Submitted by: Iram Jamil 13-Arid-2574

BBA 6th A (Finance) UIMS

FINANCIAL PERFORMANCE
OF BANKS IN PAKISTAN: A
COMPARATIVE ANALYSIS OF
TWO COMMERCIAL BANKS
Analysis of Financial Statements
Course Instructor: Sir Khalid Sohail

Table of Contents
1.0 Abstract.................................................................................................. 3
2.0 Introduction............................................................................................. 3
2.1 History of Banking in Pakistan.................................................................3
2.2 History of Allied Bank Limited.................................................................5
2.3 Vision...................................................................................................... 7
2.4 Mission.................................................................................................... 7
2.5 Core Values............................................................................................. 8
2.6 Strategic Objectives................................................................................8
2.7 Company Information.............................................................................8
2.8 Allied Bank Limited principal lines of business......................................16
2.9 SWOT Analysis of ABL...........................................................................17
2.10 Major competitors of ABL....................................................................19
2.11 Target Market and potential
customers..19
2.12 Financial Performance of the last year................................................20
2.13 Social Responsibility............................................................................21
2.14 Investor Relations...............................................................................22
2.15 Financial Highlights............................................................................. 22
2.16 Total Capitalization..............................................................................23
2.17 What is 'Financial Analysis'.................................................................23
2.18 Users of Financial Statement Analysis.................................................25
2.19 Overview of Ratio Analysis..................................................................26
3.

Justification and Back ground of the Study...........................................28

4.

Objectives of the Study.........................................................................29

5.

REVIEW OF LITERATURE........................................................................29

6. RESEARCH
METHODOLOGY
.32
6.1 Population............................................................................................. 33
6.2 Sample Study:....................................................................................... 33

1.0 Abstract
This study is an attempt to analyze and compare the financial performance of
Allied Bank Ltd and National Bank of Pakistan by applying common size analysis and ratio
analysis of financial statement of banks. The secondary data was utilized in analysis of
balance sheet, profit and loss statements and other accounting information for the financial
year 2010-15. Both banks are very important financial institution and are providing different
facilities to the customers. The banks also give advances to the other industries, companies
and other deficit economic units. The results obtained shows considerable improvement in
financial performance by banks in private sectors.
Keywords: Common size Analysis, Ratio Analysis, Vertical Analysis

2.0 Introduction
2.1 History of Banking in Pakistan
Banking in Pakistan first formally started in Pakistan during the period of British
colonialism in the South Asia. After independence from British Raj in 1947, and the
emergence of Pakistan as a country in the globe, the scope of banking in Pakistan has been
increasing and expanding continuously. Pakistan's oldest bank is the State Bank of Pakistan,
which is also the central bank of the nation. Before independence on August 14, 1947, the
Reserve Bank of India was the central bank of what is now Pakistan. After independence,
Muhammad Ali Jinnah took actions to establish a central bank in Pakistan which resulted in
the new founding of the State bank of Pakistan, with its headquarters to be based in Karachi.
Only 7% of the population uses the banks, has tremendous potential, but this needs to be
pushed a little further.
Just after the partition, the Indian bankers started immigrating and shifting the
head offices of their banks and capital to India. It caused a great set back to the banking field
in Pakistan, and resulted in decline in the number of offices in schedule bank from 631 to 195
by 30th June, 1948. The West Pakistan the number fell from 487 to 81 in East Pakistan from
144 to 69 by 30th June, 1951. Among these Habib Bank Ltd., with 25 offices and Australia

Bank Ltd. with 19 offices were institutions run by Muslims who shifted their head offices to
Pakistan.

The technical and administrative difficulties of establishing a central bank just

after independence compelled Pakistan to enter into an agreement with the Reserve Bank of
India by which the bank was to perform the function of a central bank in this area also up to
30th September, 1948. The Reserve Bank of India started following wrong policies against
the interest of Pakistan. The situation became so grave that after the consultation of two
governments the Reserve Bank of India was asked to finish the agreement from 30th June
instead of from 30th September,1948. So the Government of Pakistan decided to establish the
State Bank of Pakistan as its central bank from 1st July, 1948. In the same year first Pakistani
notes in the denomination of Rs.5, 10, and 100 were issued and Indian currency was
withdrawn from circulation. After it the government was advised to a bank which should
serve as an agent of State Bank of Pakistan. On this suggestion National Bank of Pakistan
which was established in 1949 to finance jute trade in East Pakistan to take over the agency
functions from the Imperial Bank of India. Furthermore, banking companies control act 1949
was promulgated which empowered the State Bank of Pakistan to control the operation of
other banks.
To boost the economic development, the State Bank of Pakistan encourage the
commercial banks and gave them schemes to advance in the agricultural and industrial fields.
In addition to this specialize financial institutions were set up to meet the acute shortage of
funds in these fields.
The State Bank of Pakistan's policy encouraged expansion in established banks,
establishment of new banks, and weeding out of unsound banks just to faster the growth of
banking system in the country. This policy not only established the banking system by 1965
but increased its functional efficiency, scope of operations and soundness to a great extent
and the following banking structure emerged:
1.

