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Bank: Silk Bank Ltd - Analysis of Financial Statements Financial Year 2007 - 2001 H 2010

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Highlights - Corporate News

OVERVIEW : Silk Bank (formerly Saudi Pak Commercial Bank) came into existence when a consortium of investors, comprising of Bank Muscat SAOG, Nomura European Investments Limited and International Finance Corporation signed a share purchase agreement with the Saudi Pak investment group. On March 31, 2008 the consortium acquired 86.55% of the bank for around USD 260 million or $0.47 per share (Rs 29.3 equivalent per share).

Under the new leadership, the bank will continue to focus on SME and consumer financing resulting in efforts of increased profitability. In December 2009, after completing all regulatory requirements, the bank announced a Rights Issue of 311% at a discount of Rs 7.5 per share to generate net additional capital of Rs 7.00 billion to meet the MCR of the State Bank of Pakistan (SBP).

The issue has been supported by all members of the consortium of investors, except Bank Muscat because of regulatory constraints by the Central Bank of Oman. However, their share will be subscribed by new investors and the process is expected to successfully complete by end June 2010. Its shares are quoted on all stock exchanges of Pakistan.


During the first half of FY10, Silk Bank has shown phenomenal performance, recording a profit for the first time in the past four years. While the company was facing a loss of Rs 1.11 billion last June, this June a profit of Rs 208 million has been recorded. As a result, EPS of Rs 0.11 has been recorded as compared to an EPS of Re -1.00 per share over the same period last year, a growth of 111%. Net Interest Income saw a remarkable increase of 205%, an increase attributed to a large jump in Interest Income and only a marginal rise in Interest Expense. In addition, the sharp decline in Provisions resulted in a much higher Net Interest Income after Provisioning, moving from a loss of Rs 286 million at the end of 1H09 to a profit of Rs 237 million at the end of 1H10. Provisions against loans dropped from Rs 279 million to Rs 36 million, a decline of 87%.

Non-interest income increased significantly, from Rs 395 million at the end of 1H09 to Rs 959 million at the end of 1H10, a growth of 142%. This rise was mainly due to a gain of Rs 567 million on the sale of certain bank properties. Non-interest expense showed a marginal decline, as a result of which the company presented a profit over the period as compared to a loss the same period last year. The profit for the period was improved further as a result of the tax refund received.

Deposits showed an increase of 8.9% over the period, rising from Rs 49.6 billion at the end of 2009 to Rs 54 billion at the end of the first half of 2010. Within Deposits, Savings Accounts saw an increase of 39.9% followed by Current Accounts, which rose by 24.9%. Borrowings, however, declined by 26.9%, from Rs 15 billion to Rs 11 billion. As a result, no major change was seen in Total Liabilities.

Total Assets rose from Rs 68.6 billion at the end of FY09 to Rs 72.9 billion at the end of 1H10, a rise of 6.8%. This rise can be attributed to the 28.9% increase in Advances, which was dampened slightly by the 18.9% decline in Investments.

Equity of Silk Bank has seen a large increase, from Rs 1.76 billion to Rs 6.17 billion, a growth of 250%. This is a very big achievement for the bank, as they have reached this goal despite the large losses they have been facing as well as the poor market response towards newly issued shares. Shares issued this period were done so at a discount of Rs 7.5 per share instead of the full price of Rs 10 per share. In addition, the company recorded a gain of Rs 567 million on the sale of certain assets, also contributing to the increase in equity. These measures were all taken in order to comply with the Minimum Capital Requirement set by the State Bank, which required all banks to hold Rs 6 billion paid-up capital by the end of 2009.

NPLs showed a marginal rise of 0.91%, rising from Rs 11.89 billion to Rs 11.99 billion at the end of this period. The NPL to Advances ratio has declined from 37% to 29%, signifying an improvement in asset quality. The Advance to Deposit Ratio has remained relatively stable, with a rise of only 1.7%.

Market value of silk bank has been declining, with the share price dropping from Rs 5.47 to Rs 2.7 over the past six months. In addition, issuance of shares at a discount shows the market response to shares is poor and it may take some time before the bank gains investor confidence in the market.

The first half of this year has shown a positive trend for the bank, as it has now met the MCR and has once again become profitable. Despite the difficult economic situation in the country this stability is expected to continue for the remaining year.


Silk bank s Loss before Tax increased by 50% to Rs 4.25 billion in FY09 as compared to Rs 2.83 billion in FY08. The net interest income registered a decline of 84% as it reduced to Rs 57 million from Rs 369 million in FY08. The reason behind this decline was the increase in interest expense resulting from high costs of deposits and increased borrowing from financial institutions. The non-mark-up income registered a sizable growth of 72% in FY09 (to Rs 662.187 million) with almost half of this income coming from fee, commission and brokerage income. The rise can also be attributed to the gains made on dealing in foreign currencies in the wake of unstable rupee and from gains on sales of securities. Non-interest expenses increased by 36.8% to Rs 2.66 billion with administrative expenses increasing by 41.9% to Rs 2.74 billion. This rise was due to the bank s focus on increasing its branch network and the cost associated with re-branding, new recruitments and setting up of and refurbishments of existing branches.

