| Allied Bank - 2006 |
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BALANCE SHEET AS AT DECEMBER 31, 2006
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December 31 December 31
Note 2006 2005
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(Restated)
Rupees In '000
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ASSETS
Cash and balances with treasury banks 8 23,039,577 14,742,711
Balances with other banks 9 1,705,445 3,292,041
Lendings to financial institutions 10 19,050,239 5,777,382
Investments 11 46,953,241 44,926,652
Advances 12 144,033,634 111,206,774
Operating fixed assets 13 6,445,111 4,720,662
Deterred tax assets 14 638,168 680,093
Other assets 15 10,161,361 7,227,953
252,026,776 192,574,268
LIABILITIES
Bills payable 16 2,278,007 2,448,620
Borrowings 17 18,410,425 9,693,785
Deposits and other accounts 18 206,031,324 161,410,268
Sub-ordinated loans 19 2,500,000 -
Liabilities against assets - -
subject to finance lease
Deferred tax liabilities - -
Other liabilities 20 5,119,267 4,471,948
234,339,023 178.024,621
NET ASSETS 17,687,753 14,549,647
REPRESENTED BY
Share capital 21 4,488,642 4,488,642
Reserves 6,133,209 5,693,484
Unappropriated profit 5,607,796 2,731,979
16,229,647 12,914,105
Surplus on revaluation of assets - net of total 22 1,458,106 1,635,542
17,687,753 14,549,647
CONTINGENCIES AND COMMITMENTS 23
======================================================================================The annexed notes 1 to 48 form an integral part of these financial statements,PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED DECEMBER 31, 2006 ======================================================================================
December 31, December 31,
Note 2006 2005
Rupees in '000
======================================================================================
Mark-up/Return/Interest earned 25 17,215,507 9,892,051
Mark-up/Return/Interest expensed 26 6,793,1 01 2,024,659
Net Mark-up/Interest income 10,422,406 7,867,392
Provision against non-performing 12.5 583,305 399,608
loans and advances - net
(Reversal)/Provision for diminution in the
value of investments - net 11.3 (14,623) 20,411
Bad debts written off directly 12.6.1 136,189 160.059
704,871 580,078
Net Mark-up/Interest income after provisions 9,717,535 7,287,314
NON MARK-UP/ INTEREST INCOME
Fee, commission and brokerage income 27 1,353,888 1,220,362
Dividend income 193,255 46,146
Income from dealing in foreign currencies 282,285 250,224
Gain on sale of securities 28 376,792 124,383
Unrealized (loss)/gain on revaluation of
investments classified as held for trading 11.5 (30,180) 25,706
Other income 29 273,028 272,762
Total non-markup/Interest income 2,449,068 1,939,583
12,166,603 9,226,897
NON MARK-UP/ INTEREST EXPENSES
Administrative expenses 30 5,290,578 4,259,532
Provision against other assets - net 15.2 205,307 35,076
Provision against off-balance 20.1 2,546 79.095
sheet obligations - net
Other charges 31 7,078 18,999
Total non-markup/interest expenses 5,505,509 4.392,702
Extra ordinary/unusual items - -
PROFIT BEFORE TAXATION 6,661,094 4,834,195
Taxation - Current 32 2,215,092 1,331,468
- Prior years 32 - 22,000
- Deferred 32 48,752 390,594
2,263844 1,744,062
PROFIT AFTER TAXATION 4,397,250 3,090,133
Unappropriated profit/(Accumulated 2,731,979 (6,387,872)
losses) brought forward
Transfer from surplus on revaluation 22.1 19,452 19,882
of fixed assets - net of tax 2,751,431 (6,367,990)
Accumulated losses set off against - 6,323,707
share premium account
PROFIT AVAILABLE FOR APPROPRIATION 7,148,681 3,045,850
Basic earnings per share (in Rupees) 33 9.80 6.88
Diluted earnings per share (in Rupees) 33 9.80 6.88
======================================================================================CASH FLOWS FROM OPERATING ACTIVITIES======================================================================================
December 31, December 31,
Note 2006 2005
Rupees in '000
======================================================================================
Profit before taxation 6,661,094 4,834,195
Less: Dividend income (193,255) (46,146)
6,467,839 4,788,049
Adjustments for non-cash charges
Depreciationmortization 238,881 241 .604
Provision against non-performing
loans and advances
(including general provision) 583,305 399,608
(Reversal of provision) / provision for (14,623) 20,411
diminution in the value of investments
Unrealized loss/(gain) on revaluation 30,180 (25,706)
of held for trading securities
Provision against off balance sheet items 2,546 79,095
Provision against other assets 205,307 35,076
Gain on sale of fixed assets (68,397) (28,838)
Bad debts written off directly 136,189 160,059
Others - (14,999)
1,113,388 866,310
7,581,227 5,654,359
(Increase)/decrease in operating assets
Lendings to financial institutions (13,272,857) 10,427,990
Held for trading securities 327,421 (590,359)
Advances (33,546,354) (52,121,676)
Other assets (excluding advance taxation) (2,961,688) (1,625,853)
(49,453,478) (43,909,898)
Increase/(decrease) in operating liabilities
Bills payable (170,613) (85,743)
Borrowings from financial institutions 8,496,595 (2,788,411)
Deposits 44,621,056 35,089,232
Other liabilities 640,267 1,155,457
53,587,305 33,370,535
11,715,054 (4,885,004)
Income tax paid (2,386,844) (1,008,337)
Net cash flows from/(used in) 9,328,210 (5,893,341)
operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Net investments in available (19,493,339) (7,477,213)
-for-sale securities
Net investments in 16,953,404 20,605,814
held-to-maturity securities
Dividend income 193,537 46,937
Investments in operating fixed assets (1,997,685) (1,556,587)
Proceeds from sate of fixed assets 102,752 44,674
Net cash flows (used in)/ (4,241,331) 11,663,625
from investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of TFCs 2,500,000 -
Dividend paid (1,096,654) -
Net cash flows from financing activities 1,403,346 -
Increase in cash and cash equivalents 6,490,225 5,770,284
CASH AND CASH EQUIVALENTS 17,753,472 12,128,632
AT BEGINNING OF THE YEAR
EFFECT OF EXCHANGE RATE CHANGES 123,950 (21,494)
ON CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS 34 24,367,647 17,877,422
AT END OF THE YEAR
======================================================================================STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2006====================================================================================================================================================================
(Accumulated
loss)/
Share Share Statutory Special Merger General Un-appropriated
Rupees in '000 Capital Premium Reserve Reserve Reserve Reserve Profit Total
Balance as at January 01, 2005 - ABL 4,404,642 10,640,031 574,703 67,995 67,864 6,000 (6,313,635) 9,447,600
Balance as at January 01, 2005 - FABM 350,000 - 860,727 - - - (74,237) 356,490
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Transferred from surplus on revaluation of fixed
assets to accumulated loss - net of tax - - - - - - 19,882 19,882
Profit after taxation for the year ended
December 31 2005-ABL - - - - - - 3,033,372 3,033,372
Profit after taxation for the year ended
December 31 2005-FABM - - - - - 56,761 56,761
Total recognized income and expense for the year - - - - - - 3,110,015 3,110,015
Transfer to statutory reserve - ABL - - 303,337 - - - (303,337) -
Transfer to statutory reserve - FABM - - 10,534 - - - (10,534) -
-Accumulated losses set off against share
premium account - AOL - (6,323,707) - - - - 6,323,707 -
Balance as at December 31, 2005 ABL - Restate 4,404,642 4,316,324 878,040 67,995 67,864 6,000 2,759,989 12,500,854
Balance as at December 31, 2005 - FABM 350,000 - 91,261 - - - (28,010) 413,251
Elimination of Capital (modaraba certificates) of
-Creation of merger reserve as a result
-of merger of ABL and FABM (350,000) - - - - 266,000 - (84,000)
Further issue of share capital of ABL to the
-certificate holders of FABM as a result of merger 84,000 - - - - - - 84,000
Amalgamated balances as at -
December 31, 2005- Restated 4,488,642 4,316,324 969,301 67,995 333,864 6,000 2,731,979 12,914,105
Effect of change in accounting policy'
Final cash dividend for the year ended December
31, 2005 declared subsequent to year end
(Rs. 2.5 per Ordinary share) - - - - - - (1,101,160) (1,101,160)
Transferred from surplus on revaluation of
fixed assets to unappropriated profit - net o - - - - - - 19,452 19,452
Profit after taxation for the year ended
December 31 2006 - - - - - - 4,397,250 4,397,250
Total recognized income and expense for the year - - - - - - 4,416,702 4,416,702
Transfer to statutory reserve - - 439,725 - - - (439,725) -
Balance as at December 31, 2006 4,488,642 4,316,324 1,409,026 67,995 333,864 6,000 5,607,796 16,229,647
====================================================================================================================================================================Refer note 6 for change in accounting policy and the resulting impact on unappropriated profit.NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECMBER 31, 2006 1. STATUS AND NATURE OF BUSINESS Allied Bank Limited (the bank), incorporated in Pakistan, is a scheduled bank engaged in commercial banking and related services. The bank is listed on all stock exchanges in Pakistan. The bank operates a total of 742 (2005: 741) branches in Pakistan, The medium to long term credit rating of the bank rated by JCR- VIS Credit Rating Company Limited is 'A+' with a positive outlook. Short term rating of the bank is 'A- 1+', The bank is a holding company of Allied Management Services (Private) Limited. The registered office of the bank is situated in Lahore whereas the principal office is situated at Khayaban-e-lqbal, Main Clifton Road, Bath Island, Karachi. 1.1 During the year, the Board of Directors of the bank, in their meeting held on April 28. 2006. decided to merge First Allied Bank Modaraba (FABM) with Allied Bank Limited (ABL), pursuant to Section 48 of the Banking Companies Ordinance, 1962 and approved the Scheme of Amalgamation of the FABM with and into ABL under section 284 to 288 read with section 503(1)(C) of the Companies Ordinance. 1984. The effective date of the said amalgamation was fixed at January 01, 2006. The proposed Scheme of Amalgamation was adopted by the shareholders of the bank through a special resolution passed in the Extraordinary General Meeting held on June 24, 2006. The said Scheme of Amalgamation was approved by the State Bank of Pakistan (SBP) in principle through its letter No. BPD (PU- 31)/625- 74/10473/ JD/2006/4742 dated May 27. 2006. The Lahore High Court, subsequently, sanctioned the above referred Scheme of Amalgamation vide its order dated July 12, 2006. 1.2 As a result of the amalgamation of the FABM with the bank on the above- mentioned effective date, the results of both entities have been combined for the purposes of preparation of these financial statements. International Accounting Standard- 22 "Business Combinations" is not applicable to the amalgamated financial statements, as the amalgamation is between two enterprises under common control. The bank has applied the "uniting of interests" method to account for the amalgamation. In applying the "uniting of interests" method, the financial statement items of bank and FABM for all periods presented are included in these financial statements as if they had been combined from the beginning of the earliest period presented, i.e., January 01, 2005, except for the treatment accorded to 8.400,000 Ordinary shares of Rs.10 each, determined pursuant to the Scheme of Amalgamation in accordance with the share- swap ratio stipulated therein. The resulting effects of the above have been included in the Statement of Changes in Equity in the relevant period on account of the fact that the Ordinary shares were issued subsequent to the beginning of the earliest period presented. 1.3 The comparatives in the accompanying balance sheet of the bank as at December 31, 2005 and comparatives in the accompanying profit and loss account, cash flow statement and statement of changes in equity relating to the year ended December 31 2005 comprise (a) balances of ABL and (b) balances of FABM. 2(a). BASIS OF PRESENTATION In accordance with the directives of the Federal Government regarding the shifting of the banking system to Islamic modes, the State Bank of Pakistan (SBP) has issued various circulars from time to time. Permissible forms of trade- related modes of financing include purchase of goods by banks from their customers and immediate resafe to them at appropriate mark- up in price on deferred payment basis. The purchases and sales arising under these arrangements are not reflected in these financial statements as such but are restricted to the amount of facility actually utilized and the appropriate portion of mark- up thereon. 2(b). BASIS OF MEASUREMENT These financial statements have been prepared under the historical cost convention except that certain operating fixed assets are stated at revalued amounts, certain investments are stated at market value and derivative financial instruments have been marked to market. 3. STATEMENT OF COMPLIANCE 3.1 These financial statements are prepared in accordance with the directives issued by the State Bank of Pakistan. The Banking Companies Ordinance, 1962, the Companies Ordinance, 1984 and approved accounting standards as applicable in Pakistan. Approved accounting standards comprise of such International Financial Reporting Standards as are notified under the provisions of the Companies Ordinance, 1984. Wherever the requirements of the Banking Companies Ordinance, 1962, the Companies Ordinance, 1984 or directives issued by the State Bank of Pakistan differ with the requirements of these standards, the requirements of Banking Companies Ordinance, 1962 the Companies Ordinance, 1984 and the said directives take precedence. 3.2 Amendments to the following standard have been published that are applicable to the bank's financial statements covering annual periods, beginning on or after the following date: Effective from (i) IAS - 1 Presentation of financial statements - Capital Disclosures January 01, 2007 Adoption of the above amendment would result in an impact to the extent of disclosures presented in the future financial statements of the bank, In addition to above, a new series of standards called 'International Financial Reporting Standards (IFRSs)" have been introduced and seven IFRSs have been issued by IASB. Out of these, following three IFRSs have been adopted by SECP vide its S.R.O. (1)2006 dated December 06, 2006. (i) IFRS - 2 "Share- based Payments": (ii) IFRS - 3 "Business Combinations": and (iii) IFRS - 5 "Non- current Asset Held for Sale and Discontinued Operations". The bank expects that the adoption of these standards mentioned above will have no significant impact on the bank's financial statements in the period of initial application. 3.3 The SBP, vide BSD Circular No, 10. dated August 26, 2002 has deferred the applicability of International Accounting Standard 39. Financial Instruments: Recognition and Measurement (IAS 39) and International Accounting Standard 40. Investment Property (IAS 40) for banking companies till further instructions. Accordingly, the requirements of these standards have not been considered in the preparation of these financial statements. However, investments have been classified in accordance with the categories prescribed by the SBP, vide BSD Circular No. 10, dated July 13, 2004. 3.4 The bank has obtained a waiver from the Securities and Exchange Commission of Pakistan for the preparation of consolidated financial statements. 4. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY The preparation of financial statements in conformity with approved accounting standards requires the use of certain critical accounting judgments. It also requires management to exercise its judgment in the process of applying the bank's accounting policies. Estimates and judgments are continually evaluated and are based on historical experience including expectations on future events that are believed to be reasonable under these circumstances. The areas where various assumptions and estimates are significant to the banks financial statements or where judgment was exercised in application of accounting policies described in notes 7.1 to 7.16 are as follows: 4.1 Investments As described in note 7.4, held for trading are securities which are either acquired for generating a profit from short- term fluctuations in market prices or dealer's margin or are securities included in a portfolio in which a pattern of short- term profit taking exists, held to maturity are investments where the management has positive intent and ability to hold to maturity and available for sale-securities are investments that do not fall under the held for trading or held to maturity categories. The classification of these securities involves management judgement at the time of purchase whether the financial assets are held for trading, held to maturity or available for sale investments. 4.2 Provision against non- performing advances Apart from the provision determined on the basis of time- based criteria given in Prudential Regulations, the management also applies the subjective criteria of classification, and, accordingly, the classification of advances is downgraded on the basis of credit worthiness of the borrower, its cash flows, operations in account and adequacy of security in order, to ensure accurate measurement of the provision. In addition to the specific provision held against loans and advances, the bank also makes a general provision of 5% of unsecured and 1.5% of the fully secured consumer/credit card financing portfolio. 4.3 Retirement Benefits The key actuarial assumptions concerning the valuation of defined benefit plans and the sources of estimation are disclosed in note 36 to the financial statements. 4.4 Useful life of property and equipment Estimates of useful life of the property and equipment are based on the management's best estimate. Changes in the expected useful life are accounted for by changing the depreciationmortization period or method, as appropriate, and are treated as changes in accounting estimate. 5 CHANGE IN ACCOUNTING ESTIMATE 5.1 Property and equipment/Intangible assets During the year, the management decided to charge depreciationmortization expense on its property and equipment and intangible assets on a proportionate basis. Previously, the bank was charging full year's depreciation on assets acquired during the year and no depreciation was charged on assets disposed off during the year. As per the new method, depreciation on additions is charged from the month the asset is available for use and on disposals up to the month preceding the month of disposal. This change has been accounted for prospectively, in accordance with the revised IAS-8 "Accounting Policies, Changes in Accounting Estimates and Errors". Had there been no change in estimate, the profit for the year and the carrying value of property and equipment at the end of the current year would have been lower by Rs. 91.21 million. 6 CHANGE IN ACCOUNTING POLICY The accounting policies adopted are consistent with those used in the previous financial years except that during the year, the Institute of Chartered Accountants of Pakistan issued a Circular No. 06/2006 dated June 19, 2006 which requires all declarations of dividend to holders of equity instruments. including declaration of bonus issues and other appropriations, except appropriations which are required by law after the balance sheet date not to be recognized as liabilities or change in reserves at the balance sheet date, which also is in compliance with the requirements set out in BSD Circular No. 4, dated February 17. 2006. Previously all declarations of dividends to holders of equity instruments and transfers to reserves relating to profit for the year although declared subsequent to year end were accounted for in the year to which they were related. This change has been applied retrospectively and comparatives have been restated. In accordance with the treatment specified in IAS-8 "Accounting Policies, Changes in Accounting Estimates and Errors". The change in accounting policy has the following impact on the financial statements: ======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