STATE BANK OF PAKISTAN (CENTRAL BANK)

2.

COMMERCIAL BANKS

3.

SAVING BANKS

4.

CO-OPERAT1VE BANKS

5.

EXCHANGE LANES

6.

SPECIALIZED FINANCIAL INSTITUTIONS

There are two types of the COMMERCIAL BANKS

1.

Scheduled

2.

Non-scheduled banks
According to the State Bank of Pakistan Act,1956 a bank having a paid up capital
and a reserve of rupees five lacs and fulfilling certain other requirements can be scheduled
with the State Bank of Pakistan. With the opening of the State Bank of Pakistan and the keen
interest which it took in the establishment of the sound banking system in Pakistan despite
the separation of the East Pakistan, commercial banking made a tremendous progress which
can be judged from the following figures. Offices of the following 14 banks (scheduled)
increased from 195 to 1948 to 3600 with 71 branches outside Pakistan.
The Federal Government also set up a Pakistan Banking Council on March 21,
1974 to look after the organizational and operational matters including evaluation and
progress of the nationalized commercial banks. The State Bank was to provide the overall
policy guidelines to commercial banks.

2.2 History of Allied Bank Limited

Allied Bank Limited was the first bank to be established in Pakistan
The Bank started out in Lahore by the name Australasia Bank before independence in
1942; and became Allied Bank of Pakistan in 1974. Allied Bank is a commercial
bank in Pakistan. Allied Bank, with its registered Offices in Karachi and Lahore, is one of
the largest banks within the country with over 1000 branches, connected to an online
network. It was the first Muslim bank established in Pakistan before independence (1942)
with the name of Australasia Bank. It was named as Allied Bank of Pakistan from

Australasia Bank Limited in 1974, and Sarhad Bank Ltd, Lahore Commercial Bank Ltd and
Pak Bank Ltd were also merged in it.
Under the Nationalization Act of 1974, 14 scheduled banks were taken over by the
Government. Australasia Banks Board of Directors was dissolved and the bank was
renamed as Allied Bank of Pakistan Limited. Sarhad Bank, Lahore Commercial Bank and
Pakistan Bank Limited were merged into Australasia Bank. At time of merge, ABL was
second highest among all the banks Nationalized in 1974.
Allied Banks first Executive Board was constituted of Mr. Iqbal A. Rizvi as President,
Mr. Ajmal Khalil as Joint President and Mr. Khadim Hussain Siddique as member. In 1974
Mr. I.D. Junejo and Mr. Safdar Abbas Zaidi joined the Board later. 116 new branches were
opened in 1974 and it started participation in commodity Operation program of
Government.
In 1970s Bank played an important part of agricultural area loans and other loans. In
1976 Mr. Ajmal replaced Mr. Rizvi as Chief Executive and President. During 1974-77, 361
new branches were opened and 230 of these were located in villages and small towns. It also
opened its foreign branch in London, near the Bank of England. In 1980 the Bank of
England granted Allied Bank recognition as a full fledge Bank under the U.K. Banking Act.
In 1981, President was changed. In 1984, again new president was come to know. He
tries to increase the international business. It also initiated a major counter program. In
1985, mainframe computer was installed and effective management system was developed.
During this period profitability was increased. New President Mr. Maqbool introduced
different schemes in 1987-88. In 1989, new 13 branches were installed. In November/
December 1990, the Government announced its commitments to the rapid privatization of
the Banking sector. Allied Banks management under the leadership of Mr. Khalid Latif
decided to react positively to this challenge. As a result of privatization in September 1991,
Allied Bank entered in a new phase of its history, as the worlds first bank to be owned and
managed by its employees.

Allied Banks capital and reserves were Rs.1.525 (Billion) and assets amounted to Rs.
87.536 (Billion) and deposits were Rs. 76.038(Billion). The Bank enjoyed an enviable
position in the financial sector of Pakistan and was recognized as one of the best amongst
the major banks of the country. In August 2004 as a result of capital reconstruction, the
Banks ownership was transferred to a consortium comprising Ibrahim Leasing Limited and
Ibrahim Group.
In August 2004, because of capital reconstruction, the Banks ownership was transferred
to a consortium comprising Ibrahim Group; therefore, it was renamed as Allied Bank
Limited in 2005.
Today, with its existence of over 70 years, the Bank has built itself a foundation with a
strong equity, assets and deposit base. It offers universal banking services, while placing
major emphasis on retail banking. The Bank has a large network of 1000 online branches
and over 850 ATMs in Pakistan and offers various technology-based products and services
to its diverse clientele.
Allied Bank Limited operates by the following Vision, Mission & Values:

2.3 Vision

To become a dynamic and efficient bank providing integrated solutions in order

to be the first choice bank for the customers.

2.4 Mission

To provide value-added services to our customers.

To provide high-tech innovative solutions to meet customers requirements.

To create sustainable value through growth, efficiency and diversity for all
stakeholders.

To provide a challenging work environment and reward dedicated team members

according to their abilities and performance.

To play a proactive role in contributing towards the society.

