Will it be a win-win Proposition?
This case is written by Roma Israni1& Bakhtawar Shaikh2 , solely to provide for class discussion. The author may have disguised certain names and other identifying information to protect confidentiality.
This Publication may not be transmitted, photocopied, and digitalized, or otherwise reproduced in any form by means without the permission of copyright holder. This Case Study covers practical implications of Business theories, models, and structures. This is written for Financial Reporting and Analysis.
Its June, the last month of Pakistan’s fiscal year, After analyzing financial statements of NIB Bank, Mr.Shanawaz is looking disturbed because of bank’s performance, so many questions raised in the mind of Mr. Shanawaz that either the bank will perform well enough in future to support its operations or not? Will the bank continue its strategy for longer period? Will the economic indicators support the NIB bank for the future actions? He became further confused when MCB Bank has given them offer of merger. Would this attempt of merging will be beneficial for the NIB Bank? Either this merging option will reduce its risks of bankruptcy or not? If NIB Bank will not follow the MCB Bank offer of merging then what type of activities will make the bank more profitable than the option of merging?
For pondering over these situations, he along with the bank’s higher authorities’ recommendations have decided to hire external consultant for individually analyzing these financial statements and who will provide independent bank’s performance and also give suggestions for the future actions.
About NIB Bank Pakistan:
NIB bank is the subsidiary of Bugis investments (Mauritius) Pte. Ltd that is a wholly owned subsidiary of Fullerton Financial Holdings Pte. Ltd. NIB is amongst the largest foreign banks of Pakistan having the extensive 1 Roma Israni is student of MBA program studying at IBA Sukkur. She is currently working on the case in order to find some financial dilemmas regarding NIB Bank Pakistan. This case is solely written for Financial Reporting and Analysis.2 Bakhtawar Shaikh is student of MBA program studying at IBA Sukkur. She is currently working on the case in order to find some financial dilemmas regarding NIB Bank Pakistan. This case is solely written for Financial Reporting and Analysis.
branching network in 52 cities of Pakistan. Also one of the largest corporate entities with a paid up capital of PKR 103 billion. The NIB bank started its operations in October 2003 with the merger of National Development Leasing Corporation (NDLC) and the Pakistan operations of IFIC bank. From the start bank grew well and acquired The Pakistan operations of Credit Agricole Indosuez in 2004 and then On December 31st 2007, NIB successfully merged with Pakistan Industrial Credit & Investment Corporation ltd. (PICIC) and PICIC Commercial Bank ltd. (PCBL). With total assets swelling up to PRs. 176.7 billion, advances to PRs 82.2 billion and deposits to an amount of PRs 116.7 billion the merger resulted in formation the seventh largest commercial bank in the country in terms of distribution network The bank serves its customers through all financial and banking needs by having 170+ branches with online connections and 160 ATM. The bank satisfies its customers by providing world class financial products and services by different business units includes Retail Banking, Commercial Banking, Corporate and investment banking, and Treasury Services. The main stockholder of NIB is Temaesk through its wholly owned subsidiary Fullerton Financial Holdings ltd. Basically Temaesk is a Singapore based Investment Company incepted in 1974. NIB has a team of eight Board of directors. The NIB aims to be a high performing bank admired for inspired employees, satisfying customer services and for innovation. NIB bank CEO and director is Mr. Atif R. Bukhari.
Business Portfolio:
NIB has the vast portfolio of financial products that includes Deposits, Consumer loans, Wealth management, Trade Finance, Working Capital Finance, Seasonal Finance, and Medium Term Finance, Transaction banking, etc. And also the financial services through three different business units like:
Retail banking: Consumer banking includes the services by a bank to individual consumers, instead of companies, corporations or other banks.
Services offered include savings and transactional
accounts, mortgages, loans, debit, and credit cards.
Commercial Banking: Commercial bank is a division of a NIB bank, which
more specifically deals with deposit and loan services provided to corporations or large/middle-sized business.
