Evolution of the Summit Bank Finance Essay

Since the inception of the Summit Bank on 18th August 2010 the bank has focused on an aggressive growth strategy and reinvented its mission and vision statements, the bank was previously known as ArifHabib and was Partially acquired by Suroor Investments a stron financial group. Later took place the acquisition of Mybank this is where this research project has played the role.

The Research project focuses on the post merger profitability analysis with two approaches Financial comparison before and after the merger, (Questionnaire data tabulation where qualitative data was measured. Once the results of the two approaches were obtained they were combined to reach an answer to the hypothesis of the research.

The aim of the study was not to study this particular meger alone but was also to see what elements affected in making a merger result as a good/profitable/ efficient correct decision merger.It also opens way for opportunities related to future bank mergers. Actually the decision making of those mergers what should be the pre-requisites. Strategic management was well studied and discussed with the managers and employees, followed by an in-depth analysis of the organizational effects it had.

INTRODUCTION

Company Overview

Summit bank which is the subject of our study is presently one of the fastest growing commercial bank. Coming to evolution of the Summit Bank

"The Pakistan operations of Rupali Bank Limited were acquired by Arif Habib Securities Limited under the Scheme of Amalgamation approved by the State Bank of Pakistan. The name of Rupali Bank Ltd was subsequently changed to Arif HabibRupali Bank Ltd and then finally to Arif Habib Bank Ltd in October 2007. On 31st March 2010, Suroor Investments Ltd,A  a company incorporated in Mauritius, acquired 59.41% stake in Arif Habib Bank Ltd from Arif Habib Securities Ltd, and on 18th August 2010, ArifHabib Bank Ltd was rebranded as Summit Bank Ltd. Suroor Investments Ltd, also entered into share purchase agreements (SPAs) with majority shareholders of MyBank Ltd and Atlas Bank Ltd, who after completion of the transactions have merged in Summit Bank Ltd expanding the Bank's geographical outreach with a network of 166 Real - Time Online branches across the country. In line with the management's vision of making this bank a front runner amongst its peer banks, this merger has brought synergies and access to a wider range of markets and customers." 

This is information shows that the bank went through several stages of acquisition and merger before becoming what it is today. This also shows that the bank had different management hence different decision makers at different steps, we cannot ignore the positions Mybank and Atlas Bank and the study must separately study the financial statements this will also allow us to study the synergies and burdens contributed by the merger which is part of studying the Profitability of the merger.

Summit Bank Today

After completion of merger with My bank on 30th December 2011 the bank is now operating with a branch network of 165 branches.  As a result of merger multiple branches were located in the same vicinity which were re located strategically and were able to reduce rental costs by Rs.53 Million.  This is a huge synergy that is observed in reduction of expenses and will affect the revenue of the Current Bank.

Board of Directors of Summit Bank

Mission Statement

• To be a financial institution based on Trust, Integrity and Good Governance.
• To deliver financial solutions to our customers.
• To provide equal opportunities & professional working environment to our employees.
• To provide fair return to our shareholders on their investment.
• To serve the community at large.
• To discharge corporate social responsibility. 

Vision Statement

To be the preferred provider of financial products & services to the markets [v] .

Comments

From the above provided information we do realize that the banks approach is focused. The bank is clear of its objectives and of the path that needs to be followed in order to achieve the above stated framework.

The first clause of the mission is regarding the work ethics of the bank the second half ensures hiring of competitive, effective and efficient management.

The second clause ensures that the company want to give its employees a professional and yet comfortable environment.

Third clause being most important in terms of profitability check and conflict of interest.

The fourth is the purpose and survival of the organization and the last one is the realization of responsibility.

Products and Services Offered

The Banks Services may be divided in Six Core Services

Comments

There are six core services offered by the bank which is a competitive number for a bank of this size in the particular region. They are well distinguished from each other and cater to all segments and sectors from individuals to SMEs to large corporate organizations allowing a wide range of forms of transactions that may be made.

Deposit Products

Summit Classic Account

Key Features:

One account with a bundle of product

Minimum monthly average balance as low as Rs. 50,000/-

Up to 3 Visa Debit Cards free.

Special Retirement Or Investment Insurance Plan at only Rs. 2000/month (bancassurance)

Loan Facility (secured) with special rates [vi] 

Current Account

Non-interest bearing

Starter cheque book issued when the account is opened

UnlimitedA free-of-costA transaction facility

No deduction of Zakat

Choice of periodic statements (monthly, quarterly, half-yearly and annual) by post

Access to account statement anytime through Internet Banking facility

Account transaction information through SMS

Free issuance of VISA debit card

Cash withdrawal through large ATM network 

Savings Account

Starter cheque book is issued when the account is opened

No penalty on minimum balance not being maintained

Choice of periodic statements (on monthly, quarterly, half-yearly and annual basis) by post.

Access to your account statement anytime through our Internet Banking and e-Statement facilities

Account transaction information through SMS

Free issuance of a VISA debit card

Easy cash withdrawal through a vast network of ATMs 

Term Deposits

Individuals (single or joint)

Minors (to be operated by the guardian)

Charitable institutions

Provident fund & other funds of benevolent nature

Local bodies

Autonomous corporations

Limited companies [ix] 

Firms, associations, educational institutions, financial and other institutions who intend to retain their deposits for a fixed period in order to earn a higher rate of profit.