2.5 Core Values

Integrity

Excellence in Service

High Performance

Innovation and Growth

2.6 Strategic Objectives

Enhancing brand image and creating shareholders value through sustainable

performance, while optimizing return against acceptable risk appetite.

Augmenting financial inclusion of unbanked population through innovative and

diversified technologies, building customers confidence through convenient
delivery channels and product designs.

Continuous re-engineering of policies, procedures, SOPs, SLAs and TATs,

ensuring operational efficiencies through effective management of key resources.

Instilling a culture of ethics and responsibility among human resource and

becoming an Employer of Choice for the Top Professionals.

2.7 Company Information

Industry:
Market Price of share:

Finance and insurance

Method of depreciation is used by the company to depreciate its operational assets: ABL is
using the reducing balance method, to write down the costs of operational assets

Allied Bank fiscal year ends: 12/31

The resultant effective tax rate increased to 41% in 2015

Board of Directors

Mohammad

Chairman / Non

Naeem

Executive Sponsor Director

Mukhtar
Sheikh

Non-Executive Sponsor

Mukhtar

Director

Ahmad
Muhammad

Non-Executive Sponsor

Waseem

Director

Mukhtar
Abdul

Aziz

Non-Executive Director

Khan
Mubashir

A.

Non-Executive Director

Akhtar
Engr.

Dr.

Muhammad

Independent Director

Akram Sheikh
Tariq

Chief Executive Officer

Mahmood
Zafar Iqbal

Independent Director
Audit Committee of the Board

Zafar

Iqbal

Mubashir A. Akhtar

(Chairman)

Dr. Muhammad Akram Sheikh

Human Resource & Remuneration Committee

Abdul

Aziz

Khan
(Chairman)

Muhammad

Waseem

Tariq Mahmood (CEO)

Mukhtar

Company Secretary

Auditors

Muhammad Raffat

M/s. KPMG Taseer Hadi & Co.,

Chartered Accountants
Shariah Board
Mufti

Ehsan

Waquar(Chair
man

Mufti Mahmood Ahmad

Shariah

Mufti Muhammad Iftikhar Baig

Board)
Legal Adviser

Shares Registrar
M/s. Technology Trade (Pvt) Ltd.,
Allied Bank Limited,
Dagia House, 241-C, Block -2,
P.E.C.H.S,

M/s. Mandviwalla & Zafar Advocates

Karachi.
Tel: 021-34391316-17 & 19, 02134387960-61
Fax: 021-34391318

Status of the Company (Listed Company)

Date of incorporation:

December 03, 1942

Date of Commencement of Business:

December 14, 1942

Company Registration Number:

0000099

National Tax Number:

0801428-7

Registered & Head Office:

3 Tipu Block, Main Boulevard, New

Garden Town, LahorePakistan

Postal Code:

54000

Telephone No:

(+92-42) 35880043

Toll Free Number:

0800-22522

E-mail:

info@abl.com

Listed on:

Pakistan Stock Exchange

Trading Logo:

ABL
Associated/Subsidiary Companies
ABL Asset Management Company:

Subsidiaries

http://www.ablamc.com
Ibrahim Fibers
Limited: http://igcpk.com
Ibrahim Agencies (Pvt) Limited
Habib Allied International Bank
(HAIB):http://www.habibbankuk.com
M/s. Zenith Advisory (Pvt) Ltd, UK

Associates By common directorship

National Management Foundation

(NMF-LUMS):
http://lums.edu.pk/page.php/nmf
Arabian Sea Country Club:
http://www.asccl.com
The Hub Power Company Limited
(HUBCO): http://www.hubpower.co
m/

Membership of Industry Association & Trade Bodies

Pakistan Banks
Association

Management Association
of Pakistan

Karachi
Chamber of

Lahore Chamber of

Commerce &

Commerce & Industry

Industry

Pakistan Business Council

Compliance & Regulation

Name

Allied Bank Limited

3 Tipu Block Main Boulevard New Garden

Registered Office

Town Lahore-Pakistan

Corporate Legal Form of

the institution
Name of Regulatory Body
Other Regulatory Body:

Listed Public Limited Company

State Bank of Pakistan SBP (Central Bank)
Securities and Exchange Commission of
Pakistan (SECP)

Name of stock exchange on

which shares are publicly

Pakistan Stock Exchange Limited, Pakistan

traded
Name

of

the

External

M/S. KPMG, Taseer Hadi &Co. Chartered

Auditors

Accountants

Name of Legal Advisor:

Mandviwalla & Zafar Advocates

Name of Shares Registrar

Technology Trade (Pvt) Limited

Date of Establishment

December 3, 1942

Principal type of banking

(business) activities
Subsidiary Companies
Shareholding Pattern

Commercial Banking, Corporate Banking,

Retail Banking, Investment Banking, Islamic
Banking.
ABL-Asset Management Company Limited
Shareholding Pattern as of December 31,
2015

Chairman

Mohammad Naeem Mukhtar

President and CEO

Tariq Mahmood

Corporate Information
Bank license number and
date
Company Registration No
National & Foreign Tax
Identification No
GIIN (FATCA) No
Compliance Status