In the FY08, Silk Bank declared a loss of Rs 2014 million with earnings per share of Rs 2.83, considerably lower (33.76%) than previous year s loss of PKR 3041 million and Loss per share of PKR 6.25. Due to losses the bank did not pay any dividend. The net interest income after provisions improved by 54.10%; from negative Rs 2.773 billion to negative Rs 1.273 billion. This was mainly because during FY08, the bank s provisioning against the NPLS and Advances declined significantly (47%) to Rs 1.663billion. The non-mark-up income witnessed a decline of 50.50% to Rs 384.5 million mainly on the back of declining Fee commission and Brokerage income, which went down 49% to Rs 188.6 million.

In FY09, net interest income after provisions declined by 76.9% which can be attributed to a sharp surge in the interest expenses to Rs 5.855 billion (an increase of 38.7%). The impairment expenses for available for sale securities (Rs 138.276 million) drive up provisioning expense. Due to global economic conditions and slow down, stock markets in
Pakistan have witnessed a significant decline in value of equity instruments traded. During the period, the bank faced a sizeable impairment charges on available for sale securities (Rs 138.276 million).

In FY09, investments grew by 67% from the previous year to stand at Rs 20.179 billion. Government securities ie Market Treasury Bills and PIBs comprise 88% of the investments (Rs 17.788 Billion). Advances Show a modest gain of 3.2% from FY 08 to stand at Rs 32.097Billion but still represent the major chunk of earning assets at 60% of the Earning asset during FY09. Lending to financial institutions declined by 22% to Rs 1.067 billion mainly due to a decline in call money lending. However the ADR has fallen to 64.7% in 2009 as compared to 75.72% in 2008, because the advances rose by 3.2% (to Rs 32.097 billion) and deposits grew by 20% (to Rs 49.610 billion) in 2009.


The year FY09 witnessed a 20% increase in earning assets of the bank and they stood at Rs 53.34 billion. The most sizable contribution in this regard was made by investments as they rose by 67%. The bank was able to buy risk-free government treasury bills at coupon rates ranging from 11.5% to 13.24%. TFCs were also bought but mostly of unlisted companies which could prove to be a risky investment considering the financial instability in the country. In FY08 there was not any sizable change in the earning assets while in FY07 they declined by 10%. The losses for these 2 years can partially be explained by the dwindling size of the earning assets, which declined in both these years. During FY07, the bank s overall earning asset base declined by 10.13% to stand at PKR 44.57billion, which further slipped modestly by 0.22% to stand at Rs 44.476 billion in FY08. During the same period, lending to financial institutions increased by 63.90% (FY08: Rs 1.376 billion), investments registered a decline of 32% to stand at Rs 12.012 billion and advances grew by 20.14% to Rs 31.09 billion.

In FY09 the bank was able to match the increase in advances with a larger increase in deposits to improve its liquidity position. Advances grew by 3.02% to Rs 32 billion while deposits registered an increase of 20% and stood at Rs 49 billion for FY09. In 2008, the bank had deposits of Rs 41.056 billion; 3.22% lower than those of previous year. The remunerative, interest expense bearing deposits of 2008 were Rs 34.419 billion, representing almost 84% of the total deposit base. This is mainly due to the fact that Pakistani banks are attracting more fixed and term deposits due to banks eagerness for raising longer term deposits to match their assets maturity profiles whereas due to decline in consumer financing, the demand for consumer short to medium term financing has been wary.


Silk Bank s Return on Assets has declined to negative 4.2% in FY09 as compared to negative 3.6% in FY08. The bank has been unable to make profit after tax since 2006. In FY08 the bank had been able to reduce its loss before taxation to Rs 2.83 billion. However it was unable to sustain this performance as loss before taxation increased by 50% to Rs 4.25 billion. Most of this loss can be attributed to a decline of 84% in net interest income while the operating charges increased by 42%. Provisions against loans and advances also increased by 30% to Rs 2.17 billion as the bank suffered from high NPLs and economic downturn.

The return on equity declined to negative 164% in FY09 from negative 45% in FY08. This has been mainly due to a decline of 60% in the bank s equity. Although the bank was able to increase its assets by 23%; large increase in deposits and borrowings from financial institutions raised the bank s liabilities to Rs 66 billion (an increase of more than 30%).


The bank faced non-performing loans of Rs 11.891 billion during the FY09, which shows a decline of 7% as compared to FY08. The NPLs to advances ratio declined to 37% in FY09 against 41% in FY08. Although there had been an increase in advances but the bank was able to controls its NPLs even in a slow growing economy and a weak manufacturing sector. Provisions to NPLs increased to 18.2% in FY09 as compared to 12.9% in FY08. Although the bank was able to contain its NPLs in FY09, high provisions for NPLs had to be made this year in account of large increase in NPLs in 2008. The issue of rising NPLs in 2008 could be attributed to the economic downturn, the power crisis and the subsequent industrial crisis, which has rendered many borrowers incapable to meet their financial obligations.