Other liabilities would have been higher by 1,122,160 1,101,160
Unappropriated profit would have been lower by (1,122,160) (1,101,160)
Share premium would have been lower by' (897,728) -
Reserve for issue of bonus 897,728 -
shares would have been higher by
======================================================================================The effect of change in accounting policy has been reflected in the statement of changes in equity. The change in accounting policy has not resulted in any change in the profit for the current year.As disclosed in note 46, the Board of Directors in its meeting held on February 26, 2007 announced bonus issue of 20%, which shall be applied against share premium. 7 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 7.1 Cash and cash equivalents Cash and cash equivalents include cash and balances with treasury banks and balances with other banks (net of overdrawn nostro balances) in current and deposit accounts. 7.2 Lendings to / borrowings from financial institutions The bank enters into transactions of borrowing (repurchase) from and lending (reverse repurchase) to financial institutions, at contracted rates for a specified period of time. These are recorded as under: (a) Sale under repurchase obligations Securities sold subject to a re-purchase agreement are retained in the financial statements as investments and the counter party liability is included in borrowings from financial institutions, The differential in sale and re-purchase value is accrued on a prorata basis and recorded as interest expense. (b) Purchase under resale obligations Securities purchased under agreement to resell (reverse repurchase) are included in lendings to financial institutions, The differential between the contracted price and resale price is amortised over the period of the contract and recorded as interest income. 7.3 Trade date accounting All "regular way" purchases and sales of financial assets are recognised on the trade date, i.e., the date that the bank commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. 7.4 Investments The management determines the appropriate classification of its investments at the time of purchase and classifies these investments as held for trading, available for sale or held to maturity. These are initially recognized at cost, being the fair value of the consideration given including the acquisition cost. (a) Held for trading These are securities which are either acquired for generating a profit from short-term fluctuations in market prices or dealer's margin or are securities included in a portfolio in which a pattern of short-term profit taking exists. (b) Held to maturity These are securities with fixed or determinable payments and fixed maturity that the bank has the positive intent and ability to hold to maturity. (c) Available for sale These are investments that do not fall under the held for trading or held to maturity categories. In accordance with the requirements of the SBP, quoted securities, other than those classified as held to maturity and investments in subsidiaries are carried at market value. Investments classified as held to maturity are required to be carried at amortized cost whereas investments in subsidiaries are accounted for in accordance with the relevant International Accounting Standard as applicable in Pakistan. The unrealized surplus/(deficit) arising on revaluation of the bank's held for trading investment portfolio is taken to the profit and loss account. The surplus/(deficit) arising on revaluation of quoted securities classified as available for sale is kept in a separate account shown in the balance sheet below equity. The surplus/(deficit) arising on these securities is taken to the profit and loss account when actually realised upon disposal. Unquoted equity securities are valued at the lower of cost and break-up value. Subsequent increases or decreases the carrying value are credited/charged to profit and loss account. Break-up value of equity securities is calculated with reference to the net assets of the investee company as per the latest available audited financial statements. Investments in other unquoted securities are valued at cost less impairment losses, if any. Provision for diminution in the value of securities (except for debentures, participation term certificates and term finance certificates) is made after considering impairment. if any, in their value. Provision for diminution in value of debentures, participation term certificates and term finance certificates are made in accordance with the requirements of the Prudential Regulations issued by the SBP. Profit and loss on sale of investments is included in income currently. 7.5 Advances (including net investment in finance lease) Advances are stated net of general and specific provisions: Specific provision against funded loans are determined in accordance with the requirements of the Prudential Regulations issued by the SBP and charged to the profit and loss account. General provision is maintained at 1.5% of the fully secured consumer portfolio and 5% of the unsecured consumer portfolio. Leases, where the bank transfers substantially all the risks and rewards incidental to the ownership of an asset are classified as finance leases. A receivable is recognized at an amount equal to the present value of the minimum lease payments, including guaranteed residual value, if any. Advances are written off when there are no realistic prospects of recovery. hs2/7.6 Operating fixed assets and depreciation Owned Property and equipment, other than land which is not depreciated, are stated at cost or revalued amount less accumulated depreciation and impairment losses, if any. Depreciation is calculated using the straight line method, except buildings which are depreciated using the reducing balance method to write down the cost of property and equipment to their residual values over their estimated useful lives, The rates at which the fixed assets are depreciated are disclosed in note 13.2. Surplus arising on revaluation of fixed assets is credited to surplus on revaluation of fixed assets account, Deficit arising on subsequent revaluation of fixed assets is adjusted against the balance in the above mentioned surplus account as allowed under the provisions of the Companies Ordinance, 1984. The surplus on revaluation of fixed assets to the extent of incremental depreciation charged on the related assets, is transferred to equity. An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal, Any gain or loss arising on derecognition of the asset is recognized in the profit and loss account in the year the asset is derecognized, except that the related surplus on revaluation of fixed assets (net of deferred tax) is transferred directly to equity. The cost of day to day servicing (normal repairs and maintenance) are charged to the profit and loss account as and when incurred. Intangible assets Intangible assets are carried at cost less any accumulated amortization and impairment losses if any. The cost of intangible assets is amortized over their estimated useful lives, using the straight line method. Amortization is charged at the rate stated in note 13.3. Capital work- in- progress Capital work- in- progress is stated at cost. 7.7 Taxation Current Provision for current taxation is based on taxable income for the year determined in accordance with the prevailing laws for taxation on income earned. The charge for current tax is calculated using the prevailing tax rates or tax rates expected to apply to the profits for the year. The charge f or current tax also includes adjustments. where considered necessary relating to prior years. arising from assessments tinalised during the year for such years. Deferred Deferred tax is recognised on all major temporary differences at the balance sheet date between the amounts attributed to asset and liabilities for financial reporting purposes and amounts used for taxation purposes. In addition, the bank also records a deferred tax asset on available tax losses, Deferred tax is calculated at the rates that are expected to apply to the periods when the differences will reverse based on far rates that have been enacted or substantially enacted by the balance sheet date. Deferred tax assets are recognized only to the extent that it is probable that future taxable profits will be available against which the assets can be utilized. The bank also recognizes a deterred tax asset/liability on deficit/surplus on revaluation of fixed assets and securities which is adjusted against the related deficit/surplus in accordance with the requirements of IAS-12 "Income Taxes". 7.8 Revenue Recognition Revenue is recognized to the extent that the economic benefits will flow to the bank and the revenue can be reliably measured. The following recognition criteria must also be met before revenue is recognized. (a) Advances and investments Mark-up/return on regular loansdvances and investments is recognized on accrual basis. Where debt securities are purchased at premium or discount, the same is amortized through the profit and loss account using the effective interest rate method, Interest or mark-up recoverable on classified loans and advances and investments is recognized on receipt basis. Interest/return/mark-up on rescheduled/restructured loans and advances and investments is recognized as permitted by-the regulations of the SBP. Dividend income is recognized when the right to receive the dividend is established. (b) Lease financing Financing method is used in accounting for income from lease financing. Under this method, the unearned lease income (excess of the sum of total lease rentals and estimated residual value over the cost of leased assets) is deferred and taken to income over the term of the lease period so as to produce a constant periodic rate of return on the outstanding net investment in lease. Gains/losses on termination of lease contracts, documentation charges, front-end fees and other lease income are recognised as income on receipts basis, (c) Fees, brokerage and commission Fees, brokerage and commission on letters of credit/guarantee and others are recognized on an accrual basis. 7.9 Staff retirement and other benefits 7.9.1 Staff retirement benefit schemes a) For employees who opted for the new scheme introduced by the management: An approved pension scheme (defined benefit scheme) under which the benefits on the basis of frozen basic salary service and age as on June 30. 2002 are payable to all employees whose date of joining the bank is on or before July 01. 1992, i.e., who have completed 10 years of service as on June 30. 2002; and An approved gratuity scheme (defined benefit scheme) under which the benefits are payable as under: i) For members whose date of joining the bank is on or before July 01, 1992, their services would be calculated starting from July 01, 2002 for gratuity benefit purposes. ii) For members whose date of joining the bank is after July 01, 1992 their services would be taken at actual for the purpose of calculating the gratuity benefit. A Contributory Provident Fund scheme with the bank making equal contribution to that made by employees (defined contribution scheme). b) For employees who did not opt for the new scheme, the bank continues to operate the following: An approved pension scheme (defined benefit scheme) under which the benefits on the basis of frozen basic salary as on June 30. 2002 are payable to all employees opting continuation of the previous scheme and whose date of joining the bank is on or before July 01, 1992, i.e., who had completed ten years of service as on June 30, 2002; and A contributory benevolent fund for all its employees (defined benefit scheme). Annual contributions towards the defined benefit schemes are made on the basis of actuarial valuation carried out using the Projected Unit Credit Method. Actuarial gains/losses are amortized over the future expected remaining working lives of the employees, to the extent of the greater often percent of the present value of the defined benefit obligation at that date (before deducting plan assets) and ten percent of the fair value of any plan assets at that date. 7.9.2 Other benefits a) Employees' compensated absences The bank provides for compensated vested and non-vested absences accumulated by its employees on the basis of actuarual advice under the Projected Unit Credit Method. b) Post retirement medical benefits The bank provides post retirement medical benefits to eligible retired employees. Provision is made annually to meet the cost of such medical benefits on the basis of actuarial advice under the Projected Unit Credit Method. Actuarial gains/losses are amortized over the future expected average remaining lives of the employees. 7.10 Assets acquired in satisfaction of claims The bank occasionally acquires assets in settlement of certain advances, These are stated at lower of the net realizable value of the related advances and the current fair value of such assets. 7.11 Impairment At each balance sheet date the bank reviews the carrying amounts of its assets to determine whether there is an indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the assets is estimated in order to determine the extent of the impairment loss, if any. Recoverable amount is the greater of net selling price and value in use. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the assets is reduced to its recoverable amount. Impairment losses are recognized as an expense immediately. 7.12 Provisions Provisions are recognized when the bank has a present obligation (legal or constructive) as a result of past events and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount can be made. Provision against identified non- funded losses is recognized when intimated and reasonable certainty exists for the bank to settle the obligation. The loss is charged to profit and loss account net of expected recovery and is classified under other liabilities. 7.13 Stock and cash dividends Stock and cash dividend declared subsequent to balance sheet date are considered as non- adjusting event and are not recorded in financial statements of the current year. 7.14 Foreign currencies a) Foreign currency transactions Transactions in foreign currencies are translated into rupees at the foreign exchange rates ruling on the transaction date. Monetary assets and liabilities in foreign currencies are expressed in rupee terms at the rates of exchange ruling on the balance sheet date. Forward foreign exchange contracts are valued at forward rates applicable to their respective maturities. b) Translation gains and losses Translation gains and losses are included in the profit and loss account. c) Commitments Commitments for outstanding forward foreign exchange contracts disclosed in these financial statements are translated at contracted rates. Contingent liabilities/commitments for letters of credit and letters of guarantee denominated in foreign currencies are expressed in rupee terms at the rates of exchange ruling on the balance sheet date. 7.15 Financial instrument 7.15.1 Financial assets and liabilities Financial instruments carried on the balance sheet include cash and bank balances, lendings to financial institutions, investments, advances, certain receivables, bills payable. borrowings from financial institutions, deposits. sub-ordinated loan and other payables. The particular recognition methods adopted for significant financial assets and financial liabilities are disclosed in the individual policy statements associated with them. 7.15.2 Derivative financial instruments Derivative financial instruments are initially recognized at fair value on the date on which the derivative contract is entered into and are subsequently re- measured at fair value using appropriate valuation techniques. All derivative financial instruments are carried as assets when fair value is positive and liabilities when fair value is negative. Any change in the fair value of derivative financial instruments is taken to profit and loss account. 7.16 Off setting Financial assets and financial liabilities are set off and the net amount is reported in the financial statements when there is a legally enforceable right to set off and the hank intends in either settle tin net basis, or to realise the assets and to settle the liabilities simultaneously. 8. CASH AND BALANCES WITH TREASURY BANKS ======================================================================================
December 31, December 31,
Note 2006 2005
Rupees in '000
======================================================================================
In hand
Local currency 3,906,829 2,600,347
Foreign currencies 258,328 142,195
Remittances in transit 606,569 372,626
With State Bank of Pakistan (SBP) in 8.1
Local currency current accounts 14.396,794 8,359,676
Foreign currency deposit accounts
- Non remunerative 332,264 248,560
- Remunerative 8.2 996,792 745,679
With National Bank of Pakistan in
Local currency current accounts 2,506,138 2.236,624
National Prize Bonds 35,863 37,004
23,039,577 14,742,711