Credit Rating:

https://www.abl.com/the-bank/companyinformation/
License No. BL-04 dated 23-06-2005
0000099
0801428-7
GZNNE4. 00000.LE.586
Compliant with KYC and AML regulations
prescribed by State Bank of Pakistan
PACRA Rating
JCR-VIS

Bank Ranking: (As per

World ranking: 1166

Bankers ALMANAC):

Country Ranking: 5

SWIFT BIC

(ABPAPKKA)
AML & Due Diligence Questionnaire

ABL Compliance

The Wolfsburg Group AML Questionnaire

Documents for

ABL Compliance Policy Note

Correspondent Banks

USA PATRIOT ACT Certification

W-8 BEN-E Form
AML/KYC Questionnaire
The Wolfsburg Group AML Questionnaire

Compliance Documents

Compliance Policy/ Policy Note

Required from

USA PATRIOT ACT Certification

Correspondent Banks

Certificate of Incorporation
Banking License
W-8 BEN-E Form

2.8 Allied Bank Limited principal lines of business

The bank provides its customer various products & services, to cater
there need of investments, and other social or business requirements.
Allied Bank > Personal Banking

Everyday Accounts
Lifestyle Banking
Savings & Term Deposits
Credit & Debit Cards
Domestic Remittance Pay Anyone
Bancassurance
e-Banking Services

Allied Bank > Business Banking

Corporate and Investment Banking

Treasury Group
Transaction and Business Accounts
Home Remittances to Pakistan
Savings & Term Deposits
Cash Management Solutions
Trade Services
SME Financing
Agriculture Financing
Allied Bank > Islamic Banking

Islamic Banking Deposits

Allied Islamic Investment Certificates

Other Services
Allied Bank's other services include:

Extended Hours Banking

Online Banking
Safe Deposit Lockers
Utility Bills Payments
Allied Phone Banking
Customer Support

2.9 SWOT Analysis of ABL

SWOT, which stands for strengths, weaknesses, opportunities and threats, is an
analytical framework that can help your company face its greatest challenges and find its
most promising new markets. The method was created in the 1960s by business gurus
Edmund P. Learned, C. Roland Christensen, Kenneth Andrews and William D. Book in their
book "Business Policy, Text and Cases" (R.D. Irwin, 1969).
The SWOT matrix has been introduced for analyzing the competitive situations of
the company or even of a nation that leads to the development of four distinct set of strategic
alternatives. SWOT matrix has a wider scope and different emphases from the business
portfolio matrix. The SWOT matrix is a conceptual framework for a systematic analysis that
facilitates matching of external threats and opportunities with the internal weaknesses and
strength of organization.
Strength

Allied bank has over 800 branches all over the Pakistan
All branches are online. No other bank has all its branches online
Strongest Online System
Largest ATM Network (Powered by ORACLE ERP)
Shifted from nationalize to contemporary area of banking
Strong corporate culture
Secure banking
Foreign currency
Variety of products
Lockers facility
Customer care center
Same account number facility
Paid leaves
Low interest rates
Secure environment

Weaknesses

Some buildings of ABL are old

Branches are not renovated in some areas
No use of electronic media for promotion of services
No proper HR Management
No proper segmentation

Late promotions of employees

Opportunities

ABL is hiring new energetic qualified employees which will definitely give

desired results
Make Personal loans
Car leasing
Reduced transaction charges
Use of media for promotion

Threat

Strong competition among 5 GIANTS

Financial recession
Attitude of customers
Falling KIBER rates
Political instability

2.10 Major competitors of ABL

Allied Bank is among the 5 GIANTS (Top ranked banks) of the country. It has direct
competition with the following banks:
o

National Bank

Habib Bank

Muslim Commercial Bank

United Bank

All these banks have almost equal revenue as of Allied Bank and they have almost same
number of branches operating in every area of the country. Moreover, Allied Bank mainly
focuses on corporate clientele, while all these 4 banks are more focused towards consumer
portfolio and consumer market. Allied Bank does not use electronic media or other important
modes for the promotion of its services, whereas other banks use different means for efficient
marketing of their services.

2.11 Target Market and potential customers

The target market of ABL is both the Retail banking and the corporate banking. All the
salaried persons, house wives, retired people, labors and all those type of people who have an
average amount of savings are included in retail banking. Whereas the big business men and
big investors, financers, and those customers who take huge amounts of loans and finance are

included in corporate banking, simple all those customers which are included in corporate
sector.

