I will be evaluating UBL’s current position as well as its growth over the past year in comparison to MCB and HBL. United Bank Limited is a privately owned company operating in one of the most profitable industries in Pakistan. It became private in 2002 and has shown remarkable growth since, making valiant efforts to continue this trend. It has more than 1000 branches and operates in 6 countries offering a variety of products to its customers. Reason for choosing the topic This topic sparked an interest in me largely due to the fact that I am currently employed by UBL in their budgeting, planning and MIS department.

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One of the functions of this department is to carry out a benchmarking analysis on a quarterly and annually basis. The results of the analysis are then viewed analytically in order for initiatives to be taken and decisions to be made by higher management for future strategies. In addition, the banking industry has shown tremendous growth in the recent past owing to more attractive spreads as compared to other parts of the world and I would like to take this opportunity to explore in detail the benefits that can be acquired by investing in this industry.

Several foreign banks have realized this notion as is evident from the entrance of foreign banks. Barclays and Dubai Islamic Bank (DIB) have declared their intent to start operations in Pakistan. Barclays Bank has clearly stated that they wish to start operations with capital of US $100 million and open as many as 10 branches all over the country (http:thenews. jang. com. pk). The makings of a dynamic banking industry has also contributed to my keen interest in this field and led to my writing a research paper on this topic.

This industry has also seen its share of mergers and acquisitions in the past year in an attempt to strengthen their position in the market (www. brecorder. com). The other reason for the recent growth in mergers and acquisitions is due to a regulation introduced by the State Bank of Pakistan. This states that banks by the year 2009 must operate with share capital of at least Rs 6B, which is why banks are looking to acquire or merge with other banks (www. sbp. org. pk).

The interest in staying up to date with the changes/regulations and reacting in a steadfast manner to cope with requirements imposed by the State Bank is also a reason I chose this type of report. I believe benchmarking is an important practice because it lets an organization know where it stands and what it needs to do in order to become leaders in their particular 3 Financial Analysis of United Bank Limited industry. This is done through careful monitoring of the industry and making quick and researched decisions that benefit the bank as a whole.

It is therefore also significant that banks be able to sustain their dominance through improved practices with the help of state-of-the-art technology to support their operations. Aims and Objectives The objective of this research paper is to evaluate the financial position of United Bank Limited against two leading competitors and to also better understand the components of the banking sector that make it so attractive for investment. This report will serve as a tool for those with little or no experience of banking in Pakistan to recognize its benefits.

In the world of finance, although the main purpose of most businesses is to maximize shareholders’ wealth, the method of achieving that objective differs from region to region. By this analysis, I intend to explain the way banking is performed and highlight its benefits in this part of the world. Information Gathering Sources used and reasons In carrying out the analysis of UBL and of its competitors, MCB and HBL, the primary source of information in accomplishing this objective was the most recent published financial statements (Profit and Loss and Balance Sheet) for 2007, available from their respective websites.

This piece of information was used for the core analysis and detailed comparison of UBL with its competitors, in terms of balance sheet and profit and loss items. Also, in order to better understand the industry in which these banks operate and to present a clearer picture, several sources were referred to while discussing the market conditions of the industry. Although the main source was the financial statements, the secondary sources proved just as vital to assist with facts and figures of the Pakistan economy.

These were obtained from the State Bank of Pakistan website, which contains the most recent information and provides a detailed review of the economy. This economy report was used when putting in perspective the growth of the banking industry in the recent past and the reasons for continued success in this area of the world. Other secondary sources of information used were: Local newspaper websites (Business Recorder, Dawn News and The Times) and financial related websites (The Financial Daily).

Accessing these websites broadened my horizon and increased my knowledge of the banking industry and provided all around information which was essential in carrying out this research analysis The Karachi Stock Exchange website was also used for historical and present share prices to assess their trends Brokerage house reports written by analysts 4 Financial Analysis of United Bank Limited

Description of methods used to gather information Upon receipt of the financial statements for UBL, HBL and MCB, the information was then consolidated to a spreadsheet where data would be presented in a manner that would make it easier to view and compare the results (Appendix A and B). This presented the basis for analysis as it showed financial results for 2006 and 2007 along with the percentage rise or fall from 2006. This was carried out for all line items in the balance sheet and profit and loss.

Along with that, the articles on local newspaper and financial websites provided information regarding the performance of banks and reasons for their success (i. e. taking advantage of attractive spreads) and dominance in the existing market. These were supported by brokerage house report written by analysts. These also provided future prospects, which were taken into account while putting in perspective the growth of banks. 5 Financial Analysis of United Bank Limited Analysis The analysis portion of the report is split into three sections, the balance sheet items, profit and loss line items and ratio analysis.