======================================================================================8.1 Deposits with the SBP are maintained to comply with the statutory requirements issued from time to time.8.2 This represents special cash reserve maintained with the SBP. The special cash reserve carries mark-up at rates ranging between 3.39% and 4.39% (2005: 1.40% and 3.29%) per annum. 9 BALANCES WITH OTHER BANKS ======================================================================================
December 31, December 31,
Note 2006 2005
Rupees in '000
======================================================================================
In Pakistan
On current account 48,057 249
On deposit account 9.1 300,000 2,000,000
Outside Pakistan
On current account 9.2 1,196,561 962,601
On deposit account 9.3 160,827 329,191
1,705,445 3,292,041
======================================================================================9.1 This represents placement with a local bank. The placement carries mark- up at the rate of 11.75% (2005: 11.75% to 12%) per annum and will mature on January 19, 2007. 9.2 Included in nostro accounts are balances, aggregating to Rs. 75.08 million (2005: Rs, 123.16 million), representing balances held with a related party outside Pakistan. 9.3. This represents placement with a related party outside Pakistan. The placement carries interest at the rate of 3.63% (2005: 4.47 % to 4.62 %) per annum and will mature on January 04, 2007. 10 LENDINGS TO FINANCIAL INSTITUTIONS ======================================================================================
December 31, December 31,
Note 2006 2005
Rupees in '000
======================================================================================
Call money lendings 10.1 475,000 -
Letters of placement 10.2 384,500 785,000
Repurchase agreement 10.3 & 10.6 15,385,739 4,272,382
lendings (Reverse Repo)
Certificates of investment 10.4 2,805,000 720,000
19,050,239 5,777,382
======================================================================================10.1 These are unsecured endings to Financial Institutions, carrying mark-up at the rate of 12% (2005: nil) per annum and will mature on January 04, 2007. 10.2 These are clean placements with Non-Banking Finance Companies. carrying mark-up at rates, ranging between 12% and 13.50% (2005: 11% and 13%) per annum and maturing on various dates. latest by January 22. 2007. 10.3 These are short-term endings to various financial institutions against the government securities shown in note 10.6 below. These carry mark-up at rates ranging between 8.25% and 9.40% (2005: 7% and 8.50%) per annum and will mature on various dates, latest by March 12. 2007. 10.4 The certificates of investment carry mark-up at rates ranging between 11.25% and 12.50% (2005: 10.25% and 12.10%) tier annum and will mature various dates latest by March 28, 2007. 10.5 Particulars of lending ======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
In local currency 19,050,239 5,777,382
In foreign currencies - -
19,050,239 5,777,382
======================================================================================10.6 Securities held as collateral against lending to financial institutions=================================================================================================
December 31, 2006 December 31. 2005
Further Further
Held by given as Held by given as
Rupees in '000 bank collateral Total bank collateral Total
=================================================================================================
Market Treasury Bills 15,385,739 - 15,385,739 4,272,382 - 4.272,382
15,385,739 - 15,385,739 4.272,382 - 4,272.382
=================================================================================================11. INVESTMENTS11.1 Investments by types: =================================================================================================================================
December 31, 2006 December 31, 2005
Held by Given as Held by Given as
Rupees in '000 Note bank collateral Total bank collateral Total
=================================================================================================================================
Held-for-trading securities -
Ordinary shares of listed companies 267,290 - 267,290 594,711 - 594,711
Available-for-sale securities
Market Treasury Bills 11.1.1 18,143,360 5,188,065 23,331,425 5,459,960 478,256 5,938,216
Federal Investment Bonds - 5,000 5,000 - 5,000 5,000
Pakistan Investment Bonds 298,625 - 298,625 - - -
Ordinary shares/certificates of 1,457,860 - 1,457,860 681,854 - 681,854
listed companies
Preference shares of listed companies 275,000 - - 275,000 200,000 200,000
Investment in mutual funds 266,229 - 266,229 206 - 206
Ordinary shares of unlisted companies 17,099 - 17,099 62,878 - 62,878
Pre IPO investment in TFC 555,000 - 1,555,000 - - -
Listed term finance certificates (TFCs) 1,320,863 - 1,320,863 1,145,608 - 1,145,608
22,334,036 5,193,065 27,527,101 7,550.506 483,256 8,033,762
Held-to-maturity securities
Market Treasury Bills 11.11 - - - 12,825,430 2,875,414 15,700,844
Pakistan Investment Bonds 13,881,122 6,073 13,887,195 14,354,866 1,288,800 15,643,666
Foreign Currency Bonds (USS) 212,087 - 212,087 260,076 - 260,076
TFCs Debentures Bonds and PTCs 4,867,258 - 4,867,258 4,439,812 - 4,439,812
18,960,467 6,073 18,966.540 31,880,184 4,164,214 36,044.398
Related parties
Subsidiary
Allied Management Services (Pvt) Ltd. 62,488 - 62,488 62,488 - 62,488
Others 451,219 - 451,219 451,219 - 451,219
Investment at cost 42,075,500 5,199,138 47.274,638 40.539,108 4,647,470 45,186,578
Less: Provision for Diminution
in value of Investments 11.3 (203,038) - (203,038) (342,115) - (342,115)
Investments (Net of Provisions) 41,872,462 5,199,138 47,071,600 40,196,993 4,647,470 44.844,463
Unrealized (loss)/gain on revatuation of
Held-for-trading securities 11.5 (30,180) - (30,180) 25,706 - 25,706
(Deficit)/surplus on revaluation of
Available-for-sale securities 22.2 (87,162) (1,017) (88,179) 56,483 - 56,483
Total Investments at market value 41,755,120 5,198,121 46,953,241 40,279,182 4,647,470 44,926,652
=================================================================================================================================11.1.1 Pursuant to the requirements of BSD Circular no. 7, dated May 30, 2006, which allows a one time reclassification of securities between the three categories, the bank reclassified Market Treasury Bills, aggregating to Rs 7.801 million (book value) from Held to maturity to Available for sale category.11.2 Investments by segments: ======================================================================================
December 31, December 31,
Note 2006 2005
Rupees in '000
======================================================================================
Federal Government Securities:
- Market Treasury Bills 11.2.1 & 11.2.2 23,331,425 21.639.060
- Pakistan Investment Bonds 11.2.1 & 11.2.2 14,185,820 15,643,666
- Federal Investment Bonds 11.2.2 5,000 5.000
- Foreign Currency Bonds (US$) 212,087 260,076
Fully Paid up Ordinary Shares:
- Listed Companies 1,725,150 1,276.565
- Unlisted Companies 17,099 62.878
Investment in Mutual Funds 266,229 206
Fully paid up Preference Shares 11.2.3 275,000 200,000
Pre IPO Investment in TFC 555,000 -
Term Finance Certificates, Debentures,
Bonds and Participation Term Certificates:
Term Finance Certificates
- Listed 1.676.436 1,524,972
- Unlisted 3,262,128 2.288.712
Debentures 65,392 68,534
Bonds - Government guaranteed 938,497 1,683.862
- Others 238,645 -
Participation Term Certificates 7,023 19,340
Related parties
Investment in subsidiary 62,488 62.488
Others 11.2.4 451,219 451,219
Total investments at cost 47,274.638 45.186.578
Less: Provision for diminution 11.3 (203,038) (342,115)
in the value of investment
Investments (Net of Provisions) 47,071,600 44,844.463
Unrealized (loss)/gain on revaluation of
held-for-trading securities 11.5 (30,1 80) 25,706
(Deficit)/surplus on revaluation of
available-for-sale securities 22.2 (88,179) 56,483
Total investments at market value 46,953,241 44.926,652
======================================================================================11.2.1 Included herein are Market Treasury Bills and PIBs having a book value of Rs. 4,855.86 million and nil respectively (2005: Market Treasury Bills Rs. 3,331.78 million and PIB's Rs. 900 million), given as collateral against repurchase agreement borrowings from financial institutions.11.2.2 These include Market Treasury Bills and PIBs. having a face value of Rs. 339.80 million (2005: Rs. 339.80 million), held by the SBP and National Bank of Pakistan against Demand Loan and TT/DD discounting facilities sanctioned to the bank, In addition, PIBs and FIBS, with an aggregate face value of Rs. 10 million (2005: Rs. 10 million), have been pledged with the Controller of Military Accounts on account of Regimental Fund. 11.2.3 These represent 20,000,000 (2005: 20,000,000) KIBOR plus 2% Cumulative Preference Shares of Masood Textile Mills Limited, with Call Option available to the issuer and Conversion Option available to the bank. after completion of four years from the date of issue, i.e., June 29, 2005 and 7,500,000 (2005: Nil) KIBOR plus 2.5% Cumulative Preference Shares of Fazal Cloth Mills Limited having redemption term for ABL within 60 days after completion of 5 years from the date of issue, i.e.. May 13. 2006. 11.2.4. This includes Rs. 200 million contributed by the bank towards the equity of Khushhali Bank, as per SBP Letter No. BSD (RU-26/625-MFB/13317/00), dated August 07, 2000. In accordance with the restrictions imposed by Khushhali Bank Ordinance, 2000, the bank cannot sell/transfer these shares before a period of five years from the date of subscription. Thereafter, such sale/transfer shall be subject to the prior approval of State Bank of Pakistan, pursuant to section 10 of the Khushhali Bank Ordinance, 2000. 11.2.5 Information relating to investments in shares of listed and unlisted companies, redeemable capital, debentures and bonds, required to be disclosed as part of the financial statements under State Bank of Pakistan's BSD Circular No. 4 dated February 17, 2006, is given in Annexure "I", which is an integral part of these financial statements. 11.3 Particulars of Provision ======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
Opening balance 342,115 354,297
Charge for the year 24 83,393
Reversals (14,647) (62,982)
Net (reversal)/charge (14,623) 20,411
Amounts written oft (124,454) (32,593)
Closing balance 203,038 342,115
======================================================================================11.3.1 Particulars of Provision in respect of Type and Segment======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
By Type
Available-for-sale securities
Ordinary shares of listed companies 65,298 78,558
Ordinary shares of unlisted companies 2,173 38,266
67,471 116,824
Held-to-maturity securities
TFCs, Debentures, Bonds and PTCs 132,997 222,721
Related parties
Ordinary shares of unlisted companies: 2,570 2,570
203,038 342,115
By Segment
Fully Paid up Ordinary Shares:
- Listed companies 65,298 78,558
- Unlisted companies 2,173 38,266
67,471 116,824
Term Finance Certificates, Debentures,
Bonds and Participation Term Certificates: - -
Term Finance Certificates - unlisted 60,582 134.847
Debentures 65,392 68.534
Participation Term Certificates 7 023 19 340
132.997 222,721
Related parties
Ordinary shares of unlisted companies 2,570 2.570
203.038 342.115
======================================================================================11.4 Quality of Available for Sale Securities Information relating to quality of available for sale securities required to be disclosed as part of the financial statements under SBP's BSD Circular No. 4 dated February 17, 2006, is given in Annexure "I'. which is an integral part of these financial statements.11.5 Unrealized (loss)/gain on revaluation ======================================================================================
December 31,
2006 2005
Rupees in '000
======================================================================================
of investments classified as held for trading
Ordinary shares of listed companies (30,180) 25,706
======================================================================================12 ADVANCES======================================================================================
December 31,
Note 2006 2005
Rupees in '000
======================================================================================
Loans, cash credits, running
finances, etc. - in Pakistan 143,383,499 113,630,400
Net investment in finance lease - in Pakistan 12.2 777,878 658,716
Bills discounted and purchased
(excluding treasury bills)
Payable in Pakistan 2,942,960 2,687,766
Payable outside Pakistan 3,493,264 2,561,112
6,436,224
150,597,601
Financing in respect of continuous
funding system (CFS) 12.3 1,107,817 327,677
Advances - gross 151,705,418 119,865,671
Provision for non-performing advances 12.5 (7,657,737) (8.648,742)
General provision for consumer financing 12.5 (14,047) (10,155)
Advances - net of provision 144,033,634 111,206,774
======================================================================================12.1 Particulars of advances (Gross)12.1.1 ======================================================================================
December 31,
2006 2005
Rupees in '000
======================================================================================
In local currency 150,783,971 117,892,374
In foreign currencies 921,447 1,973,297
151,705,418 119,865,671
======================================================================================12.1.2======================================================================================
December 31,
2006 2005
Rupees in '000
======================================================================================
Short term (for upto one year) 100,024,999 84,066,027
Long term (for over one year) 51,680,419 35,799,644
151,705,418 119,865,671
======================================================================================12.2 Net investment in finance lease====================================================================================================================================================
December 31, 2006 December 31, 2005
Later than Later than
Not later one and Not later one and
than one less than Over five than one less than Over five
year live years years Total year five years years Total
Rupees In '000
====================================================================================================================================================
Lease rentals receivable 317,623 455,475 - 773,098 346,070 272,645 - 618,715
Residual value 47,653 94,295 - 141,948 40,557 82,079 - 122,636
Minimum lease payments 365,276 549,770 - 915,046 386,627 354,724 - 741,351
Financial charges for future periods (67,503) (69,665) - (137,168) (49,611) (33,024) - (82,635)
Present value of minimum lease payments 297,773 480,105 - 777,878 337,016 321,700 - 658,716
====================================================================================================================================================12.3 This represents secured financing in respect of purchase of shares from the CFS market. These carry markup at the rate of 16.50% (2005: 17.97%) per annum.12.4 Advances include Rs.10,478.589 million (2005: Rs. 12,699.338 million) which have been placed under non-performing status as detailed below:- =====================================================================================================================================================
December 31, 2006
Classified Advances Provision Required Provision Held
Category of Classification Domestic Overseas Total Domestic Overseas Total Domestic Overseas Total
Rupees in '000
=====================================================================================================================================================
Other assets especially
mentioned 35,811 - 35,811 - - - - - -
Substandard 534,865 - 534,865 88,574 - 88,574 88,574 - 88,574
Doubtful 659,307 - 659,307 229,548 - 229,548 229,548 - 229,548
Loss 9.248,606 - 9,248,606 7,339,615 - 7,339,615 7,339,615 - 7,339,615
10,478,589 - 10,478,589 7,657,737 - 7,657,73 7,657,737 - 7,657,737
=====================================================================================================================================================12.5 Particulars of provision against non-performing advances in local currency=========================================================================================================================
December 31, 2006 December 31, 2005
Note Specific General Total Specific General Total
Rupees in '000
=========================================================================================================================
Opening balance 8,648,742 10,155 8,658,897 10,572,225 5,402 10.577.627
Charge for the year 1,561,347 3,892 1,565,239 1505,377 4,753 1510 130
Reversals (981,934) - (981,934) (1,110,522) - (1,110,522)
579,413 3,892 583,305 394,855 4,753 399.,608
Amounts written off 12.6 (1,570,418) - (1,570,418) (2,318,338) - (2,318.338)
Closing balance 7,657,737 14.047 7,671,784 8,648,742 10,155 8,658,897
=========================================================================================================================12.5.1 Particulars of provisions against non-performing advances=========================================================================================================================
December 31, 2006 December 31, 2005
Specific General Total Specific General Total
Rupees in '000
=========================================================================================================================
In local currency 7,657,737 14,047 7,671,784 8,648,742 10,155 8,658.897
In foreign currencies - - - - - -
7,657.737 14,047 7,671,784 8.648,742 10,155 8.658,897
=========================================================================================================================12.5.2 During the year, in order to comply with' the requirements of the BSD Circular No. 2. dated January 14. 2006, issued by the SBP, the bank changed the method of computation of provision against the non-performing advances.The Circular requires the bank to create provision at a rate of 25 percent, instead of 10 percent of non-performing advances, in the substandard category after adjustment of the Forced Sale Value (FSV) of assets held as collateral against such non performing advances while determining the provision requirement. Additionally. BSD Circular No. 7, dated November 01, 2005, issued by the SBP restricted the benefit of the Forced Sale Value (FSV) of the collateral to financing facilities of Rs.10 million and above with effect from December 31, 2006, as against the previous requirement to restrict the same to financing facilities of Rs.5 million and above, for the purposes of determining provision against non-performing advances. The bank has made a provision of Rs. 260.02 million in order to comply with the requirements of above circulars. Had the above referred increase, in the rate of provision for substandard category and increase in the limit of financing for taking the benefit of the FSV not taken place, profit before taxation for the year and advances (net of provision) at the end of the year would have been higher by Rs. 260.02 million. 12.6 Particulars of write offs: 12.6.1 ======================================================================================
