 / 1.55
Total Current Assets / 97782157 / 118177074 / 177024164 / 58 / 61.61 / 78.54
Investment (LT) / 19388131 / 33623058 / 25007413 / 11.5 / 17.53 / 11.09
Advances-Performing (LT) / 28477494 / 26423058 / 10312297 / 16.89 / 13.77 / 4.57
Advances-Non performing (LT) / 11813855 / 5739798 / 3671991 / 7.01 / 2.99 / 1.62
Operating fixed Assets / 2864018 / 2831534 / 3884990 / 1.7 / 1.48 / 1.72
Deferred Tax Assets / 8297500 / 5026459 / 5486357 / 4.92 / 2.62 / 2.43
Total L.T Assets / 70840998 / 73643958 / 48363048 / 42 / 38.39 / 21.45
Total Assets / 168623155 / 191821032 / 225387212 / 100 / 100 / 100
Liabilities
B/Payables / 1540592 / 1847025 / 2991269 / 0.91 / 0.96 / 1.32
Borrowings ST / 4004130 / 174533 / 174533 / 2.37 / 0.09 / 0.07
Deposits - Current / 102568752 / 118167469 / 152580240 / 60.83 / 61.6 / 67.69
Lease and Others / 8838842 / 9986608 / 5933743 / 5.24 / 5.2 / 2.63
Total Current Liabilities / 116952316 / 130175635 / 161679785 / 69.36 / 67.86 / 71.73
Fixed Deposits / 38747422 / 43998916 / 37252204 / 22.98 / 22.94 / 16.52
Other Long term Liabilities / 21264831 / 5212755 / 10883720 / 6.21 / 2.72 / 4.82
Total LT Liabilities / 49219400 / 49211671 / 48135924 / 29.19 / 25.65 / 21.35
Total Liability / 166171716 / 179387306 / 209815709 / 98.55 / 93.52 / 93.09
Shareholder's Equity
Share Capital / 22481680 / 5180000 / 5180000 / 13.33 / 2.7 / 2.3
Reserves / 3960453 / 4258947 / 4712569 / 2.35 / 2.22 / 2.09
Accumulated Losses/Profits / -27282709 / -722387 / 454403 / -16.18 / -0.38 / 0.2
Minority Interest / 1168264 / 1271700 / 1412932 / 0.69 / 0.66 / 0.62
Surplus on revaluation / 2123751 / 2445466 / 3811599 / 1.26 / 1.27 / 1.69
Total / 24541439 / 12433726 / 15571503 / 1.45 / 6.48 / 6.9

Source: UBL (2003) Annual Report

The trend of switching over the investing in share market or other businesses instead of committing money in advances it is because of fall in interest rates.

The share capital of the company is static while in 2002 the share capital was decreased because of losses faced by the company.

4.8.2 COMMON SIZE ANALYSIS OF INCOME STATEMENT

The common size analysis of income statement is given in the table. Which shows that the UBL has been able to control its interest or mark up expense. As a result of decrease in mark up expense as a percentage of total revenues the gross profit margin has shown a trend of continuous increase. The increasing G/P Margin shows efficiency of the bank in controlling cost of sales (Markup expense) and better strategy of pricing, products and services.

The provision for non-performing loans has a decreasing trend making no provision for non-performing loans and diminution in value of investment, which increases the profit of current year. The reduction in provision is a good sign, which shows that the bank is recovering its disbursed advances. It shows the good credit management of the bank.

There is a great increase in non-markup income, which is about 23%. Among its individual components investment income has shown a large increase as a percentage of sales.

Non markup expenses also show a rising trend in absolute amount though the common size in percentages have shown a mixed trend due to the changes in revenue figures. The non-performing expanses also increased to about 25%, which is a very high percentage, but the other aspect of this is that it increased the efficiency and credit management of the staff.

Like gross profit the net profit margin before tax has also increased with 24% rate. The extraordinary item expanse has not occurred in 2003 that caused a slight increase in the net income. The tax expanse is increased about 7% because of the increase in profit. Loss brought forward from previous year is reduced by 14%.

The common size analysis of the UBL is clearly showing that the bank has shown a lot of improvement in its performance. The organization shows profit for the first time in the last 5 years which is a positive sign and it will build up the moral of the employees by which they can work more effectively and efficiently increasing the performance of the bank.