MahanaAmdan

Deposit Limits

Rs. 50,000 up-to Rs.10 million

Rate of Profit

Term Deposits

Expected Rate of Profit

3 Months

8.50%

6 Months

8.75%

1 Year

9.50%

2 Year

10.00%

3 Year

10.00%

Source Official Website Summit Bank dated 9/8/2012

Daily Product Account

Here the interest is calculated on the daily closing balance.

Hamara Summit Family Savings Account

Key Features

Grouped accounts for the family

Initial Investment Requirement-Rs.5,000/-

Minimum Balance Requirement-Rs.5,000/-

Attractive return of 9%

Additional 2% as bonus feature

Up to Five free Visa debit cards

Minors can make purchases and withdraw cash at ATMs via the Visa Debit Card [x] 

Summit Advantage Account

Key Features:

Maximum Loan up to 70% of the depositA with no additional markupA (11.0% p.a.)

Exceptional returns up to 11.0% p.a.

Monthly profit payout

Term: 1 year

Minimum investment of Rs 100,000/- with a maximum limit of up to Rs 50,000,000

Access to aA range of value added facilities [xi] 

Summit Sixer

Added Insurance

Comments

The above information describes the Key features of each product. In-depth study of the products makes the key differences evident of products under the same category. In this particular write up the differences in deposit products are evident. The different savings rates offered depending upon minimum deposits, on your income, on the time period of the deposits, if the rates are changing with every year or month then what conditions is to be met. The bank has made efforts to accommodate maximum deposit base through the variety of products and flexibility given to the consumer.

This allows the consumers to choose according to their own deposit needs.

Corporate and Investment Banking

Commercial and SME Banking

Commercial & SME Division targets Medium Sized Companies with a turnover of at least PKR 25 - 50 million.A 

Financing is offered to the following

Working Capital Financing

Procurement of Inventory

Receivables financing

Procurement of Machinery

Expansion of production facilities

BMR

Import / Exports

Guarantees [xii] 

ConsumerBanking

Home Finance

These are mainly mortgage loans. These loans are offered for immovable property such as housing finance. The purpose is to allow

Personal Finance

The salient features of this plan are appended here-under:

Loan Amount

Minimum: Rs.25,000/-Maximum: Rs.1,000,000/-

Loan Tenor

Minimum: 1 yearMaximum: 5 years

Type of Loan

Term Loan

Type of Facility

Un-Secured

Type of Markup

Fixed During Loan Term

Premature Payment Facility

Available

Loan Enhancement Facility

AvailableA A (History / Income Based)

Loan Top-up Facility

Available

Source: Official Website of Summit Bank as at 9/8/12

Bancassurance

"Bancassurance"A is the distribution of insurance products by banks, through their own distribution channels.

The Products and Sub-Products are listed below

MetLife Alico

The Graduate Plan

The Wedding Planner

Golden Age Plan

Goals

Jubilee Life

Jubilee Life (formally New Jubilee Life Insurance Company Limited), a subsidiary of the Agha Khan Fund for Economic Development (AKFED), Switzerland, brings global experience to Pakistan. For over a decade, Jubilee Life has been in the business of providing customers with a better life; a life of security and safety. Jubilee Life's clients can be secured in the knowledge that their operations are backed by an internationally acclaimed organization with global reach. [xiii] 

SuhanaKal

A combination of savings and protection elements ensuring that the family is secured even after retirement.

The salient features of this plan are appended here-under:

Product Type

Unit linked life insurance

Policy Term

Min 10yrs to max up to 57 yrs with retirement age 55 - 75 yrs choice

Minimum Basic Premium

Annual 24000/,A 

semi-annul 12000/,

quarterly 6000/-

Monthly 2000/-

Premium Payment Method

Direct debit from SMBL account

Eligible Age for Enrollment

Min 18yrs to Max 65yrs

Unit Allocation

1yrs policy 30%A 

2yrs policy 85%

3yrs policy 90%

4yrs onwards 100%

AVAP 100%

Investment Stratigies

Managed FundA 

Yaqeen Growth Fund

Meesaq Fund

Capital Growth Fund

Loyalty Bonus

5 yrs and onwards 3%

Maturity Benefit

At the end of the chosen term of the plan, the policy holder will receive the accumulated cash value of the plan. If the attained age of the policy holder at maturity is 55 yrs or above, he will also have an option to use the cash value, to buy a pension, especially tailored for individuals who prefer a steady stream of income instead of a lump sum amount, at the time of retirement. The Pension term and conditions will be defined at the time of the maturity.

Free Look Period

14 days

Partial Withdrawal

If you need to withdraw cash for meeting some emergency needs, but do not want to surrender the policy, you can withdraw any amount provided that the residual cash value of your policy after withdrawal is greater than or equal to Rs. 24,000 (the residual cash value floor may be reviewed by Jubilee Life)

Grace Period

30 days (renewal)

Policy Surrender

After completion of two policy years (given two year's complete premiums have been paid), you can surrender your policy. At the time of surrender, you will be paid in full the cash value of your fund. However, surrender in early policy years may result in lower cash values.

Non-Medical Limit

PKR 2.0 Million upto Age of 44 yrs

Optional Riders

*Optional Riders available on request

Source: Official website of Summit Bank as at 9/8/12

SunehraAaghaaz

Sunehra Aaghaaz offers to make regular, systematic savings, and allows for protection to the family from uncertainties.

