Research Proposal

Title:
The business and financial performance of SONERI BANK LIMITED over a period of three years

AHMED GAUHAR (FEB 2013)

Table of Content
Ch Topics Introduction 1 Background to the problem Overview of banking industry in Pakistan Soneri bank ltd and its mission statement Aims, objectives and research questions 2 Literature Review PEST/PORTERS 5 FORCES/SWOT frameworks with their limitations Financial Ratio Analysis (Trends and Comparison) and limitations Business Analysis (PEST/PORTERS 5 FORCES/SWOT) Financial Ratios chart 3 Research Methodology Primary research Secondary research Conclusion References Banking Survey by KPMG Page # 2 3 3 4 5 6 6 7 8 13 14 14 14 15 16

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Introduction:
The coursework below is my individual effort using the help of academic and website work with proper referencing. It consists of three chapters where: Chapter 1:- Includes an overview of the study, the aims and objectives of my research and the research questions. Chapter 2:- Includes some academic work (theories/models) and analysing the work of other researchers. Chapter 3:- Includes the methodology used for carrying out the research.

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Chapter 1:Background to the problem:

The topic I have chosen for my research project is The business and financial performance of SONERI BANK over a period of three years. The reason for choosing this topic is i am from a finance background and I will continue my professional career into this field of finance. So it will provide me with an opportunity to carry out business and financial performance analysis of SONERI BANK. This will not only help me in my career but also it will improve my analytical skills and also get better understanding of financials of a financial institution.

Overview of Banking Industry in Pakistan:

During 2011 the economys ability to achieve sustainable recovery remains constrained. The key variables impending stabilization and thereby growth were persistent high inflation, fiscal distress, severe energy shortage, devastating floods and the security situation. Real GDP growth moderated to 2.4% in FY 2011 mainly due to lacklustre performance of the industrial sector though agricultural sector showed resilience despite catastrophic floods of 2010. However, fiscal deficit for FY 2011 recorded at 5.9% of GDP. The countrys external account which was in surplus during first half of year 2011 turned into deficit by the year end due to a deteriorating trade balance. After recording the peak of 13.9% in January 2011, YOY CPI inflation reduced in the second half of the year reaching to 9.7% in December 2011. The cornerstone of business philosophy remains on customers satisfaction, providing long-term competitive advantage, through strong importance given to quality of service, product innovation and efficient delivery.

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SONERI BANK LTD:

RUPALI group is the major shareholder in SBL. The Bank was incorporated on 28th September, 1991 by the RUPALI Group which is owned by the FEERASTA family. The first branch of the Bank started its operations on 16th April, 1992 in Lahore. As at 31st December, 2011 the bank is currently operating with 184 branches spread all over Pakistan including the Northern Areas of the country. The branches are being increased based on a policy of maintaining a balance between urban and rural areas with a view of offering services even in remote areas of Pakistan. As at 31st December, 2010 the bank has a staff of 2,559 employees out of which 2,042 employees are permanent while the rest are either contractual or outsourced. SBL is listed on all three stock exchanges of Pakistan and has long term rating of AA- and short term rating of A1+ assigned by Pakistan Credit Rating Agency (PACRA) as at June 2011. The bank is currently operating in four segments which are corporate finance, trading & sales, retail banking, and commercial banking.

Mission:
To develop SONERI Bank Ltd. into an aggressive and dynamic financial institution having the capabilities to provide personalized service to customers with cutting edge technology and a wide range of products, and during the process ensure maximum return on assets with ultimate goal of serving the economy and the society.

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Aims and Objectives:

The research from an investors point of view will attempt to critique the business and financial performance and the future prospects of the bank. Following are the main aims of the report: Using PEST and SWOT analysis to evaluate the business performance of SONERI BANK LIMITED and interviewing MR ABBAS ZAIDIEY (Credit Risk Manager) from SONERI BANK LIMITED. Using trend analysis, comparing the key ratios and SBLs performance over a period of three years. Comparing the financial performance of SBL with a competitors financial performance of Samba Bank Limited.

Research Questions:
What are the sources of data available and the limitations on information gathering about SBL? What are the internal and external factors affecting the performance/position and the future of the bank?

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Chapter 2:Literature Review:

In order to analyse the business and financial performance of SBL, the following models have been used in this research project: PEST Analysis SWOT Analysis Porters Five Forces Analysis Financial Ratios Analysis

PEST Analysis:
It is a strategic management tool which is used to understand and analyse external macroenvironment (Political, Economic, Social and Technological). Market decline or growth, the position and direction for a business can be evaluated by the use of this model.

Limitations:
This framework doesnt consider the internal factors affecting the company. So it fails to present a complete picture of companys strategic environment. There is a high level of uncertainty and development may make it difficult to forecast future trends and developments affecting the company with high level of accuracy.

Porters Five Forces Analysis:

Michael Es model is a useful framework for competitive analysis within an industry. This competitive analysis of new entrants, substitutes, buyer or customer power, supplier power and competitors leads into strategic planning and the development of a tailored competitive strategy that expects to exploit the situation.

