INTERNSHIP REPORT ON ASKARI BANK LIMITED

Maham Malik

Submitted in partial fulfillment of the requirements for the degree of Bachelor of Business Administration at

National University of Modern Languages Islamabad, Pakistan June 2013

NATIONAL UNIVERSITY OF MODERN LANGUAGES

Faculty of Management Sciences

It is hereby certified that the report has been thoroughly and carefully read and recommended to the faculty of management sciences for acceptance of the Final Internship Report, by Maham Malik, Roll number IC-2144, session Aug 2009-June 2013, morning, in partial fulfillment of the requirements for the degree of bachelor of business administration of national university of modern languages Islamabad.

Dated ______________

Supervisor name

_____________

Supervisor signature ______________

Panel member name _______________ Panel member signature _____________

Head of department: _______________

Acknowledgement

I am thankful to Almighty ALLAH who gave me courage and strength to successfully complete my internship report on Askari bank ltd. I also express my gratitude to all the individuals who have helped me with my internship report. I most courteously acknowledge the great help and support of Mr. Munnawar ( Vice President Credit Risk Management) and Mr. Daniyal ( Credit Risk Analyst at Risk Management Askari bank) during my internship period. I am highly indebted to my course instructors who provided me with the opportunity to learn about practical work and its implementation. I am also thankful to my supervisor maam Bushra who helped me at every step for the completion of my task. Who provided support and guidance to me

Executive Summary
This report is on the internship experience gathered by me. The objective of this internship program was to acquire practical knowledge in the business sector. I did internship at Askari Bank Limited which provided me with the opportunity to learn about the banking sector.

The purpose of this report is to present the experience gained during my tenure with Askari Bank and also provides an overview of the performance of Askari Bank.

Askari Bank has aggressive growth plans in Pakistan. Its name is generally considered for quality and reputation. It offers a broad range of products to target different market segments.

My working experience with the company was informative. I learned a lot about the working of the organization and how it plans to minimize risks and maximize profits. The information that I have gathered in the limited time as an intern is briefly described in this report.

Table of Contents
Chapter 1 ......................................................................................................................................... 1 1.1 History of the organization ................................................................................................... 2 1.2 Information about the organization ....................................................................................... 3 1.4 Products/Services. .......................................................................................................... 4

1.4 Organizational structure ........................................................................................................ 6 Chapter 2 ......................................................................................................................................... 7 Critical Analysis.............................................................................................................................. 7 2.1 Operational Risk Analysis .................................................................................................... 7 2.2 PEST Analysis .................................................................................................................... 10 Chapter 3 ....................................................................................................................................... 12 Internship Experience ................................................................................................................... 12 3.1 Concerned department information & Work Experience ................................................... 12 Chapter 4 ................................................................................................................................... 31 4.1 Financial Analysis ............................................................................................................... 31 Chapter 5 ....................................................................................................................................... 44 5.1 Conclusion. ......................................................................................................................... 44 5.2 Recommendations ............................................................................................................... 45

Chapter 1 Introduction

Banking in primitive societies existed in some form. The initial business was done on barter which meant an exchange of commodity for commodity. There is a myth also about the invention of money, which tells that king Midas of Libya invented money in 800 B.C. Another statement states that the king of Babylonian empire named as King Hammurabi in 1700 B.C. made all the rules and regulations of lending and borrowing and interest etc. He wrote them on an eight feet stone in the center of the city. Two famous temples are also remembered for the lending and borrowing in different transactions. One was the temple of Ephesus and the second was known as the temple of Delphi.

It is said that the first bank was established in Barcelona in Spain. Another statement tells that Venice and Genoa were the hub of financial transactions and the first bank was founded there in 14th century. The first public bank that was formed was in Germany in later part of the time.