The salient features of this plan are appended here-under:

Product Type

Unit linked life insurance

Policy Term

Min 10yrs to max up to 70 yrs

Minimum Basic Premium

Annual 24000/,semi-annul 12000/,

quarterly 6000/-

Monthly 2000/-

Premium Payment Method

Direct debit from SMBL account

Eligible Age for Enrollment

Min 18yrs to Max 65yrs

Unit Allocation

1yrs policy 30%

2yrs policy 85%

3yrs policy 90%

4yrs onwards 100%

AVAP 100%

Investment Stratigies

Managed Fund

Yaqeen Growth Fund

Meesaq Fund

Capital Growth Fund

Loyalty Bonus

5 yrs and onwards 3%

Maturity Benefit

Account value Payable in Lump sum Payment

Free Look Period

14 days

Partial Withdrawal

If you need to withdraw cash for meeting some emergency needs, but do not want to surrender the policy, you can withdraw any amount provided that the residual cash value of your policy after withdrawal is greater than or equal to Rs. 24,000 (the residual cash value floor may be reviewed by Jubilee Life)

Grace Period

30 days (renewal)

Policy Surrender

After the completion of two policy years (given two years' complete premiums have been paid), you can surrender your policy. At the time of surrender, you will be paid in full the Cash Value of your fund. However, surrender in early policy years may result in lower cash values.

Non-Medical Limit

PKR 2.0 Million upto Age of 44 yrs

Optional Riders

*Optional Riders available on request

Source: Official website of summit bank as at 9/8/12.

Electronic Banking

Our Mobile Banking allows customers to avail a variety of banking services of pure SMS-based technology, including mobile balance recharge and utility bill payments, as well as account information.

Internet Banking is another channel on which we offer extensive banking services. Customers can view account information, pay bills, transfer funds, and conduct many other transactions through their account(s)

Hence providing a fast, secure and convenient way to banking.

Summit Bank isA a member of 1LINK Guarantee Limited. To learn about the products and services offered by 1LINK, please click on the linkA https://www.1link.net.pk. [xiv] 

Remittance

Summit Bank has designed and developed its own electronic interface by the name of 'Amanat Cash' to facilitate various exchange companies and banks to send home remittance to Pakistan on real time basis. This has made possible, for all Pakistanis, to receive remittances by their loved ones for FREE, in a fast and fully secured manner. The service we offer is readily available to every one regardless of having account in Summit Bank. [xv] 

Salient Features Of Summit Bank Home Remittance includes:

Fastest Account Credit

Free

Quick Processing

Real Time

Premium, exclusively dedicated friendly Customer Service for Home Remittance Customers.

24/7 Customer support through Contact Center.

Trade Finance

Trade Finance

Trade Finance being the prime focus of our Management, we offer wide variety of Funded and Non-Funded Trade related facilities. [xvi] 

Other Services

To become highly Competitive in the field Evening Banking Branches were highlighted these branches operate longer than the usual banking hours, to further enhance the experience e-banking services were introduced which did satisfy the needs of different segments of the consumers. The Saturday banking branches were also singled out as Saturday is holiday for other banks. The Bank was successfully able to become part of the VISA international network by August 2011. [xvii] This allows the bank to increase the source of foreign exchange as well as income not to forget it removes restriction from being able to obtain local currency from anywhere where ATMs are located.

These policies show that the bank is ambitious to achieve its goals of widening and diversifying its customer base, continuous innovation and addition to product and services offered, also, to continue to increase its present e-banking and branching banking services.

Literature Review

Banking

Banking is part of the financial systems; which has a vast number of institutions working under it for the allocation and mobilization of financial resources, is an integral part of the economy.

Banking in my view is a phenomena itself no less a world of its own yet so closely related to the global economic phenomena, business cycles, and money supply. They act as intermediaries between the surplus units and the deficit units. Savers are mainly households, whereas borrowers are businesses, investors and firms " As suppliers, households are depositors of savings; as users they are borrowers of the banking system, where banks are financial intermediaries. [xviii] 

When talking of the structure of the financial system it is divided in two parts indirect finance and direct finance it is the indirect finance where commercial banks play a role.

The mechanism shows us how banks are driving forces for the economic development through economic growth when the borrowers have successful business ventures resulting in profits which result in corporate expansion increased income and increased employment reducing improving the country's GDP.

Now once we are through with the role of banks let us not forget that commercial banks are also businesses which need to be successful business ventures and failure to make profits can lead to their shutdown and deteriorate the trust of the savers from the banking system, especially in a developing economy such as Pakistan. Banks have their own products which are a source profits their balance is different yet the same if the products are understood well. Moving on banking in Pakistan is as much a baby as the country itself and with the many economic and other political and many more factors the banking system has suffered much, political influence in the wreckage of banks cannot be ignored.

The relationship is explicit in the diagram on the next page.

There is a list of Banking Risks faced by the banks whose in depth analysis is interesting and a new opening.

FINANCIAL SYSTEM: Flow of funds Structure & Operations

Str [xix] 

Debt or Equity Funds

Investment funds

Investment Funds

Surplus Units

Savers Households Business Firms Government Foreigners

Deficit Units Spenders Households Business Firms Government Foreigners

Debt or Equity Funds

Direct Finance

Financial Markets

Loan Funds

Deposit Funds

Indirect Finance

Financial IntermediationBanking Sector in Pakistan

When talking about banks it is the central bank which never loses its importance which in most part of the world is separate from the government which really doesn't mean it is separate from political influences.

In Pakistan State Bank plays the role, gives all the advises and set all the rules and regulations not to forget offers investment opportunities to the banks in Pakistan to a high level that economic growth is actually reduced.