December 31, December 31,
Note 2006 2005
Rupees in '000
======================================================================================
Against Provision 12.5 1,570,418 2,318,338
Directly charged to Profit &Lose account 136,189 160.059
======================================================================================
1,706,607 2,478,397
======================================================================================12.6.2======================================================================================
December 31, December 31,
Note 2006 2005
Rupees in '000
======================================================================================
Write Offs of Rs. 500,000 and above 12.7 1,196,664 2,437,559
Write Offs of Below Rs. 500,000 509,943 40,838
1,706,607 2,478,397
======================================================================================12.7 Details of loan write off of Rs. 500,000/- And above In terms of sub-section (3) of Section 33A of the Banking Companies Ordinance, 1962. the Statement in respect of written-off loans or any other financial relief of five hundred thousand rupees and above allowed to a person(s) during the year ended December 31, 2006 is given in Annexure - II. However, this write off does not affect the bank's right to recover debts from these customers.12.8 Particulars of loans and advances to directors, related parties, etc. ======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
Debts due by directors, executives
or officers of the bank or any of them
either severally or jointly with
any other persons
Balance at beginning of year 3,887,659 2,684,482
Loans granted during the year 939,585 1,626,009
Repayments (626,390) (422,832)
Balance at end of year 4,200,854 3,887,659
======================================================================================13. OPERATING FIXED ASSETS======================================================================================
December 31, December 31,
Note 2006 2005
Rupees in '000
======================================================================================
Capital work-in-progress 13.1 516,047 163,443
Property and equipment 13.2 5,899,386 4.530,262
Intangible assets 13.3 29,678 26,957
6,445,111 4,720.662
======================================================================================13.1 Capital work-in-progress======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
Civil works 249,263 61,287
Equipment 44,703 14,612
Advances to suppliers and contractors 222,081 87,544
516,047 163,443
======================================================================================13.2 Property and equipment==========================================================================================================================================================================
Cost / Revaluation Accumulated Depreciation
Charge for
Adjustment/ the year/ Adjustment/ Net book Annual
At surplus/ At At adjustment/ depreciation At value at rate of
January 1, Additions/ (deficit) on December 31, January 1, (depreciation reversed on December 31, December 31, depreciation
Description Note 2006 (deletions) revaluation 2006 2005 on deletions) revaluation 2006 2006 %
==========================================================================================================================================================================
Rupees in' 000
Land 13.4 2,882,599 852,585 (18,599) 3,704,167 - - - - 3,704,167 -
(12,418)
Buildings 13.4 1,256,759 284,919 (1,550) 1,538,382 75,293 61,465 - 136,593 1,401,789 5
(1,746) (165)
Furniture and fixtures 367,198 8,650 - 361,256 265,015 23,801 - 275,286 85,970 10
(14.592) (13,530)
Electrical, office and 891,789 280,917 - 1,149,681 614,306 110,697 - 703,797 445,884 14.28-50
computer equipment (23,025) (21,206)
Vehicles 219,749 201,839 - 348,509 152,924 28,388 - 125,708 222,801 20
(73,079) (55,604)
Building improvements
(rented premises) 25,932 26,163 - 52,095 6,226 7,094 - 13,320 38,775 20
2006 5,644,026 1,655,073 (20,149) 7,154,090 1,113,764 231,445 - 1,254,704 5,899.386
(124,860) (90,505)
2005 3,525,829 1,403,394 811,943 5,644,026 1,016,623 235,405 (56,959) 1,113,764 4,530,262
(97,140) (81,305)
==========================================================================================================================================================================13.3.1 Intangible assets=============================================================================================================================================
Cost Accumulated Amortization Net book
At At At Amortizations/ At value at Rate of
January 1, Additions/ December 31, January 1, (Amortizations December 31, December 31 amortization
(Rupees in '000) 2006 (Deletions) 2006 2006 on deletion) 2006 2006 %
=============================================================================================================================================
Computer software 2006 46,733 10,157 56,890 19,776 7,436 27,212 29,678 14.28
2005 33,631 13,127 46,733 13,602 6,199 19,776 26,957 14.28
(25) (25)
=============================================================================================================================================13.4 During the previous year the bank arranged for valuation of properties from M/s. lqbal A. Nanjee & Co. as at September 30, 2005. The revalued amounts of properties have been determined on the basis of Fair Value Model.The revaluation resulted in increase in the carrying values of the properties by Rs. 868.90 million, as at December 31. 2005. Had there been no revaluation, the carrying amount of revalued assets would have been as follows: ======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
Land 1,647,789 1,660,208
Building 503,395 591,391
======================================================================================For information regarding location of revalued properties, refer Annexure lll.13.5 Fair value of property and equipment s not materially different from their carrying amount, 13.6 ======================================================================================
December 31, December 31,
Note 2006 2005
Rupees in '000
======================================================================================
Effect in the current year on profit
and loss account of surplus
arising on revaluation of 22.1 29,926 31,559
buildings carried out last year
======================================================================================13.7 The land and buildings currently in use of the bank include certain properties that have been acquired in satisfaction of claims. The total cost and net book value of these properties as at December 31. 2006 amounted to Rs. 1,305.336 million and Rs. 1,265.564 million respectively. -13.8 ======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
Restriction/discrepancy in the title of property having a
net book value of 26,311 30,189
======================================================================================13.9======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
Carrying amount of temporarily idle property and equipment 61,432 221,498
======================================================================================13.10======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
The gross carrying amount of fully
depreciatedmortized assets
that are still in use
Furniture and fixtures 153,845 153,955
Electrical, office and computer equipment 556,360 556,353
Vehicles 36,844 59,540
Intangible assets - software 4,668 4,493
======================================================================================13.11. ======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
The carrying amount of property and equipment that have
retired from active use and are held for disposal 123 669
======================================================================================/13.12 Disposals of fixed assetsThe details of disposals of assets whose original cost or book value exceeds rupees one million or two hundred and fifty thousand rupees respectively, whichever is lower, are given below: ================================================================================================================================================================
Original
cost/
revalued Accumulated Book Sale Gain on Mode of Particulars of
depreciation value proceeds sale disposal purchaser
================================================================================================================================================================
Rupees in '000
Land
3,342 - 3,342 6,025 2,683 Negotiation Mr. Abdul Rauf Memon, Mirpurkhas
29 - 29 14,000 13,971 Negotiation Mr. Shaikh Mohammad Shoaib, Gujar Khan
8,368 - 8,368 21,600 13,232 Negotiation M!s Roomi Enterprises (Pvt) Ltd. Multan
679 - 679 679 - Negotiation Mr. Abdul Hamid Shaikh, Multan
12,418 - 12,418 42,304 29,886
Building
72 12 60 4,822 4,762 Negotiation Mr. Abdul Hamid Shaikh. Multan
674 93 581 1,920 1,339 Negotiation Mr. Javed Ghani, Ouetta
1,000 60 940 2,025 1,085 Negotiation Mr. Noor Mohammad. Karachi
1,746 165 1,581 8,767 7,186
Furniture & Fixtures
Items having book value of less
than Rs. 250,000 and cost of less
than Rs. 1,000,000 14,592 13,530 1,062 1,410 348 Negotiation Various
Electrical, office and
computer equipment
Items having book value of less
than Rs. 250,000 and cost of less
than Rs.1,000,000 23,025 21,206 1,819 2,755 936 Negotiation Various
Vehicles
2,590 2,590 - 714 714 Auction Mr. Fazal Muhammad, Karachi
2,461 2,461 - 246 246 As per bank policMr. Shaukat A. Kazmi, Lahore
2,200 2,200 - 494 494 Auction Mr. Muhammad Salahuddin. Karachi
1,308 1,308 - 540 540 Auction Mr. Afzal Saleem. Karachi
879 177 702 799 97 Insurance Claim E.F.U. General Insurance Karachi
849 509 340 441 101 As per bank policMr. Sheikh Tahir Azmat, Karachi
849 509 340 441 101 As per bank policMr. Khawja M. Almas. Karachi
849 509 340 340 - As per bank policMr. Muhammadi Yaqoob. Karachi
609 122 487 487 - As per bank policMr. Muhammad Rafique. Sukkur
609 244 365 390 25 As per bank policMr. I A Khairi, Karachi
609 244 365 390 25 As per bank policMr. Mohd Azam Usmani, Karachi
609 244 365 365 - As per bank policMr. Tariq A Mehmood, Karachi
Items having book value of less
than Rs. 250,000 and cost of less
than Rs.1,000,000 58,658 44,487 14,171 41,869 27,698 Various Various
73,079 55,604 17,475 47,516 30,041
December 31, 2006 124,860 90,505 34,355 102,752 68,397
December 31, 2005 97,140 81,305 15,835 44,673 28,838
================================================================================================================================================================Information relating to sale of fixed assets (otherwise than through a regular auction) made to chief executive or a director or an executive or a shareholder holding not less that ten percent of the voting shares of the bank or any related party. as required by SBP's BSD circular no. 4 dated February 17, 2006 is given in Annexure "III" and is an integral part of these financial statements.14. DEFERRED TAX ASSETS ======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
Deferred debits arising in respect of
Compensated leave absences 323,887 257,316
Provision against:
Investments 48,209 84,594
Other assets 208,277 156,972
Off balance sheet obligations 88,804 87,914
Post retirement medical benefits 368,540 328,047
Deficit on revaluation of investments 6,284 -
1,044,001 914,843
Deferred credits arising due to
Surplus on revaluation of fixed assets (198,948) (209,965)
Accelerated tax depreciation / amortization (109,242) -
Excess of investment in finance
lease over written down
value of leased assets (97,643) (24,785)
(405,833) (234,750)
638,168 680,093
======================================================================================15. OTHER ASSETS======================================================================================
December 31, December 31,
Note 2006 2005
Rupees in '000
======================================================================================
Income/Mark-up accrued on advances, investments and placements:
in local currency - 3,846,259 2.359,804
- in foreign currencies ' 9,947 9,311
Due on account of sale of investments 249,629 1,912
Advances, deposits, advance
rent and other prepayments 950,019 328,618
Advance taxation (payments less provisions) 4,135,369 3,963,617
Non-banking assets acquired 15.1 189 189
in satisfaction of claims
Stationery and stamps on hand' 49,252 56,853
Prepaid exchange risk fee - 34
Due from the employees'
retirement benefit schemes 36.4 1,032,064 731,290
Unrealized gain on forward
foreign exchange contracts 15,539 9,269
Receivable from SBP 28,048 103,146
- customers encashments
Suspense account 423,204 92,883
Others 16,917 50,115
10,756,436 7,707,041
Less: Provision held against other assets (595,075) (479,088)
Other assets (net of provision) 10,161,361 7,227,953
======================================================================================15.1======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
Market value of Non-banking assets acquired
in satisfaction of claims 135,117 45,039
======================================================================================15.2 Provision against other assets======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
Opening balance 479,088 466,324
Charge for the year 208,652 39,828
Reversals (3,345) (4,752)
Net charge 205,307 35,076
Written off (89,320) (22,312)
Closing balance 595,075 479,088
======================================================================================16. BILLS PAYABLE======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
In Pakistan 2,273,952 2,444,565
Outside Pakistan 4,055 4,055
2,278,007 2,448,620
======================================================================================17. BORROWINGS======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
In Pakistan 18,033,050 9,536,455
Outside Pakistan 377,375 157,330
18.410,425 9,693,785
======================================================================================17.1 Particulars of borrowings with respect to Currencies======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
In local currency 18,033,050 9,536,455
In foreign currencies 377,375 157,330
18,410,425 9,693,785
======================================================================================17.2 Details of borrowings Secured/Unsecured======================================================================================
December 31, December 31,
Note 2006 2005
Rupees in '000
======================================================================================
Secured
Borrowings from financial institutions 14,500 5,000
Borrowings from State Bank of Pakistan
Under export refinance scheme 17.3 5,555,134 3,999,675
LTF - EOP 17.4 3,907,552 -
9,462,686 3,999,675
Repurchase agreement borrowings 17.5 4,855,864 4,231,780
Unsecured
Call borrowings 17.6 3,700,000 1,300,000
Overdrawn nostro accounts 17.7 377,375 157,330
4,077,375 1,457,330
18,410,425 9,693,785
======================================================================================17.3 The bank has entered into various agreements for financing with the State Bank of Pakistan (SBP) for extending export finance to customers. As per the agreements, the bank has granted the SBP the right to recover the outstanding amount from the bank at the date of maturity of the finance by directly debiting the current account maintained by the bank with the SBP. These carry interest at rates ranging between 6.5% and 7.5% (2005: between 3.5% and 7.5%) per annum.17.4 This represents Long Term Financing against Export Oriented Projects (LTF-EOP) availed by the bank for further extending the same to its customers for export oriented projects, for a maximum period of 7.5 years. The loan repayments to SBP correspond the respective repayment from customers. The loan carries mark-up ranging from 4% to 5% per annum (2005: Nil), 17.5 These represent funds borrowed from the local interbank market against government securities, carrying mark-up at rates, ranging between 8.00% and 8.85% (2005: 8.25% and 8.45%) per annum maturing on various dates, latest by January 19, 2007. 17.6 These represent unsecured borrowings from the local interbank market, carrying mark-up at rates, ranging between 10.35% and 11.25% (2005: 8% and 9.10%) per annum maturing on various dates, latest by March 21. 2007. 17.7 Included in overdrawn nostro accounts are balances, aggregating to Rs. 144.05 million (2005: Rs. 2.01 million). representing balances held with a related party outside Pakistan. 18. DEPOSITS AND OTHER ACCOUNTS ======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
Customers
Fixed deposits 53,304,136 31,633,508
Savings deposits 66,954,303 66,323,993
Current accounts - Remunerative 23,028,853 13,410,869
- Non-remunerative 56,422,618 49,710,944
199,709,910 161,079,314
Financial Institutions
Remunerative deposits 6,321,414 330,954
Non-remunerative deposits
6,321,414 330,954
206,031,324 161,410,268
======================================================================================18.1 Particulars of deposits======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
In local currency 198,931,209 156,150,709
In foreign currencies 7,100,115 5,259,559
206,031,324 161,410,268
======================================================================================19. SUB-ORDINATED LOANS====================================================================================== Term Finance Certificates - Unsecured 2,500,000 - ======================================================================================The bank has issued unsecured sub-ordinated Term Finance Certificates, which will contribute towards Tier II capital for minimum capital requirements (MCR) as per guidelines set by the SBP, under BSD Circular No. 12. dated August 24, 2004. to support the bank's growth. All the regulatory approvals were obtained in December 2006. Liability to the TFC holders shall be subordinated to and rank inferior to all other debts of the bank including deposits and is not redeemable before maturity without prior approval of the SBP. The rate of return is based on the Karachi Interbank Offer Rate (KIBOR) prevailing on the last working day before the beginning of each semi annual redemption period plus 1.9% (no floor, no cap). 0.24% of the principal shall be redeemed in the first 72 months and the remaining principal shall be redeemed in 4 equal semi-annual installments of 24.94% each of the Issue amount respectively, starting from the 78th month. Other salient features of the issue are as follows: =========================================================== Total issue: Rs. 2,500 million Pre-initial public offer (Pre-IPO) : Rs. 1,875 million Initial public offer (IPO) : Rs. 625 million Rating: A Listing: Karachi Stock Exchange (Guarantee) Ltd. Repayment: 8 Years (2007 - 2014) Profit payment: Semi annually in arrears (365 day basis) ===========================================================20. OTHER LIABILITIES ======================================================================================