Limitations:
This model was designed for analysing the strategies of an individual business. This model does not cope with synergies and interdependencies within the portfolio for large corporations. There is no consideration for the possibility of creating a new market.

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SWOT Analysis:
SWOT analysis is a tool used to help in understanding the strengths, weaknesses, opportunities and threats that are involved in a project. It defines the objectives of a business and identifies the internal and external factors that are important to achieving those objectives. Strengths and weaknesses are internal, while opportunities and threats are external to an organisation.

Limitations:
Organizations may view circumstances as very simple due to which it might overlook certain key strategic contact that may occur. Categorizing those four aspects into strengths, weaknesses, opportunities and threats might be very subjective as there is high level of uncertainty in market. It does not explain how an organization can identify these aspects.

Financial Ratio Analysis:

It is used for conducting an analysis on the information within the Financial Statements to see the movement in trends within a business over a period of years. It also helps in comparing performance with businesses of similar industry. A further division of financial analysis section is given below:

Trend analysis:
Comparing a companys performance over a period of years is known as horizontal or trend analysis. A weakness of such comparison is there are no independent benchmarks to determine whether the company's current year performance is good or bad.

Comparison of financial results of SBL with a competitor:

This analysis will introduce an independent yardstick to the comparison. The weakness of such analysis is that the company chosen as a comparator may have performed well or poorly during that particular period of years.

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Limitations:
Comparison should always be like with like. Ratio Analysis will be effective if compared to similar company in the same industry which may not be present. It focuses on financial information of an organisation and ignores the Non-Quantitative information.

Business Analysis: PEST Analysis:

Political Environment: The banking industry is highly regulated by the State Bank of Pakistan (SBP) and Securities & Exchange Commission of Pakistan (SECP). All banks have to abide by a number of regulations by SBP and SECP to operate in the industry and any breaches are penalized. Increase in government borrowings has recently led to an increase in interest rates which has consequently reduced private lending. Political instability in the country halts the operations of businesses at times in the country which lead to losses for the industry due to loss of business in a day. Political instability can also lead to changes in laws and regulations which may not be in favour of the banking industry.

Economic Environment: Devaluation of the currency, high inflation, high mark-up rates, declining business performance leading to higher non-performing loans (NPLs) made it difficult for the banking industry in order to provide financing to private lenders and stay profitable.

Social Environment: Technology oriented people prefer carrying out on-line banking transaction instead of visiting branches for their convenience. A larger number of people in Pakistan use credit cards but mainly used by educated higher and middle class people. It is considered a status symbol when someone is having a credit card in urban areas as well.

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Technological Environment: Importance of high quality data and ever changing dynamics for analysis is the prime need for banking industry in Pakistan. The knowledgeable customers expect high quality services due to which most banks in the industry have on-line branches. In banking industry, huge amount is invested in IT by banks not only for their core banking systems (like TEMENOS, SYMBOLS) but also in applications used to assist in analysing huge amount of data available with banks for marketing, risk management, anti-money laundering etc. (like different modules of SAS). Automation is the need in todays fast paced environment and banks are expected to provide this facility at as many locations as possible.

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Porters Five Forces Analysis:

Rivalry: SBL is facing a strong competition from other private banks like Askari Bank, Bank ALHabib, and Habib Metropolitan Bank. SBL is overtaking this competition through further improving its Corporate and Trade Finance business and recently experienced top executives with prior skills have been hired to take the Bank to a new level.

New competitors: The barriers to entry in the banking industry are high. Licenses to operate as a Bank are only issued by the SBP. A minimum paid up capital of 10 Billion rupees is required for formation of a new Bank in the country as per SBP directives.

Substitute: A number of similar services are provided by the Non-Banking Financial Institutions (NBFIs) which includes Development Finance Institutions (DFIs), Investment bank, Leasing Companies, etc. Therefore, banks are facing competition from NBFIs as well.

Bargaining power of suppliers: The major supplier for a bank is its depositors, who provides for further investment purposes. Medium tier banks like SBL are offering higher returns to depositors in order to attract them while top banks like MCB Bank are offering lower return to depositors since these banks are considered more stable due to their high external ratings by credit rating agencies.

Bargaining power of customers: The major customers of a bank are its borrowers through whom a bank earns for itself and for its depositors. Over 20 Banks are present in the market with large players like MCB, National Bank, Allied Bank, Habib Bank, Bank Alfalah etc. which have a large number of borrowers availing a number of their facilities, therefore customers have a choice to avail facilities from any Bank and negotiate the best possible mark-up rate against facilities availed by them.

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SWOT Analysis:
STRENGTHS: Equity of over RS. 8.9 Billion as at 31st December, 2010. Capital Adequacy Ratio (CAR) of 12.61% i.e. 2.61% higher than the minimum required CAR by the State Bank of Pakistan (SBP). SBL considered a top bank in Trade Financing. Investment in high tech modules of SAS for Credit Risk, Market Risk, Operational Risk, and Anti-money Laundering. Very experienced management team. Presence in rural areas of the country. External rating of AA- by Pakistan Credit Rating Agency (PACRA).