Before we move on to the current banking structure let's see what history tells us at the time of partition all banks but two moved to India with all their major clients, the two banks which stayed included Habib Bank and all in all Pakistan had 70 branches of banks in all. At the time there was no central bank for Pakistan and Reserve Bank of India acted as the central bank as Pakistan did not have its own currency however India soon started to withdraw the currency. This gave the newly born country a huge set back as the Reserve Bank started withdrawing money Pakistan then came up with its own currency and in June 1948 Pakistan succeeded to do so. Then came development of the financial sector which was soon met by two wars 1965 and 1975 which were a set back to the system.

Today, after much struggle the banking sector in Pakistan has made a stand and needs to improve further, foreign banks have come in after privatization of the banking sector was introduced the corporate sector was given credits which again further improved the positions and after this rapid decade long phase of privatization we recognize the 6 largest banks of Pakistan particularly in terms of deposit percentage. This introduced interest rate banking in more free and obvious ways.

However currently in the year 2012 it is observed that many large foreign banks have wrapped up their system and plan to retrieve.

The growth rate of the deposits say Financial savings also play a vital role, during the past decade this average growth rate of financial savings was 13% per year. [xx] 

Financial system deposits include banking system deposits and NBFI's deposits. NSS are not part of Financial System Deposits, these have increased from Rs 1174 Billion to Rs 4731 Billion over the past decade. And Banking Deposits were the largest being being 97% [xxi] .

The banking sector of Pakistan consists of the total 40 banks in which there are 4 public scheduled banks operating, 25 local private banks, 7 foreign banks and 4 specialized banks [xxii] .

Post-Merger Profitability Analysis

As observed from the past studies it is seen that vast number of academic research analyze pre and post-merger efficiency and profitability however it is also observed that these studies are done with respect to a particular subject such as the wealth holder that is the equity holder, however this particular research paper will analyze efficiency and profitability in particular from the perspective of the institute itself and hence the shareholder.

In order to evaluate the financial performance of an institute use of financial ratios is like a universal standard which will be the main research methodology used here. The research method has also been used by (Kemal, 2011) for RBS. In his paper he has mentioned Rhoades (1993) whose paper had 33 bank to bank mergers as a sample and he has discussed cost and profit efficiency with borders and cross borders and no cost efficiency was analyzed cross border mergers. Another paper Resti (1998) analyzed the paper with respect to performance, target markets of merged banks and reached to a conclusion that the efficiency did increase in the later years of the merger if the size of the bank was not too big. The article also concluded that it was better if the merged bank were of equal size.

Challenges & Issues

The higher credit risk in the form of non-performing loans is affecting the performance of the bank in particular where we have government influence. Second major issue is that of performance is that the public banks are more affected by the adverse situations of the economy and non-satisfactory governance the higher degree of capital losses result in insolvency which is then covered by the SBP. To create a higher degree of competition and to increase the transparency in the management of the whole system privatization should be considered as a basic agenda.

Proper diversification of the risk among all the sectors should be done e.g. restricting the flow of credit to just a few sectors which results in the earnings highly skewed to the performance of those sectors which can further be of high risk. The high liquidity requirements by bank can also be a source of inefficiency making its proper management a crucial task. As maintaining a higher level of liquidity the required means the bank is under utilizing its assets making the banking business cost ineffective by increasing the costs of funding

There is a need to identify all the supervisory authorities; their responsibilities, effective implementation of the supervisory framework for which the trained staff is a prerequisite. Strict notice should be taken with respect to enforcement of law, implementations of the judgments of the courts on the basis of the disputes relating to the financial issues.

Hence, the efficiency analysis of banks will help to identify the attainment of efficiency using rational resources which seem to be in accordance with the policies of the management and more importantly the function of bank in the economy; only if the banks will be operating in the efficient manner the efficient allocation of money can take place.

Competitive Analysis

For the purposes of competitive analysis NIB bank has been selected. NIB bank has a very similar history of mergers as Summit Bank and hence is a good benchmark for analysis of financial data not to forget that the NIB Bank size is also in the same bracket as Summit Bank.

About NIB Bank 'NIB started operations in October 2003 with a paid up capital of Rs. 1.2 bn. Operations for NDLC, IFIC's Pakistan and Credit Agricole Indosuez Pakistan were amalgamated with their assets and liabilities in April 2004.

Temasek Holdings acquired 25% shareholding in NIB in March 2005 through Bugis Investments which was enhanced to over 70% in June 2005.NIB has branches all over Pakistan." [xxiii] 

We will focus on the Financial Analysis of the two Banks over the past three years.

MyBank INTRODUCTION

Company Overview

My bank was launched in 2005 as a public limited company under the Companies Ordinance 1984. It's banking operations commenced from November 2005. The bank was involved in commercial banking and related services.

Remittance

Deposit schemes

Foreign trade

Utility collection bills

Lockers

Car financing

MySahoolat (MyDream Home) - home financing

Easy credit scheme

Agricultural finance schemes

Online banking

ATMs

Mobile banking.

Were the services offered by the bank.

Vision Statement

To be the best Customer Service bank in the country with the highest Economic Value Added through engaged and motivated people.

Mission Statement

Satisfying customers, building the productive & everlasting relationship.

Core values

Comments

The Core values of the two banks were coherent, which is very essential.

FINANCIAL ANALYSIS BEFORE AND AFTER MERGER

Earning Per Share

As it may be evident the earning per share situation has improved after the merger it was negative 2 and this has most certainly declined even though Summit has not as yet announced any dividends.

As for ROI we may see clerarly from the Financial Reports that the ROI has also improved over the past year this was attributed to the reduction in cost when the two banks merged and synergies enavbled them to layoff as well as close down unnecessary branches and strategically relocate wher they could pitch more number of Depositors.