December 31, December 31,
Note 2006 2005
(Restated)
Rupees in '000
======================================================================================
Mark-up / Return / Interest
payable in local currency 1,323.318 549,988
Mark-up / Return / Interest
payable in foreign currency 31,279 3,092
Accrued expenses 324,389 252,636
Branch adjustment account 131,623 838,568
Provision for:
gratuity 36.4 112,570 112,325
employees' medical benefits 36.4 1,052,971 937,276
employees' compensated absences 36.8 925,392 735,189
Unclaimed dividends 4,506 -
Provision against off-balance sheet obligation 20.1 253,727 251,181
Security deposits against lease 142,948 122,562
Unrealised loss on future contracts
in respect of equity instruments - 9,735
Others 816,544 659,396
5,119,267 4,471,948
======================================================================================20.1 Provision against off-balance sheet obligations======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
Opening balance 251,181 172,086
Charge for the year 4,108 87,626
Reversals (1,562) (8,531)
Net charge 2,546 79,095
Closing balance 253,727 251,181
======================================================================================The above provision has been made against letters of guarantee issued by the bank.21. SHARE CAPITAL 21.1 Authorized Capital ================================================================================================
December 31, December 31, December 31, December 31,
2006 2005 2006 2005
No. of shares Rupees in '000
================================================================================================
1,000,000,000 500,000,000 Ordinary shares of Rs.10/- each 10,000,000 5,000,000
================================================================================================21.2 Issued, subscribed and paid up================================================================================================
December 31, December 31, December 31, December 31,
2006 2005 2006 2005
No. of shares Ordinary shares Rupees in '000
================================================================================================
Fully paid up Ordinary shares of Rs, 10/- each
406,780,094 406,780,094 Fully paid in cash 4,067,801 4.067,801
24,535,471 24,535,471 Issued as bonus shares 245,355 245,355
431,315,565 431,315,565 4,313,156 4,313,156
18.348.550 Ordinary shares of
Rs. 10 each, determined
pursuant to the Scheme of
Amalgamation in accordance
with the swap ratio, stipulated
therein less 9.200,000
Ordinary shares of
Rs. 10 each, held by ILL on
9,148,550 9,148,550 the cut-off date (September 30, 2004) 91,486 91,486
8,400.000 Ordinary shares of
Rs. 10 each, determined
pursuant to the Scheme of Amalgamation
of First Allied Bank Modaraba with
Allied Bank Limited
8,400,000 8,400,000 in accordance with the share 84,000 84,000
swap ratio stipulated therein
448,864,115 448,864,115 4,488,642 4,488,642
================================================================================================Ibrahim Fibres Limited and Ibrahim Agencies (Private) Limited, related parties of the bank, held 141,982,700 and 27,281,554 (December 31, 2005: 141,982,700 and 25,190,230) Ordinary shares of Rs.10 each, respectively, as at December 31, 2006.21. SURPLUS/(DEFICIT) ON REVALUATION OF ASSETS - NET OF TAX ======================================================================================
December 31, December 31,
Note 2006 2005
Rupees in '000
======================================================================================
Surplus/(deficit) arising on revaluation of:
- fixed assets 22.1 1,540,001 1,579,059
- securities 22.2 (81,895) 56,483
Surplus on revaluation of assets - net of tax 1,458,106 1,635,542
======================================================================================22.1 Surplus on revaluation of Fixed Assets======================================================================================
December 31, December 31,
Note 2006 2005
Rupees In '000
======================================================================================
Surplus on revaluation of 1,789,024 953,073
fixed assets as at January 1
Net increase arising on - 868,902
revaluations during the year
Surplus realized on disposa (20,149) (1,392)
l of revalued properties
Transferred to unappropriated
profit in respect of incremental
depreciation charged during the (19,452) (19,882)
year - net of deferred tax
Related deferred tax liability (10,474) (11,677)
13.6 (29,926) (31,559)
Surplus on revaluation of fixed 1,738,949 1,789,024
assets as at December 31
Less: Related deferred tax liability on:
Revaluation as at January 1 209,965 169,664
Surplus arising on revaluation - 51,978
of building during the year
Disposal of revalued properties (543) -
Incremental depreciation charged
during the year transferred to
profit and loss account (10,474) (11,677)
198,948 209,965
1,540,001 1.579,059
======================================================================================22.2 Surplus / (Deficit) on revaluation of Available-for-sale securities======================================================================================
December 31, December 31,
Note 2006 2005
Rupees In '000
======================================================================================
Federal Government Securities
Market Treasury Bills (15,715) 1,409
Pakistan Investment Bonds (2,240) -
Term Finance Certificates - Listed 7,298 -
Shares / Certificates - Listed (97,150) 53,714
Mutual Funds 19,628 1,360
11.1 (88,179) 56,483
Less: Related deferred tax asset 6,284 -
(81,895) 56,483
======================================================================================22. CONTINGENCIES AND COMMITMENTS23.1 Direct credit substitutes ======================================================================================
December 31, December 31,
2006 2005
Rupees In '000
======================================================================================
Guarantees in favour of:
Banks and financial institutions 1,761,869 1,355,300
======================================================================================23.2 Transaction-related contingent liabilities Guarantees in favour of:======================================================================================
December 31, December 31,
2006 2005
Rupees In '000
======================================================================================
Government 1,986,614 627,404
Others 4,761,103 3,464,202
6,747,717 4,091,606
======================================================================================23.3======================================================================================
December 31, December 31,
2006 2005
Rupees In '000
======================================================================================
Trade-related contingent liabilities 38,142,108 22,394,618
======================================================================================23.4======================================================================================
December 31, December 31,
2006 2005
Rupees In '000
======================================================================================
Claims against the bank 2,738,318 5,622,737
not acknowledged as debt
======================================================================================23.5======================================================================================
December 31, December 31,
2006 2005
Rupees In '000
======================================================================================
Commitments to extend credit 8,090,550 6,480,152
======================================================================================23.6 Commitments in respect of forward foreign exchange contracts======================================================================================
December 31, December 31,
2006 2005
Rupees In '000
======================================================================================
Purchase 6,983,267 3,173,997
Sale 3,266,742 2,300,788
10,250,009 5,474,785
======================================================================================23.7 Commitments in respect of:======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
Civil works 294,037 323,025
Acquisition of operating fixed assets 1,149,408 258,327
======================================================================================23.8======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
Commitments in respect of - 290,136
future sale of equity instruments
======================================================================================23.9======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
Commitments in respect of lease financing 150,384 13,012
======================================================================================23.10 Commitments in respect of:======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
Forward lending
Forward borrowing 1,853,461 -
1,853,461 -
======================================================================================23.11 Other Contingencies23.11.1 The Income tax assessments of the bank have been finalized up to and including Tax Year 2005 and Tax Year 2004 for, local operations and Azad Kashmir operations, respectively. a) While finalizing income tax assessments up to the assessment year 2000-2001. the Income Tax Authorities made certain add backs with a tax impact of Rs. 278 million. As a result of appeals filed by the bank before the Appellate Authorities, these add-backs were deleted and set-aside with a tax impact of Rs. 64 million and Rs. 125 million respectively. The appeal effect orders with regard to the above matters are pending. b) The assessments from Assessment Year 2001-2002 to Tax Year 2005 have been finalized with net additional tax liability of Rs. 4,684 million. As a result of the appeals filed by the bank before the Appellate Authorities, various additions having tax impact of Rs. 4.718 million and Rs, 2,424 million have been deleted and set-aside by the Appellate Authorities, respectively. The appeal effect orders with regard to the above matters are pending. c) Income tax return for Tax Year 2006 is filed with tax liability of Rs. 1,601 million whereas provision has been made upto Rs. 1,331 million after considering the effect of carry forward losses of the above mentioned Assessment / Tax Years which would be made available in Tax Year 2006. Pending the finalization of the above-referred appeals. no provision has been made by the bank in an aggregate sum of Rs. 5,232 million in these financial statements, This sum includes tax liability, aggregating to Rs. 4,782 million, already deleted by the Appellate Authorities for which appeal effect orders are pending. The management is hopeful that the outcome of these appeals will be in favour of the Bank. 23.11.2 As a result of a compromise decree granted by the Honourable High Court of Sind in August 2002, Fateh Textile Mills Limited pledged 16,376,106 shares of ABL with the bank as security consequent to the default by Fateh Textile Mills Limited on the terms of the decree. The bank published a notice on June 23, 2004 in accordance with the requirements of section 19(3) of the Financial Institutions (Recovery of Finances) Ordinance. 2001 and invited sealed bids from interested parties to purchase the pledged shares, The bidding process was scheduled for July 23, 2004 and the bank had fixed a reserve price of Rs, 25 per share. On the bid date, the highest offer for these shares was received at a rate of Rs. 25.51 per share. The bid was approved and the successful bidder had deposited an amount of Rs. 417.75 million with the bank. Fateh Textile Mills Limited had filed a Suit against the bank in the High Court of Sindh challenging the sale of the above shares. The High Court had not granted a stay order on the process of sale of shares, However, the matter is still pending in the Court. 24. DERIVATIVE INSTRUMENTS The bank at present does not offer structured derivative products such as Interest Rate Swaps. Forward Rate Agreements or FX Options. However, the bank's Treasury buys and sells derivative instruments such as: - Forward Exchange Contracts - Foreign Exchange Swaps - Equity Futures Forward Exchange Contracts (with Importers and Exporters) Forward Exchange Contract (FEC) is a product which is offered to the obligor who transact internationally. These traders use this product to hedge themselves from unfavorable movements in a foreign currency. however, by agreeing to fix the exchange rate, they do not benefit from favorable movements in that currency. An FEC is a contract between the Obligor and the bank in which both agree to exchange an amount of one currency for another currency at an agreed forward exchange rate for settlement more than two business days after the FEC is entered into (the day on which settlement occurs is called the value date). FEC is entered with those Obligors whose credit worthiness has already been assessed. If the relevant exchange rate moves un-favourably, the bank will loose money. and Obligor will benefit from that movement because the bank must exchange currencies at the FEC rate. In order to mitigate this risk of adverse exchange rate movement, the bank hedges its exposure by taking forward position in inter-bank FX. Foreign Exchange Swaps A Foreign Exchange Swap (FX Swap) is used by the bank if it has a need to exchange one currency for another currency on one day and then re-exchange those currencies at a later date, Exchange rates and forward margins are determined in the "interbank" market and fluctuate according to supply and demand. An FX Swap prevents the bank from gaining any benefit resulting from a favourable exchange rate movement in the relevant currency pair between the time bank enters into the transaction deal and when settlement occurs. Cancellation of the swap may also result in exposure to market movements. The key advantage of an FX swap is that it provides the bank with protection against unfavourable currency movements between the time it enters into the transaction and settlement, The term and amounts for FX Swap can also be tailored to suit the bank's particular needs. Equity Futures An equity futures contract is a standardized contract, traded on a futures counter of the stock exchange, to buy or sell a certain underlying scrip at a certain date in the future, at a specified price. The bank uses equity futures as a hedging instrument to hedge its equity portfolio, in both held for trading and available for sale, against equity price risk. Only selected shares are allowed to be traded on futures exchange. Equity futures give flexibility to the bank either to take delivery on the future settlement date or to settle it by adjusting the notional value of the contract based on the current market rates. Maximum exposure limit to the equity futures is 10% of Tier I Capital of the bank. The accounting policies used to recognize and disclose derivatives are given in note 7.15.2. 25. MARK-UP / RETURN / INTEREST EARNED ======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
On loans and advances to customers 12,199,617 5,998.381
On investments in:
Available for sale securities 1,716,804 402,390
Held to maturity securities 1,582,206 2,513,853
3,299,010 2,916,243
On deposits with financial institutions 219,812 106,109
On securities purchased 824,084 228,075
under resale agreements
On certificates of investment 226,961 338,757
On letters of placement 352,633 74,818
On call money lending 93,390 229,668
17,215,507 9,892,051
======================================================================================26. MARK-UP / RETURN / INTEREST EXPENSED======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
Deposits 6,125,387 1,696,420
Securities sold under repurchase agreements 313,740 215,869
Other short term borrowings 319,855 112,253
Markup on TFCs 21,387 -
Others 12,732 117
6,793,101 2,024,659
======================================================================================27. FEE. COMMISSION AND BROKERAGE INCOME======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
Core fees, commission and brokerage 1,152,093 820,031
Account maintenance charges 201,795 400,331
1,353,888 1,220,362
======================================================================================28. GAIN ON SALE OF SECURITIES======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
Federal Govt. Securities
Market Treasury Bills 24 1,117
Pakistan Investment Bonds 375 -
Shares - Listed 376,393 123,266
376,792 124,383
======================================================================================29. OTHER INCOME======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
Gain on sale of fixed assets 68,397 28,838
Miscellaneous 204,631 243,924
273,028 272.762
======================================================================================30. ADMINISTRATIVE EXPENSES======================================================================================
December 31, December 31,
Note 2006 2005
Rupees in '000
======================================================================================
Salaries, allowances, etc. 3,083,342 2,610,605
Charge for defined benefit plan 226,909 39,341
Contribution to defined contribution 118,499 107,956
plan - provident fund
Non-executive directors' fees, 361 194
allowances and other expenses
Rent, taxes, insurance, electricity, etc. 498,321 378,017
Legal and professional charges 67,874 48,261
Communications 174,032 145,142
Repairs and maintenance 83,675 71,085
Stationery and printing 111,194 81,892
Advertisement and publicity 188,517 103,750
Auditors' remuneration 30.1 8,805 9,576
Depreciation I Amortization 13.2 & 13.3 238,881 241,604
Brokerage and commission 71,740 84,379
Security service charges 108,686 87,271
Travelling, conveyance and fuel expenses 114,805 86,887
Entertainment 40,334 28,691
