Meezan Bank Limited is a publicly listed company. It was incorporated in Pakistan on January 27, 1997 and started operations as an investment bank in August 1997. In January 2002, Meezan Bank was granted first full-fledged commercial banking licence dedicated to Islamic Banking, by the State Bank of Pakistan. Meezan Bank is the largest Islamic Bank in Pakistan with a network of 100 branches in 31 cities.
The banking sector is showing a significant paradigm shift away from traditional means of business, and is catering to an increasingly astute and demanding financial consumer who is also becoming keenly aware of Islamic Banking.
The bank has achieved a strong balance sheet with excellent operating profitability, including a capital adequacy ratio that places the bank at top of the industry, a long-term entity rating of A+, and a short-term entity rating of A1.
The bank’s main shareholders are leading local and international financial institutions, including ‘Pak-Kuwait Investment Company’, the only AAA rated financial entity in the country, the ‘Islamic Development Bank of Jeddah’, and the renowned ‘Shamil Bank of Bahrain’. The Bank has an internationally renowned, very high caliber and pro-active Shariah Supervisory Board presided over by former Justice Maulana Muhammad Taqi Usmani.
The total number of branches increased from 28 in January 2006 to 100 by December 2007. This comprehensive branch network, offers a range of retail and wholesale banking products to a large customer base in more than 22 cities. The branch network is supported by real time on-line banking, network of over 50 ATMs, 24/7 Call Centre and Internet Banking.
Islamic banking performance
In Pakistan, the Islamic banking system has witnessed a very healthy growth during the last couple of years and is steadily proving its potential to work as a compatible and parallel alternative system for providing financial services. It is growing in terms of size and structure.
The balance sheet footing of the Islamic banking industry kept on increasing. The total assets growing at a very healthy rate of 66.9 percent reached to Rs 119.2 billion in CY06 from Rs 71.5 billion in CY05. The deposits remained the main source of finance. In absolute terms, deposits grew by Rs 33.8 billion to Rs 83.7 billion during CY06 and its share in overall sources remained around 70 percent.
On the asset side, financing continued to remain the main activity, however its share in overall assets experienced a decline from 64.0 percent to 55.0 percent. The assets seem to experience some shift away from financing to the investments and other assets since the share of these two has increased over the year.
As the growth in assets base of Islamic banking outpaced the growth in the assets of the country’s banking industry as a whole, the share of Islamic banking assets as percentage of overall banking assets increased to 2.86 percent from 2.0 percent last year. Likewise, deposits and financing as percent of overall deposits and financing of the banking system also increased to 2.75 percent and 2.62 percent in CY06 from 1.8 percent and 2.3 percent respectively in CY05. The industry aims to increase its overall market share to 12% by 2012 (12 by 12 goal).
Growing at a rate of 114 percent, total number of branches increased to 150 in CY06 from 70 in CY05. As on April 17, 2007, the six full-fledged Islamic and 13 conventional banks have a total of 108 and 58 branches respectively. They have presence in 25 cities and towns cover all the four provinces of the country.
Financial performance (FY03-FY07)
Meezan Bank’s profitability saw a promising growth of 60% in the year 2007. The growth was driven by a high net spread income of Rs 1.2bn, an increase of 71.7% from the previous year.
The ROA, which witnessed a slight dip to 1.30% in FY06 (2005: 1.37%), surged to 1.43 in FY07. The bank’s assets have been on the average being fuelled by growths in investments and fixed asset. The bank’s assets at the end of 2006 were Rs 67 billion. The bank has been following a policy of expansion to cater the needs of a large number of people, who getting attracted to Islamic banking. An increased investment by 266% and the overall growth in earning assets promises higher profitability in the years to come. Also the ROA is above that of the other Islamic Banking Institutions (IBIs) which is 0.9%.
The deposits of the bank have grown remarkably well this year around increasing by 58.4%. The deposits of the bank were Rs 54bn at the end of 2007. The banks deposits are mainly comprised of long term fixed and savings deposits comprising around 72% of the deposits. During the FY07 period, the deposit structure depicts some changes; wherein the share of fixed deposits and saving deposits increased from 38 percent and 29 percent last year to 39 percent and 32 percent in FY07 respectively, thus increasing the term deposits from 67% to 71% respectively.