FINANCIAL ANALYSIS WITH COMPETITOR

Financial Analysis

Profitability Analysis

Performance

2011

2010

2009

1

ROE

-27.9%

-83.98%

-50.83%

2

ROA

-1.28%

-4.18%

-5.41%

3

Pre-Provisions Operating Profit / Avg. Equity

-56.84%

-40.34%

-12.04%

4

Pre-Provisions Operating Profit / Avg. Assets

-2.69%

-2.80%

-1.28%

5

Personnel Expense to Total Net Revenue

327.20%

176.48%

127.93%

6

Cost to Total Revenue

-448.79%

-194.00%

483.50%

7

Other Operating Income / Total Net Revenue

56.22%

35.23%

30.30%

8

Taxes / Pre Tax Profit

-49.50%

-22.12%

-9.57%

9

Net Non Earning Assets / Assets net of Non Interest Liabilities

25.17%

22.59%

16.10%

Profitability Ratios for Summit Bank

Source: The data to calculate values was taken from Annual Report of Summit Bank.

Profitability Ratios for NIB Bank

A

PERFORMANCE

2011

2010

2009

1

ROE

-15.05%

-74.02%

1.66%

2

ROA

-14.95%

-74.01%

1.66%

3

Pre- Provision Operating Profit/ Avg Equity

-5.24%

-9.30%

6.70%

4

Pre- Provision Operating Profit/ Avg Assets

-5.23%

-9.32%

4.46%

5

Personnel Expenses- to - Total Net Revenue

111.13%

149.12%

75.48%

6

Cost- to - Total Net Revenue

120.47%

151.79%

84.00%

7

Other Operating Income/Total Net Revenue

50.86%

36.78%

23.75%

8

Taxes/Pre Tax Profit

41.27%

19.88%

-7.29%

9

Net Non- Earning Assets/ Assets net of Non- Interest Liabilities

34.68%

33.05%

42.01%

Source: The data to calculate values was taken from Annual Report of NIB Bank

Comments

As may observed from the above ratios the profitability ratios of NIB bank are better this may be due to the MBL merger as that introduced a lot of defaulter credit base which the bank was able to in 2011 however we see that Summit Bank's position has improved contrary to NIB bank whose position has deteriorated over the past three years. The most important ratio here is ROE specially when our study is based upon analyzing the efficiency of the mergers.

Capital Adequacy Ratio Analysis

Capital Adequacy Ratios for Summit Bank

B.

CAPITAL ADEQUACY

2011

2010

2009

1

Equity / Total Assets

4.60%

4.97%

10.65%

2

Adjusted Equity ( including revaluation surplus ) / Total Assets

5.20%

4.67%

10.62%

3

Revaluation Surplus ( deficit ) / Adjusted Equity

11.58%

-6.54%

-0.28%

4

Capital Adequacy Ratio as per SBP

7.77%

5.35%

9.83%

Source: The data to calculate values was taken from Annual Report of Summit Bank

Capital Adequacy Ratios for NIB Bank

B

CAPITAL ADEQUACY

A 2011

2010

2009

A 1

Equity/Total Assets

8.78%

8.31%

20.01%

A 2

Adjusted Equity (Including revaluation impact)/Total Assets

8.83%

8.31%

19.95%

A 3

Revaluation Surplus/(Deficit)/Adjusted Equity

0.66%

0.01%

-0.28%

A 4

Capital Adequacy Ratio as per SBP

7.77%

5.35%

9.83%

Source: The data to calculate values was taken from Annual Report of NIB Bank

Comments

It is clearly evident that the equity for NIB is much stronger than that of Summit Bank however it may not be said that it is a good sign as it reflects the under utilization of Assets by NIB bank we need the Industry averages to make more appropriate conclusions. As the impact of stability will become more evident as NIB is more stable and less aggressive at the moment. Also the economic situation has to be kept in mind.

Liquidity Ratios for NIB Bank

Source: The data to calculate values was taken from Annual Report of NIB Bank

Comments

In terms of Liquidity both banks have comparable ratios which shows that after all Summit is doing well within its branch size has sufficient depositors to keep up in the market even though deposits are never enough in a bank. The liquidity is in good shape Demand deposits portray a comfortable position.

Loan Loss Coverage Ratios Analysis

Loan Loss Coverage Ratios for Summit Bank

D.

Loan Loss coverage

A 2011

2010

2009

1

Impaired Lending / Gross Advances

48.75%

34.42%

31.25%

2

Loan Loss Provisions (Specific + General) / Impaired Lending

49.37%

50.24%

51.19%

3

Net Impaired Lending / Equity

206.05%

157.77%

60.22%

4

Net Impaired Lending / Adjusted Equity

182.20%

168.09%

60.39%

Source: The data to calculate values was taken from Annual Report of Summit Bank

Loan Loss Coverage Ratios for NIBBank

D

LOAN LOSS COVERAGE

2011

2010

2009

A 1

Impaired Lending/Gross Finances

64.73%

50.33%

28.87%

A 2

Loan Loss Provision/Impaired lending

-69.10%

-68.50%

-68.20%

A 3

Net Impaired lending/Equity

447.91%

545.79%

201.76%

A 4

Net Impaired lending/Adjusted Equity

444.93%

545.76%

202.32%

Source: The data to calculate values was taken from Annual Report of NIB Bank

Comments

Impaired Lending has been generally high in the year round for all the banks and in this respect we see that despite of all the impaired lending brought in by my bank Summit has been able to keep the figures under control unlike NIB Bank which has figures crossing 60%. Now this is alarming for the Banks.