The balance sheet analysis will look at the various sources of funds that a bank generates and the multiple places where it invests to gain income from the invested funds. The profit and loss analysis will assess the items involved in determining profitability. The last piece of analysis will identify key ratios that are viewed to measure sound and profitable banks. Balance Sheet Funds (Liabilities) Funds are needed for any organization. It is what drives business and is vital to business continuity and expansion efforts. With specific reference to the banking industry, funds are available through several sources.

These are mainly obtained from customer deposits, borrowings from banks or financial institutions and sub-ordinated loans, seen as liabilities in the balance sheet. De posits 2007 (Rs. B) These various types of funds come at 600 531 different costs to the bank. The cost of 500 deposits varies from the type of 4 12 400 deposit by the customer. The two 292 300 types of deposits can be classified as 200 low cost and expensive. For any bank, their main goal is to obtain as many 1 00 low cost deposits as possible, so as to reduce their cost of capital.

In order to UB L M CB HBL achieve this, banks try to open as UBL M CB HBL many current and saving accounts, which offer relatively lower return to depositors than long-term maturity deposits and fixed term deposits. One way of evaluating the position of a bank in this regard is the determination of their CASA (current De posits Growth (Rs B) account, saving account) ratio. This 550 identifies the percentage of current 490 531 and saving account deposits to their 430 total deposits level. 459 370 4 12 310 UBL has shown clear signs of 344 250 292 growth in terms of their deposits. 57 190 2007 saw UBL’s deposits grow by 2006 2007 20% to Rs 412B, whereas growth for UBL M CB HBL HBL was up by 16% at Rs 531B and MCB increased their level by 14% to Rs 292B. This source of fund is the most preferred 6 Financial Analysis of United Bank Limited as it is obtained at a relatively lower level of cost as compared to other sources of funds. Therefore, UBL was able to capture more than its competitors and as a result was able to lend more of its newly acquired deposits for higher returns. Borrowing is another source of fund for banks, used to support investments and other lending.

There are multiple places from where banks can borrow money. These include borrowing from the Central Bank or borrowing from the market. Over the past year, borrowing for UBL has grown by 54%, whereas that of MCB and HBL is 65% and 5% respectively. Currently, UBL relies on borrowings the most as this constitutes 12% of its total liabilities as compared to HBL and MCB by 9% and 11% respectively. The reason for UBL’s reliance on this source of fund is to support their investments, which have grown by 73% over the previous year at Rs 114B.

Banks tend to borrow when they have limited funds from deposits for lending. This is because the cost of borrowing is relatively higher than that from deposits. If, however, borrowing is not an option a bank would like to pursue, the other form of funds includes to sub-ordinated loans (sub-debt), also known as TFCs. This is a long term liability and banks offer attractive rates to the public in return. The term of the loan varies and there is often a minimum amount set for the deposit. The return is given at a floating rate above the rate of Karachi Interbank Offered Rate (KIBOR).

The attraction to the public for this type of deposit is that it provides the highest return for funds provided. In comparison to its competitors, UBL has the highest volume of sub-debt at Rs 6B vs. Rs 0. 5B and Rs 3. 1B for MCB and HBL respectively, which shows its reliance on such a type of fund. Deployment of Funds (Assets) This part of the analysis will evaluate where UBL stands in terms of deploying their funds to the various sectors and the earnings it brings as compared to its competitors. As seen from the detailed financial statements of UBL (www. ubl. com. k) in notes 44. 1. 1. 1, it is diversified in its lending and supplies to the various business sectors. This is important since offering to diversified industries reduces the risk 7 Financial Analysis of United Bank Limited it faces against non-performing advances from customers. Banks will also invest their funds for a safe return, which proves less risky than consumer lending. Those options are lending to financial institutions and investments. It is observed that banks in Pakistan prefer to focus on providing consumer loans as this is favorable in returning higher rewards.

Over the past few years, there has been a boom in consumer lending as banks offer Advance s Growth (Rs B) 400 several different types of loans to 360 382 consumers and obtain attractive yields. 320 349 Of the 3 banks under scrutiny, UBL 280 308 was the first to enter into consumer 240 finance and paved the way for the rest 255 200 2 19 of the banking industry 19 8 160 (www. brecorder. com). They currently 2006 2007 lead the industry in disbursing UBL M CB HBL automobile financing and have been aggressive in their approach to lend.

This is achieved by offering a handful of products to its customers at competitive interest rates. Currently, UBL offers 6 products to its customers; auto financing, credit card facility, business finance, cash facility, mortgage loans and personal loans. This aggressive approach by UBL has assisted the level of growth it has achieved over the last year. Another area where UBL has shown tremendous growth is in their investments. It has grown by 73% to Rs 114B. MCB has also shown significant growth by 79% at Rs 115B, which shows their assertiveness to grow their investments.

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