2.12 Financial Performance of the last year

During 2015, Bank under the supervision of the Boards strategic direction evolved a
multifaceted strategy driven towards volumetric growth in balance sheet without
compromising on asset quality while optimizing earning assets mix enabling stable
profitability in challenging circumstances.
Despite stiff competition within the banking sector amid evolving regulatory and
operational environment, Bank managed to post healthy Profit Before Tax of Rs. 25,503
million during 2015 compared to Rs. 22,202 million in 2014, registering a growth of 15%.
Profit after Tax also grew by 1%, despite implications of the reducing margins and
promulgation of Finance Act 2015 which entailed one off super tax at the rate of 4% on 2014
taxable income and uniform tax rate of 35% on entire income retrospectively from January
2014 leading to combined prior year tax charge of Rs. 1,460 million. The resultant effective
tax rate increased to 41% in 2015 as compared to 32% for 2014. If we exclude the prior year
tax charge of Rs. 1,460 million, the PAT growth in 2015 comes to 10%.
The Banks EPS increased to Rs. 13.20 per share in 2015 as compared to Rs. 13.11 per
share in 2014. Excluding impact of prior year tax charge, EPS for the year ended 2015
improves to Rs. 14.48 per share reflecting an increase of 12%. Return on Assets (RoA) and
Return on Equity (RoE) during 2015 stood at 1.65% and 23.26% respectively; remaining in
line with the industry average despite prudent provisioning against impairment in Available
for Sale (AFS) portfolio and prior year tax charge adversely impacting Banks profitability.
Due to limited credit opportunities mainly in view of subdued credit offtake by the
private sector, gross advances growth remained constrained at 5% reaching Rs. 340,769
million Investments increased to Rs. 544,077 million up 27% from 2014. Surplus net
resources were diverted primarily towards Government Securities which increased by 28% to
Rs. 491,108 million. Despite intense competition within banking industry for low / no cost

deposits and lowering transactions volumes arising out of revised withholding tax regime for
non-tax return filers affecting deposit growth in the second half of the year, deposits of the
Bank increased to Rs. 734,596 million at December 31, 2015 compared to Rs. 667,878
million as at December 31, 2014, registering a YoY growth of 10%.
The overall Balance Sheet size of Bank stood at Rs. 991,666 million as at December 31,
2015 posting a YoY growth of 18%. Total Equity of the Bank increased by Rs. 8,366 million
to Rs. 89,256 million as at December 31, 2015 as compared to Rs. 80,890 million at
December 31, 2014.
The net mark-up income increased by Rs. 7,953 million or 28% during 2015 and
aggregated to Rs. 36,140 million as compared to Rs. 28,186 million in the corresponding
period. The growth in Net Interest Margin (NIM) was mainly attributed to aggregate growth
in earning assets duly supplemented by focused approach towards cost of funding
rationalization.

2.13 Social Responsibility

Allied Bank Limited (ABL) firmly believes in building trust through long term strategic
initiatives focused on the customers while supporting the community in which the Bank
operates. The Bank is committed to function transparently in order to become a first choice
bank of the customers in line with its slogan App Kai Dil Main Hamara Account. In line
with CSR objectives, Bank places primary focus on Workplace, Environment,
Community and Customer Relations to achieve overall Brand image as a community
caring organization. Workplace ABLs special emphasis on healthy work environment is
reflected in its strive to establish a workplace which promotes balanced work life along with
provision of health care facilities; provide equal employment opportunities while
encouraging employment of special persons; maintain high ethical standards and support
social interaction among employees. Equal opportunity employer and employment of special
persons ABL is equal opportunity employer and encourages employment of special persons.
ABL currently employs 1,426 females, representing 15% of total staff members, who are
diligently performing their duties. Simultaneously, 301 special persons are honorably earning
their livelihood while contributing towards the growth of the Bank. In collaboration with

Shaukat Khanum Memorial Cancer Hospital and Research Centre (SKMCH&RC) the Bank
has arranged Breast cancer awareness session for ABLs female employees.
ABL ensures that maximum safety standards are met at all premises and
encourages employees to promote the safety of their fellow team members. Provision of
emergency lights, fire and smoke detection equipment, alarm system, portable fire
extinguishers, periodic evacuation drills and emergency exit doors are some of the measures
that have been taken by the Bank.
Further, the Bank sponsored various organization including Human Rights Society of
Pakistan, Karachi Stock Exchange Guarantee Limited, Quetta Development Authority, in
social events, conferences and awareness programs, during the year 2015 by spending
Rs.10.9 million.

2.14 Investor Relations

In these challenging times and rapidly changing market dynamics, Allied Bank has
managed its progress by maintaining its focus on its clients across its target markets
and businesses.
Allied Bank has demonstrated its commitment to stand by its customers, while facilitating
and supporting them to the maximum extent.
The performance of the Bank over the years is the outcome of our strategy, business focus,
and growing tactical reach in target markets by capitalizing on the right opportunities.

2.15 Financial Highlights

Allied Bank has continuously evolved itself over the years and adapted successfully to a
rapidly changing business environment.
Deposits Rs. 734.6 billion (2014: Rs. 667.9 billion)
Loans & Investments Rs. 865.7 billion (2014: Rs. 734.8

Up

by

10%
Up

by

billion)
Total Assets Rs. 991.7 billion (2014: Rs. 842.3 billion)

18%
Up

by

18%

Profit (After Tax) Rs. 27.291 billion (2014: Rs. 23.532

Up

billion)

16%

EPS (2014: Rs. 13.11)

13.20

ROE (2014: 26%)

23%

by

2.16 Total Capitalization

In finance, capitalization is the sum of a corporation's stock, long-term debt and retained
earnings. Capitalization also refers to the number of outstanding shares multiplied by share
price. With a paid up capital of Rs.500 Million, ABL Asset Management Company is the
second highest Pakistani Startup Asset Management Companies.