Computer expenses 119,799 90,320
Subscription 18,621 23,823
Donations 30.2 9,499 15,000
Others 6,684 5.738
5,290,578 4,259,532
======================================================================================30.1 Auditors' remuneration=================================================================================================================
December 31, 2006 December 31. 2005
Ford Rhodes M. Yousut Ford Rhodes M. Yousut
Sidat Hyder Adit Saleem Sidat Hyder Adil Sateem
& Co. & Co. Total & Co. & Co. Total
Rupees in '000
=================================================================================================================
Audit fee 1,500 1,500 3,000 1,375 1,375 2,750
Special certifications, half yearly and
quarterly reviews and sundry
miscellaneous services 2,275 2.680 4,955 2,900 3,150 6,050
Out-of-pocket expenses 365 485 850 405 371 776
4,140 4,665 8,805 4,680 4,896 9,576
=================================================================================================================30.2 None of the directors, executives and their spouses had any interest in the donations disbursed during the year. Donations paid in excess of Rs. 100,000 to a single party during the year are as follows:======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
Earthquake victims in Kashmir and NWFP - 15,000
Shaukat Khanum Memorial Cancer
Hospital and Research Centre 3,700 -
Tameer-e-Millat Foundation 2,500 -
The Kidney Centre 1,000 -
Sahara For Life Trust 500 -
Golf Club Faisalabad 500 -
Care Foundation 400 -
Mr. Tahir Sadiq 249 -
Agha Khan Hospital and 150 -
Medical College Foundation
OGS Trust 150 -
======================================================================================31. OTHER CHARGES======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
Penalties imposed by SBP 7,078 18,999
32. TAXATION
Current - for the year 2,215,092 1,331,468
- for prior years - 22,000
2,215,092 1,353,468
Deferred 48,752 390,594
2,263,844 1,744,062
======================================================================================32.1 Relationship between tax expense and accounting profit======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
Accounting profit for the current year 6,661,094 4,834,195
Tax on income @ 35% (2005: 37%) 2,331,383 1,788,652
Effect of permanent differences 65,477 81,030
Effect of exempt income (91,085) (60,317)
Adjustments in respect of tax on reduced rates (36,804) (14,767)
Effect of reduction in tax rates - (43,508)
Tax charge for the prior year - - 22,000
Others (5,127) (29,028)
Tax charge for the current year 2,263,844 1,744,062
======================================================================================33. EARNINGS PER SHARE - BASIC AND DILUTED======================================================================================
December 31, December 31,
NOTE 2006 2005
======================================================================================
Profit for the year after taxation Rupees in '000 4,397,250 3,090,133
--------------------------------------------------------------------------------------
Number of Shares
======================================================================================
Weighted average number of Ordinary shares outstanding
during the year 33.1 448,864,115 448,864,115
(Rupees)
Earnings per share - basic and diluted 9.80 6.88
======================================================================================There is no dilution effect on basic earnings per share33.1 The comparative figure of weighted average number of shares outstanding has been restated to include Ordinary shares issued by the bank during the year as a result of merger with FABM. 34. CASH AND CASH EQUIVALENTS. ======================================================================================
December 31, December 31,
Note 2006 2005
Rupees in '000
======================================================================================
Cash and balances with treasury banks 8 23,039,577 14,742,711
Balances with other banks 9 1,705,445 3,292,041
Overdrawn nostro accounts 17 (377,375) (157,330)
24,367,647 17,877,422
======================================================================================34. STAFF STRENGTH======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
Permanent 7,139 6,909
Temporary/on contractual basis/trainee 65 38
Bank's own staff strength at the end of the year 7,204 6,947
Outsourced 1,675 1,326
Total Staff strength 8,879 8,273
======================================================================================36. DEFINED BENEFIT PLANS36.1 General description The bank operates a funded gratuity scheme for all employees who opted for the new staff retirement benefit scheme introduced by the management with effect from July 1, 2002. For those employees who did not opt for the new scheme, the bank continues to operate a funded pension scheme. The bank also operates a contributory benevolent fund (defined benefit scheme) and provides post retirement medical benefits to eligible retired employees. 36.2 Number of Employees under the schemes The number of employees covered under the following defined benefit scheme/plans are: ============================================== Gratuity fund 7,180 Pension fund 4,000 Benevolent fund 7,139 Employees' compensated absences 7,139 Post retirement medical benefits 7,139 ==============================================36.3 Principal actuarial assumptions The actuarial valuations were carried out on June 30. 2006 based on the Projected Unit Credit Method, using the following significant assumptions: ======================================================================================
December 31, December 31,
2006 2005 Sources of estimation
======================================================================================
Discount rate:
May 31, 2005 - 10.00%
June 30, 2006 10.00% - Yield on investments in
December 31, 2006 10.00% - Government Bonds
Expected rate of return on plan assets:
May 31, 2005 - 10.00%
June 30, 2006 10.00% - Yield on investments in
December 31, 2006 10.00% - Government Bonds
Expected rate of salary increase 8.00% 6.50% Rate of salary increase
======================================================================================36.4 Reconciliation of (receivable) / payable to defined benefit plan===================================================================================================
December 31, 2006
===================================================================================================
Post
Pension Gratuity Benevolent retirement
fund fund fund medical
Rupees in '000
===================================================================================================
Present value of defined benefit obligation 3,295,249 463,564 532,218 1,458,865
Fair value of plan/scheme's assets (5,155,897) (393,999) (610,811) -
Net actuarial gains/(losses) not recognition 907,356 43,005 (78,951) (405,894)
(953,292) 112,570 (157,544) 1,052,971
Benefit of the surplus not available to
the bank refer note 36.4.1 - - 78,772 -
(953,292) 112,570 (78,772) 1,052,971
===================================================================================================
December 31, 2005
===================================================================================================
Post
Pension Gratuity Benevolent retirement
fund fund fund medical
Rupees in '000
===================================================================================================
Present value of defined benefit obligation 3,244,547 376,520 559,397 1,292,221
Fair value of plan/scheme's assets (5,475,648) (286,159) (563,483) -
Net actuarial gains/(losses) not recognition 1,575,884 21,964 (106,869) (354,945)
(655,217) 112,325 (110,955) 937,276
Benefit of the surplus not available to
the bank refer note 36.4.1 - - 34,882 -
(655,217) 112,325 (76,073) 937,276
===================================================================================================36.4.1 The latest actuarial valuation of Benevolent Fund, carried out as at June 30, 2006 highlighted a surplus of Rs 157.544 million. Out of this amount, a benefit of Rs 78.772 million can be availed by the bank in future years in the form of reduced contributions.36.5 Movement in (receivable) from/payable to defined benefit plan ===================================================================================================
December 31, 2006
===================================================================================================
Post
Pension Gratuity Benevolent retirement
fund fund fund medical
Rupees in '000
===================================================================================================
Opening balance (655,217) 112,325 (76,073) 937,276
Charge/(reversal) for the year - note 36 (298,075) 84,084 30,219 188,045
Contribution to fund made during the year
Bank's contribution - (83,839) (32,918) -
Benefits paid - - - (72,350)
(953,292) 112,570 (78,772) 1,052,971
===================================================================================================
December 31, 2005
===================================================================================================
Post
Pension Gratuity Benevolent retirement
fund fund fund medical
Rupees in '000
===================================================================================================
Opening balance (405,673) 105,000 (34,881) 854,049
Charge for the year - note 36.6 (249,544) 80,198 (10,209) 158,896
Contribution to fund made during the year
Bank's contribution - (72,873) (30,983) -
Benefits paid - - - (75,669)
Closing balance (655,217) 112,325 (76,073) 937,276
===================================================================================================36.6 Charge for defined benefit plan===================================================================================================
December 31, 2006
===================================================================================================
Post
Pension Gratuity Benevolent retirement
fund fund fund medical
Rupees in '000
===================================================================================================
Current service cost - 75,048 15,770 41,460
Interest cost 324,455 37,652 55,940 129,222
Expected return on plan assets (547,565) (28,616) (56,348) -
Actuarial (gains)/losses (74,965) - 3,885 17,363
Contributions - employee - - (32,918) -
Benefit of the surplus not available to - - - 43,890
(298,075) 84,084 30,219 188,045
===================================================================================================
December 31, 2005
===================================================================================================
Post
Pension Gratuity Benevolent retirement
fund fund fund medical
Rupees in '000
===================================================================================================
Current service cost - 73,555 13,769 30,811
Interest cost 319,295 23,588 43,646 112,209
Expected return on plan assets (501,366) (16,945) (40,378) -
Actuarial (gains) / losses (67,473) - 3,737 15,876
Contributions - employee - - (30,983) -
(249,544) 80,198 (10,209) 158,896
===================================================================================================36.7 Actual return on plan assets======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
- Gratuity fund 38,285 37,507
- Pension fund 822,242 704,565
- Benevolent fund 71,892 65,529
======================================================================================36.8 Employees' compensated absencesThe liability of the bank in respect of tong-term employees' compensated absences is determined, based on actuarial valuation, carried out using the Projected Unit Credit Method, The liability of the bank as at December 31,2006. as per the latest actuarial valuation carried out as at September 30, 2006 which, after considering the estimated liability for the current year amounted to Rs. 925.392 million (2005: Rs. 735.189 million). A charge of Rs. 222.635 million (2005: Rs. 60 million) has been provided during the current year, representing the management's best estimate. DEFINED CONTRIBUTION PLAN The bank operates a contributory provident fund scheme for employees who are covered under the new gratuity scheme. The employer and employee both contribute 8.33% of the basic salaries to the funded scheme every month. Number of employees covered under this plan are 6,598 (2005: 6,909) as on December 31, 2006. During the year, employees made a contribution of Rs. 118.499 (2005: Rs. 107.956) million to the fund. The bank has also made a contribution of equal amount to the fund. 38. COMPENSATION OF DIRECTORS AND EXECUTIVES =====================================================================================================================
President / Chief Executive Directors Executives
December 31, December 31, December 31, December 31, December 31, December 31,
Note 2006 2005 2006 2005 2006 2005
Rupees in '000
=====================================================================================================================
Fees 38.1 - - 361 194 - -
Managerial remuneration 15,000 12,000 7,275 11,550 277,099 148,701
Charge for defined benefit plan 842 69 - - 74,310 26,103
Contribution to defined
contribution plan 1,275 1,020 - - 21,555 10,353
Rent and house maintenance - - 270 540 71,931 37,717
Utilities 667 460 728 1,155 27,748 13,718
Medical 24 2 728 1,155 19,668 3,868
Bonus 7,500 3,500 - - 251,158 236,555
Conveyance and others 480 176 - - 31,880 22,365
25,788 17,227 9,362 14,594 775,349 499,380
=====================================================================================================================
Number of persons 1 1 10 7 330 343
=====================================================================================================================38.1 This represents remuneration paid to each director (total number of directors 10) for attending meetings of the Board of Directors, Audit Committee and other committees held during the year. Each director was paid Rs. 5,000 per meeting for each meeting attended during the year. 38.2 The Chief Executive, Directors and certain executives are also provided with other facilities, including free use of the bank maintained cars. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of traded investments is based on quoted market prices, except for securities classified by the bank as held to maturity. Fair value of unquoted equity investments is determined on the basis of break up value of these investments as per the latest available audited accounts. Fair value of fixed term loans, other assets, other liabilities and fixed term deposits cannot be calculated with sufficient reliability due to the absence of current and active market for such assets and liabilities and reliable data regarding market rates for similar instruments. The provision for impairment of loans and advances has been calculated in accordance with the bank's accounting policy as stated in note 7.5. The maturity and repricing profile and effective rates are stated in notes 43.3.1 and 43.2.3 respectively. In the opinion of the management, the fair value of the remaining financial assets and liabilities are not significantly different from their carrying values since assets and liabilities are either short-term in nature or in the case of customer loans and deposits are frequently repriced. 40. SEGMENT DETAILS WITH RESPECT TO BUSINESS ACTIVITIES The segment analysis with respect to business activity is as follows: ============================================================================================================================================================
Corporate Trading & Retail Commercial Payment & Agency Assets Retail
Finance Sales Banking Banking Settlement Services Management Brokerage Others
Rupees In '000
============================================================================================================================================================
2006
============================================================================================================================================================
Total Income 169,366 2,063,283 8,326,310 13,521,560 784,622 - - - -
Total Expenses (95,912) (1,798,344) (6,547,025) (11,376,011) (650,599) - - - -
Net Income (loss) 73,454 264,939 1,779,285 2,145,549 134,023 - - - -
Segment Assets (Gross) 156,669 20,531,908 59,942,453 179,602,511 257,132 - - - -
Segment Non Performing Loans - - 2,658,173 7,820,416 - - - - -
Segment Provision Required - - 2,712,102 6,011,522 - - - - -
Segment Liabilities 72,062 8,892,264 151,543,249 71,173,039 2,404,682 - - - -
Segment Return on net Assets (ROA) (%) 59,41% 1.44% 3.62% 1.46% 63.17% - - - -
Segment Cost of Funds (%) 0.00% 8.26% 4.33% 9.18% 0.00% - - - -
============================================================================================================================================================
2005
============================================================================================================================================================
Total Income 78,367 1,126,570 6,430,550 6,069,770 477,008 - - - -
Total Expenses (45,135) (891,214) (5,082,439) (4,739,399) (333,945) - - - -
Net Income (loss) 33,232 235,356 1,348,111 1,330,371 143,063 - - - -
Segment Assets (Gross) 81,054 9,584,968 50,277,329 141,779,339 331,678 - - - -
Segment Non Performing Loans - - 4,277,854 8,421,484 - - - - -
Segment Provision Required - - 3,707,840 6,023,441 - - - - -
Segment Liabilities 18,039 5,732,000 127,570,541 41,929,921 2,522,939 - - - -
Segment Return on net Assets (ROA) (%) 45.79% 1.74% 1.94% 1.80% 46.68% - - - -
Segment Cost of Funds (%) 0.00% 4.68% 4.02% 10.22% 0.00% - - - -
============================================================================================================================================================The segment return on net assets and cost of funds are based on average assets and average liabilities for the year.41. RELATED PARTY TRANSACTIONS The bank has related party relationships with its subsidiary, companies with common directorship having equity under 20%, directors and employee benefit plans. Banking transactions with related parties are executed substantially on the same terms, including mark-up rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties and do not involve more than a normal risk (i.e., under the comparable uncontrolled price method). Details of transactions with related parties except those under the terms of employment and balances with them as at the year end were as follows: =======================================================================================================================
December 31, 2006 December 31, 2005
Companies Companies