Investment Banking: It is division of NIB that assists individuals,
corporations, and governments in raising financial capital by underwriting or acting as the client's agent in the issuance of securities.
Glimpse of the Financial Performance of NIB:
Since its inception in 2003 initially NIB performed well and grow itself by acquisition and merger. However the financial statements of NIB shows the instability of the profits and revenues the reason behind this is the economic indicators as well as the management decisions. Loss making NIB bank posted three years consecutive loss without declaring single penny of dividend to its shareholders. 37-members group of minority shareholders sent a letter to the Central Bank and request for hiring external auditor for saving the Pakistani holders. The stakeholders having the claim of about RS 2 billion in the bank’s capital. Due to the hidden and highlighting weaknesses bank had incurred loss of about RS 56.156 billion from 2010 to 2012. Stakeholders blamed the bank management for the losses and considering the administrative expenses as the contributing factor. Not only this, bank has increased its expenditures by booking seven floors at the PNSC building and is spending millions to reinvigorate the same building. And also bank has increased its salaries expense without any productive results.
The Bank has not declared any dividend to its shareholders since it is handed over by Temasek for six years back. Before acquisition of Temasek, bank was used to give dividend and bonuses every year. The share price of the bank was about RS 80 when it was PICIC Commercial Bank. In spite of claiming to be largest paid up capital, bank has not raised its share price more than Rs.3. share price is moving around RS 1.5 to RS 2.8.
After contacting the spokesman of NIB Bank, he admitted that losses has occurred since the last five years but bank has improved its performance from the first quarter of 2013, posted the profit before tax of about RS. 549 million compared to a loss before tax of RS 98 million in the year of 2012. He further pointed out its current new management that it is improving its policies and showing results. It is true that in previous years shareholders has not received any share in the bank’s earnings but now they will not be neglected because bank is now in position to increase its revenues. He further said that about the extravagant expenditures that bank has increased its revenues by 25% compared to its 10% expenditure. This is an economic move for the bank because the new location is cheaper place than the old place that was Pakistan’s most expensive place.
A tough decision to be made by NIB:
MCB Bank has showed interest in the acquiring assets of NIB Bank in order to obtain an advantage in the competitive industry of Pakistan. The merger will lead to the persistent work of operations share prices of both Banks. And this
will be done only with the permission of State Bank of Pakistan and also with the permission of SECP and CCP. NIB Bank has officially announced that by the merger of two banks stakeholders of the NIB Bank will remain the investor of the MCB Bank. These are the only talks between the banks nothing more than this declared by NIB management. According to some analyst If the both banks come to mutual decision of having a merger of MCB and NIB bank then this may be the win-win situation for both of the banks as MCB will get the benefit from the vastly expanded branch networking of NIB bank as MCB has adequate liquidity and capital buffer to grow itself through risky assets and take a initiate to expand and face the competition more strongly on the other hand NIB having lower capital adequacy of 12.5%, high cost to income of 95% in CY15. With 21% of total loan book currently classified, heavy cost structure, low interest rate environment and adverse changes in the minimum deposit rate last year, the bank’s earnings and business turnaround looks stretched.
Questions:
1. Analyze the performance of NIB bank through ratios by using financial statements provided in the Exhibits.
2. Comment over the flaws in the NIB bank’s financial performance after working through the ratio analysis.
3. What do you think would be the best decision for NIB? Whether to go for merger or not?
4. What should be the future steps that management of NIB should take in order to get stable profits in the coming years if it does not go for merger?