2.17 What is 'Financial Analysis'

Financial analysis is the process of evaluating businesses, projects, budgets and other
finance-related entities to determine their suitability for investment. Typically, financial
analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable enough to
be invested in. When looking at a specific company, the financial analyst will often focus on
the income statement, balance sheet, and cash flow statement. In addition, one key area of
financial analysis involves extrapolating the company's past performance into an estimate of
the company's future performance.
The objective of financial analysis is to draw information to facilitate decision
making, to evaluate the strength and the weakness of a business, to determine the earning
capacity, to provide insights on liquidity, solvency and profitability and to decide the future
prospects of a business entity.
There are various types of Financial analysis. They are briefly mentioned herein:

External analysis: The external analysis is done on the basis of published financial
statements by those who do not have access to the accounting information, such
as, stock holders, banks, creditors, and the general public.
Internal Analysis: This type of analysis is done by finance and accounting department.
The objective of such analysis is to provide the information to the top management, while
assisting in the decision making process.
Short term Analysis: It is concerned with the working capital analysis. It involves the
analysis of both current assets and current liabilities, so that the cash position (liquidity) may
be determined.
Horizontal Analysis: The comparative financial statements are an example of horizontal
analysis, as it involves analysis of financial statements for a number of years. Horizontal
analysis is also regarded as Dynamic Analysis.
Vertical Analysis: it is performed when financial ratios are to be calculated for one year
only. It is also called as static analysis.
An assortment of techniques is employed in analyzing financial statements. They
are: Comparative Financial Statements, statement of changes in working capital, common
size balance sheets and income statements, trend analysis and ratio analysis.
Comparative Financial Statements: It is an important method of analysis which is used
to make comparison between two financial statements. Being a technique of horizontal
analysis and applicable to both financial statements, income statement and balance sheet, it
provides meaningful information when compared to the similar data of prior periods. The
comparative statement of income statements enables to review the operational performance
and to draw conclusions, whereas the balance sheets, presenting a change in the financial
position during the period, show the effects of operations on the assets and liabilities. Thus,
the absolute change from one period to another may be determined.

Statement of Changes in Working Capital: The objective of this analysis is to extract

the information relating to working capital. The amount of net working capital is determined
by deducting the total of current liabilities from the total of current assets. The statement of
changes in working capital provides the information in relation to working capital between
two financial periods.
Common Size Statements: The figures of financial statements are converted to
percentages. It is performed by taking the total balance sheet as 100. The balance sheet items
are expressed as the ratio of each asset to total assets and the ratio of each liability to total
liabilities. Thus, it shows the relation of each component to the whole - Hence, the name
common size.
Trend Analysis: It is an important tool of horizontal analysis. Under this analysis, ratios of
different items of the financial statements for various periods are calculated and the
comparison is made accordingly. The analysis over the prior years indicate the trend or
direction. Trend analysis is a useful tool to know whether the financial health of a business
entity is improving in the course of time or it is deteriorating.
Ratio Analysis: The most popular way to analyze the financial statements is computing
ratios. It is an important and widely used tool of analysis of financial statements. While
developing a meaningful relationship between the individual items or group of items of
balance sheets and income statements, it highlights the key performance indicators, such
as, liquidity, solvency and profitability of a business entity. The tool of ratio analysis
performs in a way that it makes the process of comprehension of financial statements
simpler, at the same time, it reveals a lot about the changes in the financial condition of a
business entity.

2.18 Users of Financial Statement Analysis

There are a number of users of financial statement analysis. They are:
Creditors: Anyone who has lent funds to a company is interested in its ability to pay back
the debt, and so will focus on various cash flow measures.

Investors: Both current and prospective investors examine financial statements to learn
about a company's ability to continue issuing dividends, or to generate cash flow, or to
continue growing at its historical rate.
Management: The company controller prepares an ongoing analysis of the company's
financial results, particularly in relation to a number of operational metrics that are not seen
by outside entities (such as the cost per delivery, cost per distribution channel, profit by
product, and so forth).
Regulatory authorities

2.19 Overview of Ratio Analysis

Liquidity Ratios
Liquidity ratio measures the ability of the firm to meet its short-term obligations. These
ratios are important. The cause failure to pay such obligations can lead to bankruptcy.
Bankers use liquidity ratios to see whether to extend short -term credit to a firm. Higher the
liquidity ratio, the more able the firm is to its short -term obligations.
Liquidity ratio compares current assets to current liabilities and serves as the liquid
reserve available to satisfy contingencies and uncertainties
a) Current Ratio
The current ratio compares all the current assets (cash and other assets that can be easily
converted to cash) to all the current liabilities (liabilities that must be paid with cash). Current
ratio fluctuates from industry to industry. A current ratio significantly higher than the industry
average could indicate the existence of redundant assets. Conversely, a current ratio
significantly lowers than the industry average could indicate a lack of liquidity.
Current Ratio = Current Assets / Current Liabilities
Profitability Ratios
Profitability ratio measures how the firm's returns compare to its sales. Profitability
relates to a company's ability to earn a satisfactory income. A company's profitability is
closely linked to its liquidity because earnings ultimately produce cash flow. The Profitability
Ratios is further classified into five types of Ratios. They are described along with formula as
below:
a) Net Profit Margin

The net profit margin measures how much profit out of each sales is left after all
expenses are subtracted, that is all taxes expenses are subtracted.
Net Profit Margin = Profit after Taxes x 100
Sales
b) Operating Profit Margin
The operating profit margin is calculated by dividing earnings before interest and taxes
by sales revenue.