with common with common
directorship directorship
having equity having equity
Directors under 20% Subsidiary Directors under 20% Subsidiary
Rupees in '000
=======================================================================================================================
Nature of related party transactions
Deposits
Deposits at the beginning of the year 6,668 76,125 3,925 452 4,209 905
Deposits received during the year 17,432 765,872 270,262 12,967 889,895 3,141
Deposits repaid during the year (22,286) (782,196) (135,508) (6,751) (817,979) (121)
Deposits at the end of the year 1,814 59,801 138,679 6,668 76,125 3,925
Mark-up expensed 97 356 3,423 - - -
=======================================================================================================================The balances. held with related parties. outstanding at the end of current year are included in notes 9.2, 9.3, 17.7 and 21.2 to these financial statements.======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
======================================================================================
Net receivable from staff retirement benefit funds 918,541 609,971
(Reversal) / charge in respect of (65,273) (71,559)
staff retirement benefit funds
======================================================================================42. CAPITAL ADEQUACYThe risk weighted assets to capital ratio, calculated in accordance with the SBP's guidelines on capital adequacy was as follows:- ======================================================================================
December 31, December 31,
2006 2005
Rupees in '000
(Restated)
======================================================================================
Regulatory Capital Base
Tier I Capital
Shareholders capital 4,488,642 4,488,642
Reserves 6,133,209 5,693,484
Unappropriated profits 5,607,796 2,731,979
Less: Adjustments 144,383 62,488
Total Tier I Capital 16,085,264 12,851,617
Tier II Capital
Subordinated debt 2,500,000 -
(upto 50% of total Tier I Capital)
General Provisions subject to 1.25% 14,047 10,155
of Total Risk Weighted Assets
Revaluation Reserve (upto 50%) 770,001 817,771
Total Tier II Capital 3,284,048 827,926
Eligible Tier Ill Capital - -
Total Regulatory Capital (a) 19,369,312 13,679,543
====================================================================================== Risk-Weighted Exposures=================================================================================================
December 31, 2006 December 31, 2005
Book Value Risk Adjusted Book value Risk Adjusted
Value Value
Rupees In '000
=================================================================================================
Credit Risk
Balance Sheet Items:-
Cash and other liquid Assets 24,745,022 842,316 18,034,752 1,105,732
Money at call 19,050,239 3,284,500 5,777,382 1,505,000
Investments 46,953,241 6,942,075 44,926,652 4,779,037
Loans and advances 144,033,634 116,455,007 111,206,774 89,979,354
Fixed assets 6,445,111 6,445,111 4,720.662 4,720,662
Deferred taxation 638,168 638,168 680,093 680,093
Other assets 10,161,361 5,814,494 7,227,953 3,044,048
252,026,776 140,421,671 192,574,268 105,813,926
=================================================================================================
Off Balance Sheet items
=================================================================================================
Performance bonds etc. 8,255,859 1,908,421 5,195,725 1,126,290
Stand By letters of credit 38,142,108 8,097,854 22,394,618 3,945,079
Outstanding foreign exchange contracts
- Purchase 6,983,267 69,104 3,173,997 32,743
- Sale 3,266,742 13,750 2,300,788 12,448
=================================================================================================
56,647,976 10,089,129 33,065,128 5,116,560
Credit risk-weighted exposures 150,510,800 110,930,486
=================================================================================================
Market Risk
=================================================================================================
General market risk 237,113 330,275
Specific market Risk 237,113 910,550
Foreign exchange Risk 296,009 250,538
Market risk-weighted exposures 770,235 1,491,363
Total Risk-Weighted exposures (b) 151,281,035 112,421,849
=================================================================================================
Capital Adequacy Ratio [(a) / (b) x 100] 12.80% 12.17%
=================================================================================================43. RISK MANAGEMENTRisk Management is a continuous process which addresses all significant risks to which the bank is exposed. The process begins with the formulation of business objectives and strategies and encompasses the identification, assessment and measurement, monitoring and control of specific banking risks. The process is completed by the monitoring of current business objectives and strategies. Categories of Risk Our risk management processes distinguish among four kinds of specific banking risks: credit risk, market risk, liquidity risk and operational risk. Credit Risk This risk is defined as the possibility of loss due to unexpected default or a deterioration of credit worthiness of a business partner. Credit Risk includes Country Risk i.e., the risks that counterparty is unable to meet its foreign currency obligations as a result of adverse economic conditions or actions taken by governments in the relevant country. Market Risk The risk of loss generated by adverse changes in the price of assets or contracts currently held by the bank (this risk is also known as price risk). Liquidity Risk The risk that the bank is unable to meet its payment obligations when they fall due and to replace funds when they are withdrawn; the consequences of which may be the failure to meet obligations to repay depositors and fulfill commitments to lend. Operational Risk The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Risk Responsibilities - The Board is accountable for the management of risk. This is discharged by defining the scope of risk management activities within the Risk Management Group, distributing responsibilities at Board level for their management and determining the manner in which risk authorities are set. - The Board Risk Management Committee (BRMC) determines standards and policies for risk measurement and management. These standards and policies are proposed by Risk Management Committee (RMC). who is also accountable for providing independent assurance that risk is being managed. measured and controlled in conformity with RMG policies and standards. - The President and Group Chiefs are accountable for the management of risk collectively through their membership of risk committees: Risk Management Committee and Asset and Liability Committee (ALCO). - Independent supervision of risk management activities is provided by Audit Committee, - Day-to-day operational responsibility for implementing the Bank's risk management policies and guidelines is delegated to the appropriate business units. Risk Management Group Organization Risk management functions have been segregated by business specialization, i.e., Credit Risk. Credit Administration, Risk Architecture, Portfolio Management Operational Risk and Market Risk. All these functions are operating in tandem to improve and maintain the health of the lending portfolio. 43.1 Credit Risk Credit risk, the potential default of one or more debtors, is the largest source of risk for the bank. The bank is exposed to credit risk through its lending, trading and capital market activities. The bank's credit risk function is divided into Corporate and Financial Institutions Risk and Commercial and Retail Risk. The functions operate within an integrated framework of credit policies, guidelines and processes. The foundation of the bank's credit management framework is based on a systematic approval matrices introduced in 2005, which was followed with credit risk assessment methodology introduced in 2006 through a new Credit Application Package. The bank manages 3 principal sources of credit risk: i) Sovereign credit risk on its public sector advances ii) Non-sovereign credit risk on its private sector advances iii) Counterparty credit risk on interbank limits Sovereign Credit Risk When the bank lends to public sector borrowers, it prefers obtaining a full sovereign guarantee or the equivalent from the Government of Pakistan (GOP). However, certain public sector enterprises have a well defined cash flow stream and appropriate business model, based on which the lending is secured through collaterals other than GOP guarantee. Non-Sovereign Credit Risk When the bank lends to private sector borrowers it does not benefit from sovereign guarantees or the equivalent. Consequently, each borrower's credit worthiness is analyzed on the newly introduced Credit Application Package that incorporates a formalized and structured approach for credit analysis and directs the focus of evaluation towards a balanced assessment of credit risk with identification of proper mitigants. These risks include Industry Risk, Business Risk, Financial Risk, Security Risk and Account Performance Risk. Financial analysis is further strengthened through use of separate financial spreadsheet templates that have been designed for manufacturing/ trading concerns, financial institutions and insurance companies. Counter Party Credit Risk on Interbank Limits In the normal course of its business, the bank's Treasury utilizes products such as REPO and call lending to meet the needs of the borrowers and manage its exposure to fluctuations in market, interest and currency rates and to temporarily invest its liquidity prior to disbursement. All of these financial instruments involve, to varying degrees. the risk that the counter party in the transaction may be unable to meet its obligation to the bank. Reflecting a preference for minimizing exposure to counterparty credit risk, the bank maintains eligibility criteria that link the exposure limits to counterparty credit ratings by external rating agencies. For example. the minimum rating for counterparties to be eligible for a banking relationship with the bank is BBB. Country Risk The bank has in place a Country Risk Management Policy which has been approved by the Board. This policy focuses on international exposure undertaken by the bank. The bank utilizes country risk rating assessment reports published by Dun & Bradstreet Limited (an international credit rating agency) which use political, commercial, macroeconomic and external risk factors in assigning a country risk rating. The country risk limits used by the bank are linked to the Dun & Bradstreet ratings and FlD is responsible for monitoring of country exposure limits. Credit Administration Credit Administration is involved in minimizing losses that could arise due to security and documentation deficiencies. The Credit Administration Division constantly monitors the security and documentation risks inherent in the existing credit portfolio through six regional credit administration departments located all over the country. Portfolio Management To ensure a prudent distribution of credit portfolio, the bank manages its lending activities within a framework of Borrower, Group and Sector exposure limits and risk profile benchmarks. Portfolio Risk Measurement Models The bank has developed internal risk rating models to assign credit risk ratings to its Corporate and Institutional borrowers. These models are based on expert judgment, comprising of both quantitative and qualitative factors. The ratings are assigned at Portfolio Management Level and are given due weightage while extending credit to these asset classes. Stress Testing The bank is also conducting stress testing of its existing portfolio, which includes all assets, i.e., advances as well as investments. This exercise is conducted on a semi-annual basis in line with regulatory requirements. This testing is conducted through assigning shocks to all assets of the bank and assessing its resulting affect on capital adequacy. Early Warning System In order to ensure that monitoring of the regular lending portfolio focuses on problem recognition, an early warning system in the form of a 'Watch-List' category has being instituted to cover the gap between Regular and Substandard categories. Identification of an account on the said 'Watch-List' influences the lending branch to carry Out an assessment of the borrower's ability to rectify the identified problem / weakness within a reasonable time-frame, consider tighter structuring of facilities, confirm that there are no critical deficiencies in the existing security position and, if possible, arrange for strengthening of the same through obtaining additional collateral. -It should however, be noted that the Watch-List category of accounts is part of the Bank's Regular portfolio and does not require any provisioning. In some cases, an account may even be downgraded directly from a Regular to Sub-Standard or worse on subjective basis based on the severity of the trigger involved, Management of Non Performing Loans The Bank has a Special Asset Management Group (SAM). which is responsible for management of non performing loans, SAM undertakes restructuring / rescheduling of problem loans, as well as litigation both civil and criminal for collection of debt. For the non-performing loan portfolio, the bank makes a specific provision based on an assessment of the credit impairment of each loan. At the end of 2006, the average specific provisioning rate was 73.08% of the non-performing loan portfolio. The accounting policies and methods used to determine specific and general provision are given in the note numbers 7 and 12 to these financial statements. The movement in specific and general provision held is given in note 12.5 to these financial statements. Portfolio Diversification During the year 2006 the banking sector advances in Pakistan grew by 18% whereas growth in the bank's advances was 27%. The growth pattern indicates that the bank has outpaced overall credit growth of banking sector, while concomitantly maintaining healthy Advances to Deposit Ratio and Capital Adequacy Ratio. While expanding the advances portfolio, efficient portfolio diversification has been a key consideration. The diversification takes into account the volatility of various sectors by placing concentration limits on lending to these sectors thereby ensuring a diversified advances portfolio. Composition of the bank's advance's portfolio is significantly diversified. Textile, Cement, Financial Institutions, Agriculture and Transport I Communication are major contributors to the advances portfolio. These sectors are considered to be the biggest contributors towards country's GDP as well, 43.1.1 Segmental Information 43.1.1.1 Segments by class of business ======================================================================================================================
December 31, 2006 Contingencies
and
Advances (Gross) Deposits commitments
Rupees in '000 Percent Rupees in '000 Percent Rupees In '000 Percent
======================================================================================================================
Financial institutions 7,387,387 4.87% 3,680,768 1.79% 12,275,623 17.25%
Individuals 5,367,775 3.54% 73,450,765 35.65% 909,368 1.28%
Textile 36,230,311 23.88% 4.067,376 1.97% 2,050,040 2.88%
Sugar 5,125,441 3.38% 941,733 0.46% 979,968 1.38%
Cement/clay/ceramics 12,121,245 7.99% 1,578,921 0.77% 111,385 0.16%
Transport, storage and
communication 9,735,245 6.42% 3,677,515 1.78% 20,450 0.03%
Wholesale and retail trade 5,771,268 3.80% 11,973,448 5.81% 3,278,690 4.61%
Agriculture 13,138,154 8.66% 9,617,896 4.67% 184,524 0.26%
Real Estate Agents 10,919,991 7.20% 8,001,616 3.88% - -
Food manufacturing 5,562,228 3.67% 3.064,610 1.49% - -
Iron steel 3,551,261 2.34% 12,241,712 5.94% 465,192 0.65%
Oil and gas etc. 7,005,959 4.62% 7,880,756 3.83% 2.980,189 4.19%
Electric generation 5,471,261 3.61% 9,437,962 4.58% 8.547,092 12.01%
Others 24,317,892 16.03% 56,416,246 27.38% 39,375,340 55.32%
151,705,418 100.00% 206,031,324 100.00% 71,177,861 100.00%
======================================================================================================================43.1.1.2 Segments by sector======================================================================================================================
December 31, 2006 Contingencies
and
Advances (Gross) Deposits commitments
Rupees in '000 Percent Rupees in '000 Percent Rupees in '000 Percent
======================================================================================================================
Public/Government 27,130.760 17.88% 23,336,516 11.33% 20,691,831 29.07%
Private 124,574,658 82.12% 182,694,808 88.67% 50,486,030 70.93%
151,705,418 100.00% 206,031,324 100.00% 71,177,861 100.00%
======================================================================================================================43.1.1.3 Details of non-performing advances and specific provisions by class of business segment===========================================================================================
December 31, 2006 December 31, 2005
Specific Specific
Classified Provisions Classified Provisions
Advances Held Advances Held
Rupees in '000
===========================================================================================
Individuals 120,501 119,641 144,239 144,214
Textile 3,123,218 2,665,949 3,741,017 2,698,552
Chemical 236,486 79,814 568,331 427,895
Transport storage and communication 300,866 218,916 354,169 245,334
Wholesale and retail trade 802,230 520,140 540,146 372,938
Food manufacturing 437,020 259,561 554.609 315,733
Agriculture 366,071 242,843 797,044 747,398
Others 5,092,197 3,550,873 5,999,783 3,696,678
10,478,589 7,657,737 12,699,338 8,648,742
===========================================================================================43.11.4 Details of non-performing advances and specific provisions by sector===========================================================================================
December 31, 2006 December 31, 2005
Specific Specific
Classified Provisions Classified Provisions
Advances Held Advances Held
Rupees in '000
===========================================================================================
Public/Government 230,183 126,989 293,719 83,519
Private 10,248,406 7,530,748 12,405,619 8,565,223
10,478,589 7,657,737 12,699,338 8,648,742
===========================================================================================43.1.1.5 Geographical Segment Analysis===========================================================================================
December 31, 2006
===========================================================================================