    2007     2008     2009


 6,136,018  12,845,225  11,891,428

The revised regulations of SBP that were effective from September 30, 2009 has increased the percentage of benefit of Forced Sale Value (FSV) from 30% to 40% for mortgaged residential and commercial properties held as collateral against advances by the bank and aforesaid regulation also allowed the benefit of FSV in respect of mortgaged industrial properties (land and building only). The above regulations made changes in the computation of provisioning and have resulted in reduction of provision against non-performing advances by Rs 323.053 million and a consequent decrease in loss after tax by Rs 209.98 million. During the year, total FSV benefit availed by the Bank resulted in decrease in after tax loss of Rs 360.117 million (2008: Nil). Accordingly, as of December 31, 2009, the accumulated decrease in loss after tax of Rs 234.076 million (2008: Nil) shall not available for payment of cash or stock dividend.


The ratio of earning assets to total assets shows a slight decline in FY09 ie 77.69% as compared to 79.93% in FY08. Although earning assets have been increasing but in less proportion to total assets. The advance to deposit ratio has declined from 75% in FY08 to 69% in FY09. The bank has been able to improve on its liquidity in compliance with SBP s notifications. With deposits mainly consisting of term deposits the bank has been able to better match its advance with deposits. The advance to deposits ratio increased in FY08 to 75.72% from 61.60% in FY 07. This was mainly due to the rise in advances of 20.14% whereas the deposits fell by 3.11% because the bank had large amounts of fixed deposits, which enabled them to extend advances, particularly in the long-term advances, which stood at Rs 17.923 billion, 31.20% higher than previous year s Rs 13.661 billion. Whereas short-term deposits for FY08 stood at Rs 20.26 billion; which grew at a comparatively slower rate of 14.13%. Overall, the figures indicated that the bank was striving to maintain a good ADR by making more and more advances, but the issue of default and non-performance of loans remained a challenge.

There has been a slight increase in yield on earning assets ie from 10.54% in FY08 to 10.74% in FY09 but the cost of funding these earning assets has increased with a larger amount. In FY09 the cost of funding these earning assets was 11.97% as compared to 9.48% in the previous year. This was due to an increase of 38% in the interest expensed which rose to Rs 5.8 billion as the bank increased its financing by increasing its deposits and borrowings from financial institutions.


Assets (000 s PKR)            2006    2007    2008    2009


cash and balances

 with treasury banks        3,994,136  3,223,780  3,070,067  3,120,880

balances with other banks       613,678   128,991   190,197   151,068

lending to financial institutions  4,747,567   839,959  1,376,651  1,067,708

investments            15,828,682 17,859,169 12,012,233 20,179,329

advances              29,021,974 25,874,972 31,087,373 32,097,490

operating fixed assets       2,322,371  2,367,883  3,002,450  3,720,695

deferred taxes net         1,015,123  1,767,715  2,613,939  3,976,149

other assets            1,657,318  1,598,131  2,292,358  4,351,022

Total Assets            59,200,849 53,660,600 55,645,268 66,664,341




Bills payable             408,342   570,756   431,537   637,602

Borrowings             4,236,775  6,880,449  8,738,616 15,088,332

Deposits and other accounts    49,015,090 42,373,710 41,056,630 49,610,034

Sub-ordinated loans          650,000   650,000      -      -

Liabilities against assets

 subject to finance lease       63,030   80,155   39,731   10,476

Deferred tax liabilities          -      -      -      -

Other liabilities           829,573   925,091   987,394  1,554,808

Total Liabilities         55,202,810 51,480,161 51,253,908 66,901,252


The solvency position of the bank has deteriorated in FY09 as compared to FY08. The equity to assets ratio stood at 4.95% against 6% in FY07. Similarly the Equity to Deposits ratio declined from 7.88% in FY08 to 6.79% in FY09. This decline can be attributed to the increase in bank s liabilities (mainly Deposits and lending from financial institutions) which reduced its net assets. In FY08 there was an improvement in solvency position as equity to assets ratio increased from 5.47% to 6.01% and equity to deposits ratio increased from 6.76% to 7.88%. The reason behind to change was the improvement in share capital of 80% as a result of new injections in the equity. However the new injections were unable to maintain the minimum capital requirement of Rs 5 billion and it faced a shortfall of Rs 2.128 billion.

The Earning asset to deposit ratio has reduced marginally to 1.07 in FY09 from 1.08 in FY08. This is because of the un-proportionate variations in the Earnings assets and deposits. Also, the shortfall in meeting the MCR has resulted in the bank to make efforts on improving its capital adequacy through improving the equity side of its balance sheet.


The new board has unveiled an ambitious plan to bring the Silk bank among the top ten banks of the country. The main aim is to increase the balance sheet size of the bank aside from cleaning it up, reduce and recover the non performing loans of the bank, and invest in resources that will improve the banks performance and profitability. The JCR-VIS Credit Rating Agency has maintained the long term entity rating of the Bank as A- (Single A Minus) and the short term rating as A-3 (A-Three) and the rating has been put under a rating watch as Developing . It is also hoped by the completion of injection of new capital, the bank will take off to achieving their ambitious goals.

COURTESY: Economics and Finance Department,
Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.

DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].

Courtesy: Business Recorder

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