Operating Profit Margin = Earnings before interest and taxes x 100

Sales
c) Return on Assets
The return on assets (ROA) ratio indicates how much income generated by each or assets.
It shows whether the business is investing in its assets effectively. The return on assets is
calculated by dividing net income by the total assets.

Return on Assets =

Net Income x
Total Assets

l 00

d) Return on Equity
The return on Equity ratio measures the income earned on the shareholders investment in
the business. It is calculated by dividing net income by stockholders equity.
Return on Equity =

Net Income
Total Equity

100

e) Total Assets Turnover

This ratio measures how efficiently a firm is using its assets. A company having high
asset utilization ratio suggests that its assets help promote its sale revenue. Measures the
activity of the assets and the ability of the business to generate sales through the use of the
assets.

Total Assets Turnover = Sales

Total Assets

100

Debt Ratio
The financial analysis use debt ratios to assess the relative size of a firm's debt load and
the firm's ability payoff the debts. The debts ratios are used to evaluate the safety of longterm creditors: For these ratios of analysis the higher the number, the greater the amount of
safety.
a) Debt-Assets Ratio: This ratio measures the percentage of the firm's assets that are
financed with debts. Provides information about the company's ability to absorb asset
reductions arising from losses without jeopardizing the interest of creditors.
Debt-Assets Ratio =

Total Debts x
Total Assets

100

b) Debt-Equity Ratio: The Debt-Equity ratio is the percentage of debt relative to the
amount of equity. Indicates how well creditors are protected in case of the company's
insolvency.
Debt-Equity Ratio = Total debts
Total Equity

100

3. Justification and Back ground of the Study

Each and every stakeholder analyze the current financial position of an organization
so as to search out the profitable new financial vistas for future. For this purpose, the analysis
of financial performance can be done by using the ratio analysis and proper interpretation of
each and every ratio.
It is believed that findings of the study will help to improve the financial management
and performance of the both of the banks that are operating i.e., National Bank of Pakistan
and Allied Bank LTD.

4. Objectives of the Study

This study is designed to analyze the comparison of performance of any of two
commercial banks working in Pakistan. The more specific objectives of the study are:

to evaluate the operating income of both banks

to work out financial analysis e.g., Ratio Analysis to facilitate business

management decision by stakeholders

to forward recommendations & various suggestions for improvement of financial
management of both the banks.

5. REVIEW OF LITERATURE
Hartvigsen, et al. (1992) studied that financial analysis is considered to be a knowledgeintensive task, involving knowledge from several areas. Nowadays, banking is exploring
knowledge-based systems to improve operational efficiency and customer relations while
currently reducing costs. Financial analysis is one of the promising areas for these kinds of
applications. This author examines the limitations of the utilization of knowledge-based
systems within financial analysis (i.e., the lack of a theoretical framework for such analysis).
Salmi and Martikainen, et al. (1994) conducted a critical review of the theoretical and
empirical basis of four central areas of financial ratio analysis. The research areas reviewed
were the functional form of the financial ratios, distributional characteristics of financial
ratios, classification of financial ratios, and the estimation of the internal rate of return from
financial statements. The study found that it is typical of financial ratio analysis research that
there are several unexpectedly distinct lines with research traditions of their own.
Nabi, et al. (1997) studied the Pakistan's ongoing policy reform aims to strengthen the
competitive foundations of the economy and make it more outward-oriented. This study
reviews the recent trade performance and progress regarding tariff reform. Management of
the exchange rate as a principle tool of trade policy is further elaborated and quiet clearly
explained.
Porta, et al. (2002) used data of government owned banks from 92 countries around the
world, finds that government ownership of banks is high in countries which are characterized
by "low levels of per capita income. Underdeveloped financial systems, interventionist and
inefficient governments and poor protection of property rights". The study further finds
evidence that government ownership of banks is associated with slower subsequent financial
development, lower economic growth and especially lower growth of productivity.