Table: 4-2 Common size analysis of consolidated Income Statement

Rs in Millions / Common size (%)
ITEMS / 2001 / 2002 / 2003 / 2001 / 2002 / 2003
Mark up revenue / 11468 / 11385 / 9269 / 100 / 100 / 100
mark up expense / 6347 / 5476 / 1931 / 55.35 / 48.09 / 20.83
gross profit / 5121 / 5909 / 7338 / 44.65 / 51.9 / 79.89
provisions and B/Debts / 1263 / 746 / 564 / 11.02 / 6.55 / 6.08
Net Mark up Income / 3858 / 5163 / 6773 / 33.64 / 45.34 / 73.07
Non Mark up Return
Commission & Brokrage / 1097 / 2008 / 2142 / 9.57 / 17.63 / 23.1
Dividends/Exchange and Others / 1818 / 1514 / 2803 / 15.85 / 13.3 / 30.24
Total Non Mark up Income / 2915 / 3522 / 4945 / 25.42 / 30.94 / 53.34
Total Income / 6773 / 8686 / 11718 / 59 / 76.2 / 126.42
Non Mark Up Expense
Administrative / 4669 / 5879 / 6639 / 40.71 / 51.64 / 71.62
Other Provision and Charges / 632 / 51 / 556 / 5.15 / 0.44 / 6
Total non mark up Expenses / 5301 / 5930 / 7197 / 46.22 / 52.08 / 77.64
Profit Before Extraordinary Items / 1472 / 2756 / 4521 / 12.84 / 24.2 / 48.77
Extraordinary Items / -7200 / 25 / 0 / 62.78 / 0.21
Profits before tax / -5728 / 2781 / 4521 / 49.95 / 24.44 / 48.77
Taxation / 1739 / 1319 / 1704 / 15.16 / 11.59 / 18.38
Profit/Loss after tax / -7467 / 1462 / 2818 / 65.11 / 12.84 / 30.39
Share of Minority Interest / 6 / 10 / 21 / 0.06 / 0.09 / 0.22
Accumulated Loss Brought Frd. / 19821 / 27283 / 722 / 172.2 / 210.64 / 7.78
Adjustment against sh. Capital / 0 / 25202 / 0 / 221.36 / 0
Appropriation and Transfers
Surplus on revaluation of Assets / 0 / 238 / 0 / 2.1 / 0
Transfer to Statutory Reserve / 2 / 332 / 527 / 0.02 / 2.91 / 5.68
Accumulated Loss Brought Frd. / 27283 / 722 / 454 / 237.9 / 16.34 / 4.9

Source: UBL (2003) Annual Report

4.8.3 FINANCIAL RATIO ANALYSIS

The user of financial statements finds it helpful to calculate ratios when they interpret company’s financial statements. A financial ratio is simply one quantity divided by another. Ratios focus on special relationship between two items of balance sheet, income statement or one from each. Ratios make it easier to understand a specific relationship between various items of financial statements then looking simply at the raw numbers themselves. The number of financial ratios that might be created is virtually limitless, but there are certain basic ratios that are frequently used, these ratios can be placed into six different classes.

Liquidity Ratio

Asset Turnover Ratio

Leverage Ratios

Coverage Ratios

Profitability Ratios

Market Value Ratios

The calculation and interpretation of these ratios of financial statements of UBL are as follows.

Table:4-3 Financial Ratio analysis

YEARS / 2001 / 2002 / 2003 / FORMULA
Current Ratio / 0.84 / 0.91 / 1.15 / Current Assets / Current Liabilities
Asset Turnover / 0.07 / 0.06 / 0.04 / Markup Revenure / Total Assets
Debt to Asset / 0.99 / 0.94 / 0.93 / Total Debt / Total Assets
Debt to Equity / 14.54 / 14.4 / 13.47 / Total Equity / Total Assets
Coverage Ratio / 0.1 / 1.15 / 3.34 / EBIT / Interest Expense
Gross Profit Margin / 44.65% / 52.50% / 79% / Gross Profit / Revenue * 100
Net Profit Margin / -65.12% / 12.69% / 30% / Net Profit / Revenue * 100
Return On Investment / -4.43% / 0.76% / 1.24% / Net Profit / Total Assets * 100
Return On Equity / -887.99% / 16.78% / 18% / Net Profit / Total Equity * 100
Advances to Deposit / 56.46% / 46.74% / 45% / Advances / Deposits * 100
Investment to Deposit / 20.22% / 41.63% / 28% / Investment / Deposits * 100
Cash Ratio / 9.59% / 9.23% / 28% / Cash / Current Liabilities * 100

Source: UBL (2003) Annual Report

4.8.3.1 CURRENT RATIO:

UBL’s current ratio is increasing over the time. Higher the current ratio higher the ability to meet the short-term obligations as they come due. The UBL’s current ratio is increased by 0.18% as compared to 2002. this in turn decreases the risk of insolvency. The change is occurring due to increase in short term investment and decrease in short term borrowings.

4.8.3.2 ASSETS TURNOVER:

This shows revenue generated per rupee investment in total assets. UBL’s assets turnover ratio has shown a little decrease. This is because of increase in total assets with proportionate increase in revenue. Banks have relatively low ATR capital, as they are selective in advancing loans and generating smaller sales.

4.8.3.3 DEBT TO ASSET RATIO:

The analysis of total debt to assets ratio, there has been decrease of one percent as compared to 2002 and 6% to 2001. in 2001 every rupee one of assets was being financed by rupees 0.098 or debt and in 2002 it is 0.94 while in 2003 it is reduced to 0.93 worth of debt per rupee of asset. Although the decrease is not large enough but it is a good sign for bank’s creditors. The decrease may be attributed to the substantial decrease in borrowings from financial institutions but the affect was weakened by an increase in bills payable and other liabilities.