Growth Ratios for Summit bank

F.

GROWTH

A 2011

2010

1

Total assets

65.70%

89.32%

2

Gross Finances

38.91%

106.17%

3

Impaired Lending

96.75%

127.12%

4

Investments

93.91%

76.13%

5

Deposits

46.77%

61.91%

6

Equity

53.26%

-11.61%

Source: The data to calculate values was taken from Annual Report of Summit Bank

Growth Ratio for Summit Bank

F

GROWTH

2011.00

2010.00

2009.00

A 1

Total Assets

-5.81

-21.03

4.61

A 2

Gross Finances

-14.11

-1.66

2.75

A 3

Impaired lending

-1.49

48.15

4.33

A 4

Investments

-4.23

-17.05

77.48

A 5

Customer Deposits

39.46

34.76

-10.20

A 6

Equity

-0.57

-67.19

1.55

Source: The data to calculate values was taken from Annual Report of NIB Bank

Comments

The growth ratios also reflect that summit bank is doing what they want an aggressive growth with percentages 65% as compared to those of NIB Bank.

MEGA ENVIRONMENT& INDUSTRY ANALYSIS

Mega Environment

The Mega Environment of the Summit Bank involves economic, political, socio-cultural, technological environment and religion where Islamic Banking plays a role, Pakistan being Islamic Republic of Pakistan hence the constitution is in coherence with Shariah Law.

Source: Adapted from Sadler and Craig (2003)"Strategic Management", p.52

Political and Legal Environment

Political environment and its impact on the banking industry, before the financial liberalization and privatization period commercial banks in Pakistan mainly catered to the borrowing needs of the Government. This way Banking credit was concentrated to a few public sector organizations and the growth of the private sector was not evident. This suited the banks requirement to take less risk and not to overlook the fact that it opened doors for many such political influencers the Mehran bank scandal to BCCI fraud all are evident results from the time. This way the financial system suffered, political interference in decision making related to lending created distortions in the system due to the excessively low recovery rates on such loans [xxiv] . The all time NPLs issue that we face today.

Economic Environment

The main factors in economic environment affecting the banking industry include GDP growth rate, inflation rate, changes in the level of interest rates, money supply, disposable income, unemployment rates. Considering the GDP growth rate as new jobs are created in the economy the income per capita will increase, people will have higher purchasing power and higher disposable income which will lead to high savings i.e.; the deposits for banks will increase and hence they will have more funds to lend out. [xxv] 

Technological Environment

The technological environment plays a vital role in changing the dynamics of the banking industry, having both optimistic as well as the adverse impacts for the banking industry. Information technology help banks in such a way that it reduces the costs involved in the processing and management of the information,

Socio-cultural Environment

The most important factor observed in the last few years in Pakistan is the change of lifestyle of the people which has in turn affected their consumption patterns - people are more inclined towards consumption and less savings. People tend to borrow more and more they want to consume today and pay tomorrow.

It can become a major source of interest revenue for the firm as higher interest rate can be charged; higher risk premium involved. There is increased demand for services

Religion

Religion as mentioned above for Pakistan has played a key role played a key role in changing how things work in the industry as well as increased the level of competition with introduction of Islamic banking and other Islamic products.. There has been observed quite high expansion in the Islamic banking especially in FY 2005-10. Islamic banking is widely practiced in various Muslim countries and it is regarded as the interest-free banking. The main difference/ conflict between the conventional and the Islamic banking are the interest rates. However the average annual growth of ten years FY 2000-11 of Islamic Banks has observed to be 46% as compared to the growth of commercial banks around 14% which is much less as compared to Islamic Banks [1] xxvixxvii.

Porter's Competitive Forces

Source: Hill and Jones (2012), "Strategic Management Theory: An Integrated Approach" p.50

Michael E. Porter introduced the concept of how strategy is affected by the competitive forces of the industry in his article published in Harvard Business Review, March/April 1979 [xxviii] . Despite the reported criticisms of the model, it is still effective as a foundation for industry analysis. Considering the banking sector of Pakistan, the Five Forces Model signifies attractiveness of the industry in which Summit Bank operates. Evaluation of these competitive forces will help shape the appropriate strategy for the organization.

Bargaining Power of Suppliers

Suppliers in case of banking industry are the service providers - utilities, transportation, security, IT support, operations skilled workers, contacts, ability of customization of product. These liaisons are significant and impact the smooth operations of Summit Bank. Any discrepancy in these services gives rise to operational risk associated with the bank.

Threat of New Entrants

For banking sector, the threat of new entrants has been disproportionate [xxix] , due to the minimum capital requirement (MCR) and capital adequacy (CAR) as required by the BASEL system. According to a prudential regulation circular issued by SBP, all locally incorporated banks are required to attain CAR of 10% and MCR of PKR 15 billion by the end of 2011, PKR 19 billion by the end of 2012, and PKR 23 billion by the end of 2013 [xxx] . All banks (foreign or local) being incorporated after the issuance of circular i.e. after 2005, will be required to have the MCR of PKR 23 billion at the time of their incorporation. The foreign banks in Pakistan with their Head Offices holding paid-up capital, will have to attain approval from SBP regarding MCR and CAR, depending upon their branches in Pakistan. Similarly, the Direct Finance Institutions (DFIs) are required to attain MCR of PKR 9 billion by 2010.