EXHIBIT 1
Income Statement
NIB Bank
2012 2013 2014 2015
+ Total Interest Income
14,095. 1 13,228. 1 15,144. 9 14,928.6
- Total Interest Expense 11,125.8 9,878.1 11,248.9 10,086.7
+ Net Interest Income 2,969.3 3,350.0 3,896.1 4,841.9
+ Commissions & Fees Earned 1,166.2 1,620.4 1,616.9 1,420.9
+ Other Operating Income 157.7 226.8 10.2 3.0
Net Revenue 5,353.0 6,195.3 6,625.8 10,429.8
- Provisions for Loan Losses 116.5 -751.0 1,536.5 199.2
Net Revenue After Provisions 5,236.5 6,946.3 5,089.3 10,230.5
- Non-Interest Expense 5,413.1 5,636.5 6,305.0 6,388.8
Operating Income or Losses -176.6 1,309.8 -1,215.7 3,841.8
- Net Non-Operating Losses (Gains) -617.1 -802.5 -575.1 10.0
Pretax Income 440.5 2,112.3 -640.6 3,831.8
- Income Tax Expense (Benefit) 178.4 532.3 423.3 1,390.8
Income Before XO Items 262.1 1,580.1 -1,064.0 2,441.0
- Extraordinary Loss Net of Tax 0.0 0.0 -443.3 -109.5
- Minority/Non-Controlling Interests
(Credits) 4.8 43.4 99.2 15.9
Net Income/Net Profit (Losses) 257.3 1,536.6 -719.9 2,534.6
EXHIBIT 2
Balance Sheet
NIB Bank
2011 2012 2013 2014 2015
Assets
+ Cash & Near Cash Items 7,411.5 7,282.0 7,681.5 7,767.0 9,602.9 + Inter banking Assets 16,711.0 4,788.6 3,142.2 8,582.7 3,693.8 + Short-Term Investments 39,386.4 75,139.9 53,768.3 47,558.3 86,364.6 + Net Loans 60,861.5 71,585.9 82,026.0 93,673.5 110,669.0 + Total Loans 84,489.2 94,879.8 104,583.9 117,653.6 135,028.0 - Reserve for Losses on
Loans 23,627.7 23,293.9 22,557.9 23,980.1 24,359.0 + Long-Term Investments 4,832.9 4,692.7 1,728.4 6,703.4 6,678.9 + Net Fixed Assets 2,722.9 2,754.1 2,879.3 3,033.1 3,086.4 + Other Assets 22,898.8 24,612.1 27,567.8 27,677.3 24,947.1
Total Assets 154,825.0 190,855.2 178,793.5 194,995.3 245,042.7
Liabilities & Shareholders’ Equity
+ Interest Bearing Deposits 58,882.3 58,434.7 69,697.3 65,146.4 74,835.8 + Saving Deposits 26,112.8 33,574.9 40,747.7 38,948.7 41,684.5 + Time Deposits 32,769.5 24,859.8 28,949.6 26,197.7 33,151.4 + Other Deposits 25,169.5 27,784.1 — — — + Customer Deposits 84,051.8 86,218.8 98,234.4 98,751.8 109,917. 6 + ST Borrowings & Repos 3,158.9 4,875.6 9,516.0 9,091.6 23,058.3 + Other Short-Term Liabilities 2,574.2 5,193.3 3,836.9 3,271.7 4,105.4 + Long-Term Borrowings 51,376.4 80,171.9 51,506.7 66,948.1 89,872.3 + Other Long-Term Liabilities — 0.0 0.0 0.0 0.0
Total Liabilities 141,161.3 176,459.6 163,094.0 178,063.1 226,953.5
+ Total Preferred Equity 0.0 0.0 0.0 0.0 0.0 + Minority Interest 0.0 0.0 0.0 0.0 0.0 + Share Capital & APIC 103,028.5 103,028.5 103,028.5 103,028.5 103,028.5 + Retained Earnings & Other
Equity 89,364.9- 88,632.9- 87,329.1- 86,096.3- 84,939.4
-Total Equity 13,663.7 14,395.6 15,699.5 16,932.2 18,089.2 Total Liabilities & Equity 154,825.0 190,855.2 178,793.5 194,995.3 245,042.7
Source: Annual reports of the bank
EXHIBIT 3
Statement of Cash Flows
NIB Bank
2012 2013 2014 2015
Cash From Operating Activities
+ Net Income 257.3 1,536.6 -719.9 2,534.6
+ D&A and Provision for Loan
Losses 703.7 -121.9 2,187.2 835.7
+ Other Non-Cash Adjustments
-1,178.4 -971.3 -851.5 2,497.7
+ Changes in Non-Cash Capital
-1,622.5 1,071.7- 1,635.3 1,554.7
-Cash From Operations
-1,839. 9 -628.2 -1,019. 4 2,427.3