WEAKNESSES: High staff turnover due to changing environment. The Bank hasnt worked on improving its brand image and therefore many people dont know much about the Bank and services it offers. Increasing Non-performing Loans (NPLs) and delays in recovery process.

OPPORTUNITIES: Opportunities to grow its Corporate Finance image as it is currently at a beginning stage in the Bank. Opportunity to further grow its Trade Finance business as it is known for its trade finance services. With the experience of executive management team which has prior experience from top banks like MCB Bank, Allied Bank etc., new business with blue chip clients can be generated.

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THREATS: High amount of NPLs may hinder the existence of the Bank. The Bank may not be able to meet the regulators requirement to increase the capital of the Bank to RS. 10 Billion by 2013 and face penalties up to revocation of its banking license by SBP. Lower confidence on the Bank by the shareholders may further decrease the share price of the Bank. Intense competition in the industry.

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Financial Ratios:

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Chapter 3:-

Research Methodology:
Going through the requirements of the project, the first stage is to identify the right sources of information which will assist me in answering the research questions and achieving the objectives of the project as well. The second stage will be gathering information through different sources and perform a detailed analysis of SBL using different accounting and business techniques. All the research will be based on information gathered for the year 2009, 2010, and 2011. Chairmans review and Directors report to shareholders and the annual reports for those three years will be evaluated throughout the research. After completing the analysis, the next stage will involve writing conclusion on the research findings and commenting on the future of the Company. In the end I will prepare the Skills and Learning Statement which will include details of the learning outcomes from research and analysis project.

Primary Research:
The plan is to interview the Credit Risk Manager (CRM) of SBL for his input on the performance of SBL to identify if primary research would help me better to analyse the banks performance. A great deal of care has been taken to make sure that the information used is relevant, accurate, timely, complete and reliable. In the interview I will ask him for his opinion and explanation of current performance and future targets and prospects of the Bank.

Secondary Research:
The following sources will be used to carry out secondary research:

Internet:
Internet is the major source in information extraction for this project. The websites of SBL, State Bank of Pakistan, NIB Bank, National Bank, Allied Bank, Habib Bank, Silk Bank, KASB Bank, and SAMBA Bank will be frequently visited in order to obtain information regarding business and financial performance of these banks. The use of search engine Google will assist me in extracting relevant information and will help me in moving towards the right direction. However, due to the extent of information available, a lot of time will be spent on identifying the relevant information that I want to use in my dissertation. The State Bank of Pakistan (SBP) website is also very useful in providing the overview of banking industry of Pakistan.
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Annual Reports:
The annual report for the year ended 2011 of NIB Bank, Samba Bank, Allied Bank, National bank and Habib Bank, Silk Bank and annual reports for the year 2009, 2010, and 2011 of SBL will form the main sources of financial information that will be used for analysis part of this report. These reports will also help me in interpreting the findings of the ratio analysis exercise.

Books:
As my previous qualification was ACCA. So ACCA Study text books especially F7 (Financial Reporting) and P2 (Corporate Reporting) will be consulted. They will provide me guidance regarding the interpretation of ratios and is a very useful source of definitions and formulae. Other books referred includes, H Randall (third edition) and Frank Wood (ninth edition). BPP study text.

Articles:
The ACCA article (SAM) May 2004 How to approach performance appraisal questions will help me in interpretation of ratios. Internet, a very important tool to access local newspapers website like Dawn and Business Recorder articles will be used to assist in gathering information about the Banking Industry of Pakistan.

Conclusion:
The research project is a well approach towards the exploration of business and financial performance of banking industry. Future of SBL looks positive due to decline of 150bps in interest rates in October 2011.

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References
(2013) Untitled. [online] Available at: http://www.soneribank.com/document/url/83/Soneri_AR_2011.pdf [Accessed: 1 Feb 2013]. (2013) Untitled. [online] Available at: http://www.abl.com/investor-relations/ceosreview/ [Accessed: 2 Feb 2013]. (2013) Untitled. [online] Available at: http://www.slideshare.net/shantiramsudhir/research-proposal-tips-for-writingliterature-review [Accessed: 3 Feb 2013]. Interview conducted with Mr. Syed Abbas Haider Zaidi, Manager, Credit Risk, Risk Management Division, Soneri bank Limited. (2013) Untitled. [online] Available at: http://www.sbp.org.pk/publications/q_reviews/QPR-Dec-2010.pdf [Accessed: 4 Feb 2013]. (2013) Untitled. [online] Available at: http://www.soneribank.com/Annual%20Reports. [Accessed: 5 Feb 2013]. (2013) Untitled. [online] Available at: http://www.scribd.com/doc/88414769/Limitations-of-a-PEST-Analysis. [Accessed: 7 Feb 2013]. Weaknesses of Porters Five Forces Model. ACCA study text.

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