The aforementioned capital requirements raise the barriers to entry for local banks. However, the foreign groups having strong backing and necessary capital can diffuse in the banking sector of Pakistan which at the moment is not a feasible option as we see that many of the foreign bank which had come in recently are closing down their operations even citi bank one of the oldest foreign bank has shut down its operations in many parts. After all the foreign banks come across problems with respect to license acquisition and operations in Pakistan. Influx of Islamic banking institutions has been on the rise in Pakistan, while foreign banks like RBS, ABN-Amro, CitiBank, HSBC, etc. are either acquired by local banks or divesting their operations [xxxi] .

Threat of Substitute Products

Substitute products in case of banking sector could be the services of non-banking financial institutions (NBFIs) like insurance companies, credit unions, mutual funds, investment banks offering advisory services for IPOs, asset management companies, Islamic finance companies, mortgage and/or leasing institutions, etc.

The strength of these substitute products are derived from the rate of return they offer and the quality of customer services that are being provided by them [xxxii] . Commercial banks are offering multifarious services to compete with these substitutes. Introduction of hybrid accounts, reduction in fees, and bundling of auxiliary services are few examples of such changes [xxxiii] .

In Pakistan's banking sector, commercial banks have the stronghold; however, Islamic financing and mutual funds are catching up in terms of reported profits and growth rates. To encounter this threat, Summit Bank will; have to move on and start Islamic Banking Operations.

Bargaining Power of Buyers

In case of general banking in Pakistan, the switching costs are low for most customers; hence they have more bargaining powers. Other components increasing their bargaining costs include the sources of publically available information, which allows them to compare the products of different banks.

Degree of Rivalry

The core of other four forces is the intensity of rivalry prevalent in the banking sector in Pakistan. The attributes of those factors act as the determinants of competitiveness in among the existing banks. As of June 2011, there are 32 local banks (with 9,431 branches nationwide) available in Pakistan, while 12 foreign banks are operational (with 32 branches across the country) [xxxiv] . The deposits of local banks (both private and public) grew by 17.60% on YoY basis, while those of foreign banks decreased -0.18%. Part of this impact has been due to the merger of RBS into Faysal Bank Limited in December 2010. HBL is the biggest player in the private banks with over 1400 branches across Pakistan. Other Top 5 banks of Pakistan include NBP, MCB, ABL, and UBL.

External Factor Analysis

After assessing the opportunities and threats external to the organization, the External Factor Analysis Summary is prepared [xxxv] . The first column consists of the Summit Bank's strategic opportunities and threats, while the respective weights (0 to 1) are assigned according to the factors' significance in the banking sector. Subsequent ratings (1 to 5) are given for each factor depending upon the organization's response to the external factors present.

The next column shows the weighted score of the bank for each factor. The total weighted score calculated in the External Factor Analysis Summary Table shows that how effectively the organization is responding to the prevailing environmental conditions.

External Factors Analysis Summary

External Factors

Weight

Rating

Weighted Score

OPPORTUNITIES

Demand for SME Financing

0.10

3

0.30

Increased Rural Demand

0.05

2

0.10

Expansion in Islamic Banking

0.2

4

0.80

Improved Technology

0.05

3

0.15

Change in Consumption Patterns

0.20

4

0.80

THREATS

Differentiation on Services

0.05

3

0.15

Mobile Banking Security Threats

0.05

2

0.10

Branchless Banking

0.1

2

0.20

Competition from Islamic Banks

0.05

4

0.20

SBP Policy Changes

0.15

4

0.60

TOTAL

3.40

Source: Format suggested by R. Srinivasan (2005) in Strategic Management: The Indian Context

Comments

Opportunities

Demand for SME Financing: In the current economic conditions there is a need for SME financing in order to move the business and inject cash flow so that the business may expand. The banking sector is not sufficiently catering to the SME sector due to high risks involved as such businesses are mostly un-documented, a few microfinance have recently come in emergence and are somewhat looking after the need like Kashaf Bank even though It raises the costs for banks to evaluate their credit worthiness. However, if Summit Bank focuses on such areas it can prove to be a profitable segment supported by large customer base. Presently, around 85% of the SME credit is given to the manufacturing and trading whereas while many potential areas remain untapped. The increased need of consumer financing can create greater opportunities for banks by increasing their exposure to consumer advances portfolio - by charging higher interest rates on their advances due to risk premium they will be able to improve their asset yield given the fact that NPL's stay within the tolerance level.

Increased Rural Demand: There is a lot of demand in the agriculture Sector for loans particularly due to the floods which have ruined the soil in those areas and livestock, again Sindh Bank has tried to cater for it however political influences will never allow competition, besides influences banks are not currently catering to this sector due to the collateral problems available and hence there is a lot of scope for bank to cater to this particular segment which is evident from the share of agriculture in GDP which is still around 20%.

Expansion in Islamic Banking: A dramatic increase has been observed in Islamic Banking the average annual growth of Islamic banking has been around 46% as compared to the commercial banks rate of growth of 14% [xxxvi] . Although the assets of the Islamic Banks have remained concentrated in the six dominant Islamic banks. This volatile growth was due to the new clientele network and inclination of people towards the Islamic banking rather than the conventional banking and by expanding into Islamic banking network Summit can avail the opportunities of increasing its fund base.

Improved Technology: Through the use of improved and efficient information technology (IT) and risk management system the intermediation costs of the bank can be reduced; which will further lead to higher spread which in turn will translate into higher profitability.

Change in Consumption Patterns: The socio-cultural changes are influencing the consumption patterns of the people. Even though the disposable income has not increased but people are using their future income for consumption through the use of credit cards i.e.; plastic money and currently the interest rate charged on credit cards is around 38-40% and by increasing its focus towards this segment and by launching various value-added services the bank can capitalize on this opportunity.