Cash From Investing Activities
+ Capital Expenditures -130.1 -447.8 -599.5 -450.6 + Increase in Investments -34,580. 8 0.0 0.0 -36,633. 7 + Decrease in Investments 0.0 23,623.8 4,152.5 0.0 + Change in Loans 369.5 8,380.1 -18,758. 6 -11,100. 8
+ Other Investing Activities 212.1 151.8 774.9 321.3
Cash From Investing Activities
-34,096 .4 15,038.3 -14,357 .8 -47,852 .3 Cash from Financing Activities
+ Dividends Paid -0.4 -1.4 0.0 0.0
+ Change in Short-Term Borrowings
29,488. 6
-24,239.
8 11,122.1 22,761.6
+ Increase in Long-Term Borrowings 0.0 0.0 4,197.2 0.0
+ Decrease In Long-Term
Borrowings -1.6 3,992.8- 0.0 -1.7
+ Increase in Capital Stocks 0.0 0.0 0.0 0.0
+ Decrease in Capital Stocks 0.0 0.0 0.0 0.0
+ Change in Deposits 5,622.2 13,793.3 215.1 25,296.8
+ Other Financing Activities 1.6 97.1 -203.2 415.9
Cash from Financing Activities
35,110 .4
-14,343
.6 15,331.2 48,472.6
Net Changes in Cash -825.9 66.5 -46.1 3,047.5
Source: Annual reports of the bank
Exhibit 4.
Projected consolidated statements after if the merger
takes place.
PROJECTED CONSOLIDATED INCOME STATEMENT NIB BANK
2016 2017 Mark-up / return / interest earned
147373 21
150714 57 Mark-up / return / interest expensed 10086690 11248871
Net mark-up / interest Income 4650631 3822586
Provision against non-performing loans and advances 199229 1536501 Provision / (reversal) for diminution in the value of investments 184639 -11561
Bad debts written off directly 2248 2421
38611
6 1527361
Net mark-up / interest income after provisions
42645 15
22952 25
NON MARK-UP / INTEREST INCOME Fee, commission and brokerage income
142093 1
161686 9
Dividend income 191231 73483
Income from dealing in foreign currencies 357056 587181 Gain on sale of securities - net 4007787 509014 Unrealized gain / (loss) on revaluation of investments classified as
held-for-trading -14731
Other income 41582 89578
Total non-mark-up / interest income 6003856 2876125
Total markup plus non-mark-up income
10268 371
51713 50
NON MARK-UP! INTEREST EXPENSES Administrative expenses
618481 9
609609 8 Other provisions / write offs 141402 140376
Other charges 96877 66075
Total non-mark-up / interest expenses 6423098 6302549
Share of (loss)/ profit of associates -13473 490574
Profit / (loss) before taxation from continuing operations 3831800
-64062 5 Taxation – Current 207359 215001 - Prior years 10851 - Deferred 1,183,431 197477 1,390,7 90 423,329
Profit gloss) after taxation from continuing operations 2,441,010
-1,063, 954 DISCONTINUED OPERATIONS
Profit from discontinued operations - net of tax 109524 443.257
PROFIT/(LOSS) AFTER TAXATION 2,550,534
-1,063, 511
PROJECTED CONSOLIDATED STATEMENT OF FINANCIAL POSITION NIB BANK
2016 2017
ASSETS
Cash and balances with treasury banks 10052543 8063675 Balances with other banks 1645086 586418 lending to financial institutions 1599044 7699646
Investments 96023597 59670691
Advances 110668994 93673494
Operating fixed assets 3086446 3033057
Intangible assets 890491 2926075
Deferred tax assets – net 9359609 9992164
Other assets 7157979 9350081
Assets held for sale 4558914
245042703 194995301
LIABILITIES
Bills payable 2576216 2740528
Borrowings 85676741 62750894