Emel, et al. (2003) analyze how to manage credit risk, commercial banks use various
scoring methodologies to evaluate the financial performance of client firms. The quantitative
analyses were used in the financial performance modules of state-of-the-art credit scoring
methodologies. This innovation should help lending officers in branch levels filter out the
poor risk applicants. The Data Envelopment Analysis-based methodology was applied to
current data for 82 industrial/manufacturing firms comprising the credit portfolio of one of
Turkey's largest commercial banks. Using financial ratios, the DEA synthesizes a firm's
overall performance into a single financial efficiency scorethe credibility score. Results
were validated by various supporting (regression and discriminant) analyses and, most
importantly, by expert judgments based on data or on current knowledge of the firms.
Sapienza, et al. (2004) provides an information on individual loan contracts to study the
effects of government ownership on bank lending behavior. State-owned banks charge lower
interest rates than do privately owned banks to similar or identical firms, even if firms are
able to borrow more from privately owned banks. State-owned banks mostly favor large
firms and firms located in depressed areas. The lending behavior of state-owned banks is
affected by the electoral results of the party affiliated with the bank: the stronger the political
party in the area where the firm is borrowing, the lower the interest rates charged.
Boubakri, et al. (2005) examined the post privatization performance of 81 banks from 22
developing countries. Our results suggest that: (i) on average, banks chosen for privatization
have a lower economic efficiency, and a lower solvency than banks kept under government
ownership. (ii) In the post privatization period, profitability increases but, depending on the
type of owner, efficiency, risk exposure and capitalization may worsen or improve. However,
(iii) Over time, privatization yields significant improvements in economic efficiency and
credit risk exposure. (iv) We also find that newly privatized banks that are controlled by local
industrial groups become more exposed to credit risk and interest rate risk after privatization.
Barros, et al. (2007) used a dataset of 7635 observations on 1384 commercial
banks operating in the EU between 1993 and 2001; they utilized a mixed logic model to

identify factors that explain the probability of a bank being a best [worst] performer. The
empirical evidence confirms the importance of country-level characteristics (location and
legal tradition), and firm- level features (bank ownership, balance sheet structure and size),
Specifically, smaller sized banks with higher loan-intensity, and foreign banks from countries
upholding common law traditions have a higher probability of best performance.
Rehman and Ahmad, et al. (2008) analyzed the major determinants of a bank
section by a customer in the banking industry of Pakistan. It is based in a survey of 358
customers of private, privatized and nationalized banks located in the city of Lahore
(Pakistan). The findings of the study reveal that the most important variables influencing
customers' choice are customer services, convenience, on live banking facilities and over all
bank environments. The study aims to bridge the existing gap in local banking literature
through identifying the important bank selection determinants and conclude with some policy
implications which are expected to have an important impact on the marketing efforts of
Pakistani banks.
Shaikh, et al. (2008) constructed financial statement analysis within international
context. The study found the usefulness of case financial statement and its advantages is a
notion of financial data can be meaningfully interpreted when it is evaluated relative to
comparable quantity. The case provides a forum for you that analyst should make appropriate
adjustment before undertaking any comparative financial statement analysis and past is not
always an unqualified guide to the future for accounting decision making. Certain
comparative analyses (leases) cannot be done since all companies do not provide full
information in the absence of analytical accounting adjustment.
Ravichandran, et al. (2009) analyzed the financial statement of Sundaram Clayton, Ltd. is
taken up the office at Chennai for analyzing the stability of the organization in terms of
analyzing and computing the various ratio analysis from the balance sheet and profit and
Loss Accounts of the organization for 5 consecutive years from 2002 to 2006. The study
predicted the financial state of the organization, its strength and weakness and its stages
where it has to improve and giving the overall position of the organization for the

management for decision making so that its resources are used most effectively and
efficiently. This study not only help the management, it also gives a clear -view to the
owners, shareholders, creditors and investors.
Shahriar and Tehranian, et al. (2010) examines government ownership and government
involvement in a countrys banking system affect bank performance from 1989 through 2004.
The study uncovers an interesting pattern of changing performance differences between stateowned and privately-owned banks around the Asian financial crisis. They found that stateowned banks operated less profitably, held less core capital, and had greater credit risk than
privately-owned banks prior to 2001, and the performance differences are more significant in
those countries with greater government involvement and political corruption in the banking
system. In addition, from 1997 to 2000, the 4-year period after the beginning of the Asian
financial crisis, the deterioration in the cash flow returns, core capital, and credit quality of
state-owned banks was significantly greater than that of privately-owned banks, especially
for the countries that were hardest hit by the Asian crisis. However, state-owned banks closed
the gap with privately-owned banks on cash flow returns, core capital, and nonperforming
loans in the post-crisis period of 20012004.

6. RESEARCH METHODOLOGY
Investors, creditors, and other business people rely on accounting information to make
intelligent, informed decisions. The balance sheet, the profit and loss account and the
statement of cash flows provide a large part of the information that is used for making
decision. Various techniques are used to analyze and interpret financial statement data. This
study includes scope of the study, Data and Sources of Data, followed by Analytical
Framework.

6.1 Population
Many banks are currently operating in public and private sector of Pakistan. Commercial
banks including MCB Bank Ltd, United Bank Ltd, Askari Commercial Bank, National bank,
Allied Bank Ltd, Bank Al-Falah and all other commercial banks are considered to be
population for this study.

6.2 Sample Study:

The main objective of this study is to evaluate and compare the financial performance of
any of two commercial banks of Pakistan. For this purpose, National Bank of Pakistan and
MCB Bank Ltd is purposively selected. Therefore, the study is limited to the financial
information for the period 2010 to 2015.