Corollary to this, the share of financial institutions and current-non remunerative deposits have decreased from 10 percent and 23 percent in FY06 to 6 percent and 22 percent respectively in FY07. The shifting deposits mix is indicative of customers’ continued growing trust in the Islamic banking products as they are becoming more eager to engage in long-term relationship with Islamic banks.
The ROD of the bank has seen a slight decline in 2006, being 1.84% in 2006 as against 1.75% in 2005. But rose in FY07. The bank’s equity has been rising. It issued more capital in 2006 worth Rs 1.7bn. The bank’s reserves also grew substantially by 29.7% to Rs 721m in order to meet the SBP’s liquidity requirements. As with ROD and ROA, ROE which had declined in 2006 (because the profits did not match the growth in the bank’s equity), it improved in FY07. The bank’s ROE is too low compared to the sector’s average of 23.8%. The administration need to get their act together to rectify the situation as the time is ripe for the growth of Islamic financial institutions.
Financings (advances) have seen a growth of almost 500% since 2003. The break-up of financing as per various Islamic modes shows the continuous predominance of Murabaha and Ijara financing, having their share of 45 percent and 22 percent respectively.
When compared with the last year, the share of Murabaha has increased and that of Ijara has remained at the same level. Diminishing Musharaka has also started to increase its share, which shows the eagerness on the part of to diversify their financing portfolio.
Net finances in Q307, however increased only by 30% compared to 58% robust increase in deposits. Because of the slower growth of financing, the finance to deposit ratio dropped to around 82 percent and 69% in FY06 and FY07 from 92 percent in FY05. Earnings assets have shown an increase over the years showing strong liquidity position of the bank. The assets seem to experience some shift away from financing to the investments and other assets since the share of these two has increased over the year. This is line with overall banking industry where the assets mix has shifted more towards investments than advances.
On evaluating the performance of Meezan’s earning assets we see that yield (Yield as calculated by Net spread income/earning assets) has shown on overall rising trend till FY07. Moreover, ‘Cost of Funding Earning Assets’ has also followed the same trend. A slight increase in ‘cost of assets’ coupled with returning higher profits is a good sign for any business and signifies its potential to produce/earn in future.
On the performance side, markup income experienced a strong growth of 71 percent during FY07. Net markup income after provisioning also witnessed healthy growth of 51 percent. Moreover, as the yield is still higher then costs of funding, we hope that Meezan continues future expansion through low cost funding sources.
With the growing operations and fast expanding financing portfolio, the occurrence of non-performing financing is inevitable. The NPLs of the bank had been on the rise till FY07. The NPL has increased by 122.7% in 2006 to become Rs 408 million. The rise in NPL is because of the increase in defaults and substandard loans. As a proportion of finances (2006: Rs 27 billion) this amount is significant. NPL form 1.51% of the finances in 2006 but declined to 1.1% in FY07. The industry trend has been reversed in 2007 where NPL have risen. Meezan’s ratios have on the other hand shown improvement in FY07.
These ratios are still very low and do not carry significant threat to the financial soundness of Meezan. However, it will have to exercise extra safety measures for the financing portfolio, keeping in view the fact that Shariah-based modes of financing require that any late payment fee recovered from clients could only be used for charitable purposes. The major sectors in Meezan’s corporate portfolio are textiles, food, energy and chemicals and fertilizers. The bank needs to monitor defaults and must lend cautiously after having studied the credit worthiness of the borrower, as SBP is going to implement full provisioning against non-performing loans from 31 December 2007.
The peculiar trends in the funding and financing structures also had their impact on the key debt management indicators. We can see that the bank has increased its dependence on debt, as a source of finance. Debt management figures reveal that the bank has 84% of its assets financed by debt in 2003. However it has reached a very high level now at 91% and there is always a potential to fall back from heights Furthermore, debt to equity ratio also suggests the same trend where the ratio increased to around 10% in FY07. Rising deposit times capital is indicative of customers’ continued growing trust in the Islamic banking products as they are becoming more eager to engage in long-term relationship with Islamic banks.