Deposits and other accounts 130399643 105102800
Sub-ordinated loans 4195516 4197195
Liabilities against assets subject to finance lease Deferred tax liabilities
Other liabilities 3463013 3271665
Liabilities held for sale 642415
226953544 178063082
Owners’ equity
Share capital 103028512 103028512
Reserves 997582 474123
Accumulated loss -40416118 -42432340
Shareholders' equity 17840353 15300672
Surplus on revaluation of assets - net 248806 1631547
18089159 16932219
245042703 194995301
PROJECTED CONSOLIDATED STATEMENT OF CASH FLOWS MCB BANK
2016 2017 CASH FLOWS FROM OPERATING ACTIVITIES IN RS (000)
Profit / (loss) 4029136 -107897
Less: Dividend income -191231 -92743
383790
5 200640
-Adjustments for non-cash Items
Depreciation 311847 309133
Amortization 324637 341516
Impairment charge on tangible fixed assets 27941 Gain on sale of securities – net
-400778
7 -729629 Gain on sale of operating fixed assets – net -8780 -37907 Gain from insurance against loss of fixed assets – net -64 -162
Fixed assets written oft 8619
Provision against non-performing loans and advances 199229 1536501 Bad debts written off directly 2248 2421 Provision / (reversal) for diminution in the value of investments 184639 -11561 Unrealized loss / (gain) on revaluation of investments classified as
held-to-trading 14731 -21558
Other provisions / write offs 141402 140376 Share of profit of associates -1948 -548290
-280328
6 980840
103461
9 780200
(Increase)/decrease In operating assets
Lending to financial institutions 610060
-0 Net investments in held-for-trading securities -853935 367686 Advances -172013 76 -131864 49 Other assets (excluding advance taxation) 2001606
-154551 2
Increase /(decrease) In operating liabilities
Bills payable -164286 -122135
Borrowings 22925847 11,244,221
Deposits and other accounts 25296843 215069
Other liabilities 406995 -457435 395469 15 -827648 5
Income tax paid -353261 -257708
Net cash generated from / (used in) operating activities 39193654
-853419 3
CASH FLOWS FROM INVESTING ACTIVITIES
Net investments in available-for-sale securities
-366582
38 9127520 Net investments in held-to-maturity securities 24504
-497503 1 Net investments in associates 321120 773898
Dividend received 191231 93336
Payments for capital work in progress -272189 -327379 Acquisition of property and equipment -169470 -270795 Acquisition of intangible assets -8935 -1284 Sale proceeds of property and equipment disposed off 11468 72780 Recovery from Insurance company against loss of assets 181 1030
Net cash (used in) / generated from investing activities
-365603
28 4494075
CASH FLOWS FROM FINANCING ACTIVITIES (Redemption) / receipt of sub-ordinated loans Dividend paid
Receipt from non-controlling unit holders PICIC Mutual Funds Net cash generated from financing activities
Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash
equivalents at end of the year
95
Dividend paid -45 -22
Receipt from non-controlling unit holders PICIC Mutual Funds 415,934 203,168
-Net cash generated from financing activities
414,21 0
3,994,0 05
Net increase / (decrease) in cash and cash equivalents 3,047,536 -46,113
Cash and cash equivalents at beginning of the year 8,650,093 8,696,206