Profit Total Net Contingencies
before assets assets and
taxation employed employed Commitments
Rupees in '000
===========================================================================================
Pakistan 6,661,094 252,026,776 17,687,753 71.177,861
===========================================================================================43.2 Market RiskThe bank is exposed to Foreign Exchange Risk, Interest Rate Risk and Equity position Risk. Market Risk Function has been partially set up with current responsibility of performing basic market risk measurement, monitoring and control functions. However, to give it a formal structure, we expect to appoint a consultant within the first quarter of 2007, for assistance in establishment of Market Risk Management Framework. Risk Pertaining to the Trading Book Trading Book A trading book consists of positions in financial instruments held either with trading intent or in order to hedge other elements of the trading book. To be eligible for trading book, financial instruments must be held with the intent of trading and free of any restrictive covenants on their tradability. In addition, positions need to be frequently and accurately valued and the portfolio should be actively managed. The bank's trading book includes equity securities classified as 'Held for Trading'. These positions are actively managed by treasury as part of their capital market activities. Since trading book constitutes capital market equities therefore, they are mainly exposed to equity price risk, Risk Pertaining to Banking Book All the investments excluding trading book are considered as part of banking book. Banking book includes: i) Available for sate securities ii) Held to maturity securities iii) Other strategic investments Treasury investments parked in the banking book include: i) Government securities ii) Capital market investments iii) Strategic investments iv) Investments in bonds, debentures, etc. Due to the diversified nature of investments in banking book, it is subject to interest rate and equity price risk. interest Rate Risk - Banking Book Government securities (PIB & T-Bills) and other money market investments are subject to interest rate risk, To capture the risk associated with these securities extensive modeling is being done with respect to duration analysis. Stress testing and scenario models are also in place to capture the sensitivity of the portfolio to adverse movement in interest rates. For prudent risk management all money market investments are marked to market to assess changes in the market value of investments due to interest rate movements, Equity Position Risk - Banking Book The bank's portfolio of equity securities categorized under 'Available for Sale' and 'Strategic Investments' are parked in the banking book, These investments expose the bank to equity price risk. Stress Testing The bank also conducts Stress Testing of the bank's investment portfolio to ascertain the impact of various adverse scenarios on the capital adequacy and sustainability of the bank. The exercise assumes various stress conditions, with respect to Market Risk (Rise or Fall in Interest Rates, leading to interest rate risk), Equity Price Risk resulting from Stock Market movements, FX Rate Risk leading from adverse movements in exchange rates and Liquidity Risk (ability to meet short-term obligations if there is a run on deposits). This is in line with the Central Bank's regulatory requirements. Duration GAP Analysis A Duration Gap Analysis is also conducted to ascertain the duration gap between the bank's assets and liabilities, to ascertain the effect of interest rate shifts on the market value of equity. Market Risk Capital Charge The bank uses standardized measurement method for calculation of market risk capital charge. The results are as under: ======================================================================================
Risk Weighted
Exposures Capital Charge
Rupees in '000
======================================================================================
General market risk - Equity Exposures 237,113 18,969
Specific market risk - Equity Exposures 237,113 18,969
Foreign Exchange risk 296,009 23,681
Total 770,235 61,619
======================================================================================43.2.1 Foreign Exchange RiskForeign Exchange Risk is the risk of loss arising from fluctuations of exchange rates. Our FX Risk is first controlled through substantially matched funding policy. On the mismatched exposures, we utilize appropriate derivative instruments such as Forwards and Swaps. The majority of net foreign currency exposure is in US Dollars. The bank is carefully monitoring the net foreign currency exposure and the effect of exchange rate fluctuations by conducting sensitivity analysis and stress testing, as well as utilizing the currency forwards and swaps to hedge the related exposure. ============================================================================================
December 31, 2006
Net foreign
============================================================================================
Financial Financial Off-balance currency
assets liabilities sheet Items exposure
Rupees in '000
============================================================================================
Pakistan Rupee 234,550,090 223,065,585 (3,716,525) 7,767,980
United States Dollar 3,555,379 5,598,173 2,271,948 229,154
Great Britain Pound 167,090 1,110,894 945,406 1,602
Japanese Yen 17,799 1,312 (16,778) (291)
Euro 283,131 747,869 502,612 37,874
Other Currencies 64,853 50,520 13,337 27,670
4,088,252 7,508,768 3,716,525 296,009
============================================================================================
238,638,342 230,574,353 - 8,063,989
============================================================================================43.2.2 Equity Position RiskThe Board with the recommendations of ALCO approves exposure limits applicable to investments in Trading Book, Equity securities are perpetual assets and are classified under either Held for Trading Portfolio or Available for Sale Portfolio. Concentration Risk ALCO is responsible for making investment decisions in the capital market and setting limits that are a component of the risk management framework. Portfolio, Sector and Scrip wise limits are as signed by the ALCO to guard against concentration risk and these limits are reviewed and revised periodically. Treasury ensures compliance of concentration limits set by ALCO. Limit monitoring is done on a daily basis. Limit breaches if any are promptly reported to ALCO with proper reason and justification. Price Risk Trading and investing in equity securities give rise to price risk. ALCO and Treasury's Capital Market Unit both ensure that through prudent trading strategy and use of equity futures, the equity price risk is mitigated. albeit to a certain extent, 43.2.3 Mismatch of Interest Rate Sensitive Assets and Liabilities ===========================================================================================================================================================================================================
December 31, 2006
===========================================================================================================================================================================================================
Effective Exposed to Yield / Interest risk Non-interest
Yield / Over 1 Over 3 Over 6 Over 1 Over 2 Over 3 Over 5 bearing
Interest Upto 1 to 3 to 6 Months to 1 to 2 to 3 to 5 to 10 Above 10 financial
Rupees in '000 rate Total Month Months Months Year Years Years Years Years Years instruments
===========================================================================================================================================================================================================
On-balance sheet financial instruments
Assets
Cash and balances with
treasury banks 3,39% - 4.39% 23,039,577 996,192 - - - - - - - - 22,042,785
Balances with other banks 3.65% 1,705,445 460,827 - - - - - - - - 1,244,618
Lending to financial institutions 9.34% 19,050,239 15,946,799 3,103,440 - - - - - - - -
investments 7.66% 46,953,241 7,002,035 5,270,477 4,353,928 14,951,671 2,030,842 1,595,826 2,130,731 6,302,526 - 3,315,205
Advances 9.99% 144,033,634 130,671,046 208,495 281,163 660,825 2,215,854 1,658,380 1,662,453 1,791,518 2,063,048 2,820.852
Other assets 3,856,206 - - - - - - - - - 3,856.206
238,638,342 155,077,499 8,582,412 4,635,091 15,612,496 4,246,696 3,254,206 3,793,184 8,094,044 2,063,048 33,279,666
===========================================================================================================================================================================================================
Liabilities
===========================================================================================================================================================================================================
Bills payable 2,218,007 - - - - - - - - - 2,278,007
Borrowings 73.6% 18,410,425 12,180,747 2,536,011 172,790 431,451 1,449,671 1 009 586 571,268 58,901 - -
Deposits and other accounts 4.01% 206,031,324 126,388,320 114,504,789 4,543,025 4,172,572 - - - - - 56,422,618
Sub-ordinated loans 12.49% 2,500,000 - - 2,500,000 - - - - - - -
Liabilities against assets
subject to finance lease
Other liabilities 1,354,597 - - - - - - - - - 1,354,597
230,514,353 138,569,067 17,040,800 7,215,815 4,604,023 1,449,571 1,009,586 511,268 58,901 - 60,055,222
On-balance sheet gap 8,063,989 16,508,432 (8,458,388) (2,580,724) 11,008,473 2,191,025 2,244.620 3,221,916 8,035,143 2,063,048 (26,775,556)
===========================================================================================================================================================================================================
Off-balance sheet financial instruments
===========================================================================================================================================================================================================
Forward lending 11.78% - 15.60% 8,240,934 230,745 280,305 2.750,234 3,279,650 1,700,000 - - - - -
Forward borrowing 8.65% (1,853,461) (1,853,461) - - - - - - - - -
Oft-balance sheet gap 6,387,473 (1,622,116) 280,305 2,750,234 3,279,650 1,100,000 - - - - --
Total Yield/
Interest Risk Sensitivity Gap 14,451,462 14,885,116 (8,178,083) 169,510 14,288,123 4,497,025 2,244,620 3,221,916 8,035,143 2,063,048 (26,775,556)
Cumulative Yield/
Interest Risk Sensitivity Gap 14,885,716 6,707,633 6,877,143 21,165,266 25,662,291 27,906,911 31,128,827 39,163,970 41,227,018 14,451,462
===========================================================================================================================================================================================================43.2.3.1 Reconciliation of Assets and Liabilities exposed to Yield Interest Rate Risk with Total Assets and Liabilities========================================================================= Total financial assets as per note 43.2.3 238,638,342 Add Non Financial Assets Operating fixed assets 6,445,111 Deferred tax asset 638,168 Other assets 6,305,155 Total assets as per balance sheet 252,026,776 Total liabilities as per note 43.2.3 230,514,353 Add Non Financial Liabilities Other liabilities 3,764,670 Total liabilities as per balance sheet 234,339,023 =========================================================================43.3 Liquidity Risk Liquidity risk is the risk that the bank is unable to fund its current obligations and operations in the most cost efficient manner, Asset Liability Committee (ALCO) is the forum to oversee liquidity management. The overall bank's principle is that the ALCO has the responsibility for ensuring that bank's policy for liquidity management is adhered to on a continual basis. Other than customer's deposits the bank's funding source is the inter-bank money market, Change in the government monetary policy and market expectations of interest rate are all important factors that can adversely affect our key funding source. Efficient and accurate planning plays a critical role in liquidity management. Our MIS provides information on expected cash inflows/out flows which allow the bank to take timely decisions based on the future requirements. Comprehensive gap analysis, stress testing and scenario analysis is done on periodic basis to capture any adverse effect of market movements on liquidity position. Based on the results produced by analytical models, ALCO devise the liquidity management strategy to maintain sufficient liquidity to deal with any related catastrophe. 43.3.1 Maturities of Assets and Liabilities The table below summarizes the maturities of assets and liabilities in accordance with liquidity assumptions used by the bank to monitor liquidity risk. Assets and liabilities are assumed to mature on their contractual maturities or on the expected date of realization/settlement/replacement as required by the assumptions. ==============================================================================================================================================================================
December 31, 2006
==============================================================================================================================================================================
Over 1 Over 3 Over 6 Over 1 Over 2 Over 3 Over 5
Upto 1 to 3 to 6 Months to 1 to 2 to 3 to 5 to 10 Above 10
Total Month Months Months Year Years Years Years Years Years
Rupees in '000
==============================================================================================================================================================================
Assets
==============================================================================================================================================================================
Cash and balances
with treasury banks 23,039,577 23,039,577 - - - - - - - -
Balances with other banks 1,705,445 1,705,445 - - - - - - - -
Lending to financial institutions 19,050,239 15,946,799 3,103,440 - - - - - - -
Investments 46,953,241 1,643,754 5,552,558 4,540,490 15,311,179 4,209,204 2,305,857 3,908,816 8,157,492 1,323,891
Advances 144,033,634 13,793,820 9,140,413 28,420,534 40,998,448 13,537,452 10,418,660 13,728,001 9,503,655 4,492,651
Operating fixed assets 6,445,111 23,212 46,425 69,638 139,274 745,031 194,400 278 097 351,770 4,597,264
Deferred tax assets 638,168 134,553 9,254 13,434 24,969 46,100 46,382 92,702 115,122 155,652
Other assets 10,161,361 2,069,248 2,554,593 2,546,304 2,991,216 - - - - -
252,026,776 58,356,408 20,406,683 35,590,400 59,465,086 18,537,787 12,965,299 18,007,615 18,128,039 10,569,458
Liabilities
Bills payable 2,278,007 2,278,007 - - - - - - - -
Borrowings 18,410,425 5,625,613 2,536,011 - 5,727,924 431,451 1,449,671 1,009 586 571,268 58,901
Deposits and other accounts 206,031,324 42,367,111 41,178,574 19,376,104 21,194,510 14,142,578 24,517,204 15,084,408 14,352,654 13,818,181
Sub ordinated loans 2,500,000 - - 500 500 1,000 1,000 2000 2,495,000 -
Other liabilities 5,119,267 21,72,202 1,591,725 576,925 576,609 34,258 35,593 56,909 37,523 37,523
234,339,023 53,442,933 45,305,310 25,681,453 22,203,070 15,627,507 25,563,383 15,714,585 16,944,078 13.855,704
Net assets /(liabilities) 17,687,753 4,913,475 (24,899,627) 9,908,947 37,262,016 2,910,280 (12,598,084) 2,293,031 1,183,961 (3,286,246)
==============================================================================================================================================================================
Share capital 4,488,642
Reserves 6,133,209
Unappropriated profit 5,607,796
Surplus on revaluation
of assets - net of tax 1,458,106
17,687,753
================================================43.3.1.1 When an asset or liability does not have any contractual maturity date, the period in which these are assumed to mature has been taken as the expected date of maturity.43.4 Operational Risk The bank, like all financial institutions, is exposed to many types of operational risks, including the potential losses arising from internal activities or external events caused by breakdowns in information, communication. physical safeguards, business continuity, supervision, transaction processing, settlement systems and procedures and the execution of legal, fiduciary and agency responsibilities. The bank maintains a system of internal controls designed to keep operational risk at appropriate levels, in view of the bank's financial strength and the characteristics of the activities and market in which it operates. These internal controls are periodically updated to conform to industry best practice. In 2006. the bank has initiated the process of implementing internationally accepted Internal Control-Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). with a view to consolidate and enhance the existing internal control processes. LIQUIDATION OF ALLIED MANAGEMENT SERVICES (PRIVATE) LIMITED The Board of Directors in its meeting held on October 30. 2006 has approved the liquidation of Allied Management Services (Private) Limited, (AMSL) a wholly owned subsidiary of the bank, consequent to the merger of First Allied Bank Modaraba (managed by AMSL) into the bank. RECLASSIFICATION Following corresponding figure has been reclassified for the purpose of better presentation. =====================================================================
December 31,
From To 2005
Rupees In '000
=====================================================================
Deposits Other liabilities 442,956
=====================================================================46. NON ADJUSTING EVENT AFTER THE BALANCE SHEET DATEThe Board of Directors in its meeting held on February 26, 2007 has proposed a cash dividend in respect of 2006 of Rs. 2.5 per share (2005: cash dividend Rs. 2.5 per share). In addition, the directors have also announced a bonus issue of 20%. These appropriations will be approved in the forthcoming Annual General Meeting. The financial statements, for the year ended December 31, 2006 do not include the effect of these appropriations which will be accounted for in the financial statements for the year ending December 31, 2007. 47. GENERAL 47.1 These accounts have been prepared in accordance with the revised forms of annual financial statements of the banks issued by the State Bank of Pakistan through its BSD Circular No. 04 dated February 17, 2006. 47.2 Figures have been rounded off to the nearest thousand rupees. 48. DATE OF AUTHORIZATION FOR ISSUE These financial statements were authorized for issue on February 26, 2007 by the Board of Directors of the bank. |