The solvency situation for the industry as a whole witnessed a marked improvement in recent years, caused by increasing profitability and fresh inflows of the capital. In Meezan’s case, here was a decline in the solvency position over the years as a result of high growth in deposits. Therefore, the earning assets as a percentage of deposits declined in FY07.
Since the capital of the Islamic banking system grew at a lower rate as compared to the assets growth, the capital to total assets ratio decreased to 9.2 percent from 16 percent. Yet, the ratio is comfortably more than double the generally accepted benchmark of 5 percent. Moreover, the capital adequacy ratio of the bank at 11.63% percent is also well above the regulatory benchmark of 8 percent. Equity/Deposits also showed a falling trend due to aforementioned reasons.
The bank has been following a conservative dividends policy as the last cash dividend came in the year 2003. The bank is more inclined on bonuses and rights, to increase its equity whereby conserving its profits for investment in expansion. From this, we hope that it will improve its debt management and solvency position in the coming years.
The price of its share has been fluctuating between Rs 13 and Rs 38.5 from the year 2004 to December 2007. Since 2005 the share price has risen by 69% and has gone up to Rs 38.5. As has been the case the bank’s profitability has not been too high. But investors feel an upside in the share of the bank and with the expectation of Islamic banking occupying around 25% of the market share by 2010 there is bright possibility of growth for Meezan Bank. Also given the bank’s policy of increased investments and expansion, the bank is likely to get more profitable in the coming years.
The share operated at a P/E multiple of 15.2 in 2007 mainly because of high share price. MV was 2.0x the BV indicating a strong investor demand for the share. The price chart comparing FY07 price performance of Meezan Bank with the 100-index shows that Meezan’s scrip has followed a similar trajectory as the 100-index.
The overall performance of the Meezan Bank remained encouraging and the key indicators depicted healthy trends in FY07, auguring well for the future growth prospects.
The Islamic Banking industry continues to grow in Pakistan and six-full fledged Islamic Banks are now in operation. It is interesting to note that the conventional banks are increasingly realizing the huge potential market backed by the untapped and steadily growing appetite for Islamic banking products; hence the drive for entering this market is based on business considerations in addition to religious considerations. As the level of awareness and understanding of Islamic Banking remains very low, this might pose as a threat to the credibility to the full-fledged Islamic Banks like Meezan. For this reason, there is a need for all banks to act in concert and help build awareness of Islamic Banking throughout the country.
The State Bank of Pakistan has decided to reduce Special Cash Reserve Requirement for Islamic banks/Islamic banking branches from 6 per cent to 2 percent of total FE-25 deposits with immediate effect. Accordingly, Islamic banks and Islamic banking branches would keep 7%, including 5% Cash Reserve Requirement (CRR) and 2% Special Cash Reserve Requirement (SCRR), of their FE-25 deposits with the SBP in the current account. This would encourage Islamic banks including Meezan to lend more.
Islamic banks should come forward to serve the nation by providing the less privileged with the opportunity to meet their needs in the Shariah Compliant manner. The bank, which has firmly established its leadership position in the Islamic Banking industry, should focus more on the development and offering of the financing products of social welfare such as education and micro finance.
Recently, Meezan has put into place a comprehensive Strategic Plan for the next five years, using a ‘bottom-up approach’, which is being implemented using the ‘Balanced Scorecard’. The Bank’s strategy is to continue to build market share through an aggressive branch expansion plan supported by a strong technology backbone. For this purpose, it has decided to upgrade its core banking software and recently signed a contract with Temenos acquiring the right to use its latest product – T24. Another important project, is the setting up of a dedicated online real time Disaster Recovery (DR) ie a ‘hot’ DR site.However, the bank will have to manage its growing expenses is addition to following the stringent appraisal and monitoring standards. This along with the strengthening systems and building capacities of the human capital will add to the efficiencies of its system and thus proving it a comparable alternate financial system.
In the light of above scenario we can say that Meezan Bank is well poised to meet the challenges of the future and will continue to play its leadership role in the Islamic Banking industry.
Source: Financial Gadget