Threats

Differentiation on Services: The increase in the number of private banks has increased the competition within the banking industry, since banking is a service industry the only way to compete in it is through service, price wars tend to play a minimal role in banking industry and hence arises a need for differentiation of the products and in the service level for the bank to be remained as a preferred bank by the consumers.

Mobile Banking Security Threats: As mobile banking and the e-banking has increased along with the technological implementations there exist certain loop holes in the system for hackers to exploit - hence a high level of security is required to protect the consumers and the bank itself from getting into a law suit..

Branchless Banking: United Bank Limited's "Omni" and Telenor's "easypaisa" mimic branchless banking facilities which Summit Bank is currently not offering none the less Summit Bank is working with western union for international money transfers in particular which make it possible for consumers to make the transactions which otherwise would not be possible and consumers worth this particular need would switch.

Competition from Islamic Banks: Islamic banks are currently offering high deposit rates as compared to the commercial banks; as the nominal weighted average return on commercial banks PLS deposits is around 4.76% including current accounts whereas in the case of Islamic Banks it around 5.50% in 2010, thus there is a threat that the depositors will toggle towards the Islamic banks in an attempt to earn more returns and consequently making it a threat for commercial banks.

SBP Policy Changes: Changes in SBP monetary policy can lead to changes in interest rates which in turn causes change in the intermediation costs. Moreover the changes in the regulations regarding capital requirement and exposure limits can also affect the profitability level of the bank.

INTERNAL FACTORS ANALYSIS SUMMARY

INTERNAL FACTORS ANALYSIS SUMMARY

Evaluating the strengths and weaknesses of Summit Bank will help identify the competencies which may be capitalized upon in the long run. Also, the deficiencies in the organizations could then be condensed through appropriate actions. Summit Bank's internal factors were identified by analysis of financial statements, interviews with the operational as well as top management, and the insights offered by the banking sector experts for expert opinion some magazine cuttings were taken and have been referred to throughout.

After assessing the strengths and weaknesses internal to the organization, the Internal Factor Analysis Summary is prepared [xxxvii] . The first column consists of the Summit Bank's strategic strengths and weaknesses, while the respective weights (0 to 1) are assigned according to the factors' significance in the banking sector. Subsequent ratings (1 to 5) are given for each factor depending upon the organization's position. The comments section following the Table elucidates the reasons for selecting each strength or weakness"

Internal Factor Analysis Summary

Internal Factors

Weight

Rating

Weighted Score

STRENGTHS

Branch Network

0.15

4

0.60

Strong Deposit Base

0.15

4

0.60

Established Clientele

0.1

4

0.40

Group-Backing

0.10

4

0.40

Low-Cost Funds

0.07

4

0.28

WEAKNESSES

Customer Response Time

0.05

2

0.06

Decline in Advances

0.15

3

0.45

Impaired Lending

0.10

2

0.20

Risk Mitigation

0.10

2

0.20

Employee Turnover

0.05

3

0.15

TOTAL

3.34

Source: Format suggested by R. Srinivasan (2005) in Strategic Management: The Indian Context

Comments

Strengths

Branch Network: Summit Bank is a medium sized bank when we talk about the Asset Base of the bank however the bank right now is following an aggressive approach to achieve its goals of an increased asset base. With respect to the branches of Summit Bank, are 166 operational presently. The Top 5 banks of Pakistan namely NBP, HBL, MCB, ABL and UBL are the prime competitors due to their asset base. However, other banks like Askari Commercial Bank, Standard Chartered, and Faysal Bank are gaining significance as competitors in regular banking.

Strong Deposit Base: The deposits of Summit Bank includes Mybank's deposits too and hence has become huge CMH are also good clients.. Through opening of new branches, offering services that the clients require, and hiring skilled CRO's, the bank is successful in attracting new deposits every year.

Established Clientele: The prime customers of the banks consist of established businesses and multi-national corporations. Their transactions constitute significant share of business of Summit Bank. These clients keep the bank as an essential liaison in terms of trade financing, overdraft lending, letters of credit, deposits, etc [xxxviii] .

Group Backing: Summit Bank is backed by Arif Habib group a leading name in Pakistan. And Suroor investments a group with the adequate equity. The strength of the parent company is evident in terms of raising funds to fulfill the liquidity required by the bank. Subordinated loans as the Tier II Capital in the balance sheet of Summit Bank is one example of such backing by the Abu Dhabi Group5.

Weaknesses

Customer Response Time: The customers seem happy with the branch network presence and with the EFFICIENCY there some of the customer interviews showed that certain customers had only recently moved to the new branch near their new location and were more satisfied with the service than the older bank service which were also namely old bank with an apparent excellent reputation.

Decline in Advances: Summit Bank is inclined towards maintaining appropriate liquidity levels to match the withdrawals of the demand deposits, hence their advances have declined. Primarily, the respective funds are invested in the T-Bills as they have no credit risk and can be liquidated whenever required5.

Impaired Lending: The degree of non-performing loans has risen in case of Summit Bank, despite its adherence to the SBP regulations regarding the maximum exposure in a given sector. The rate of repayment of loans given to related parties is lower, while the greatest portion of impaired lending is attributed to the Textile sector, with inadequate provisions. The second largest NPLs have originated from consumer loans offered to individuals (albeit 'credit worthy' on paper) [xxxix] . These NPLs were mostly brought in by My Bank and Atlas Bank a gift of the mergers.

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