Banking and Financial services sector in Pakistan comprise of the commercial banks and the non-banking financial institutions, including the development finance institutions (DFIs), leasing companies, and investment banks. These are controlled and regulated by the State Bank of Pakistan (SBP). Islamic banking is becoming popular as well and most of the banks including Askari Bank Limited also now provide a range of Islamic facilities in addition to the normal 1

banking facilities offered by the bank. The number of banks operating in Pakistan has also increased, which in turn has resulted in increased competition. The banking sector, in general, has shown good progress during the last few years.

Opportunities for new foreign banks exist in consumer banking, corporate bonds, investment banking, leasing and housing finance sectors.

1.1 History of the organization

Askari Bank Ltd was incorporated in Pakistan on October 09, 1991, as a Public Limited Company. It commenced operations on April 1, 1992 and is principally engaged in the business of banking, as defined in the Banking Companies Ordinance, 1962. The Bank is listed on the Karachi, Lahore & Islamabad Stock Exchanges. Askari Bank has since expanded into a network of 245 branches / sub-branches, including 31 dedicated Islamic banking branches, and a Wholesale Bank Branch in the Kingdom of Bahrain. A shared network of 5,319 online ATMs covering major cities of Pakistan, internet banking (inet) and call centers operating on 24/7 basis supports the alternate delivery channels for customer service.

As at December 31, 2012 the Bank had equity of Rs. 19.7 billion and total assets of Rs. 353 billion, with 907,984 banking customers, serviced by our 5,597 employees. Askari Investment Management Limited and Askari Securities Limited are subsidiaries of Askari Bank primarily engaged in managing mutual funds and share brokerage, respectively.

Askari Bank Limited ensures a commitment to a culture of innovation which seeks out synergies with clients and service providers to ensure uninterrupted services to its customers. They perceive the requirements of the customers and match them with quality products and service solutions. During the past five years, they have emerged as one of the foremost financial institution in the region endeavoring to meet the needs of tomorrow and today. 1.2 Information about the organization 1.2.1 Vision The institutions vision is to be the bank of first choice in the region. This demands continuous strive for creation of business opportunities with innovation while maintaining core values to meet commitment to all stakeholders. 1.2.2 Mission The mission statement of the bank is: To be the leading private sector bank in Pakistan with an international presence, delivering quality services through innovative technology and effective resource management in a modern and progressive organization culture of meritocracy, maintaining high ethical and professional standards, while providing enhanced value to all the their stakeholders, and contributing to society

1.2.3 Core Values Commitment Integrity Fairness Teamwork Service

1.4

Products/Services. Branch Banking Deposits includes following current, saving and term deposit products 1. Value Plus Current Account 2. Paishgi Munafa Account 3. Askari Bachat Account 4. Rupee Travelers Cheque Lockers

Consumer Banking Credit Cards Auto Loans Home Loans Consumer Durables

Electronic Banking Phone Banking ATMs Online Banking

Corporate Banking Trade Finance Structured Finance

Treasury and Investment Money Market Investments

Islamic Banking Services Ijjarah Bi Sayyarah Home Musharika

Corporate/Commercial/SME Advances Product Running Finance Term Finance Finance Against imported Merchandise Finance Against Foreign Bills

1.4 Organizational structure

President

Commercial &

Corporate Regional Regional Marketing Business Managers Chief Branch Managers Investment Banking Group Chief

Retail Banking

Chief

Operations Group Chief

Regional

Operations Chief

Corporate Head North& Regional Compliance Chief Operations Department of the Region Branch Operations Manager Corporate Head South

Special Assets Management Risk Management Group Chief

Regional Risk
Chief

Management Chief
Credit Department of Region Branch Credit Officer Regional GM H.R.M. H.R.M. Group Chief

Audit Inspection Group Chief

Area Audit Chiefs

Chapter 2 Critical Analysis

The company analysis of a firm comprises of many factors and revolves around all the internal activities, which refer to the operations carried out, strategies that are a part of the marketing mix and the environment in which the firm or company has to survive. All these factors are linked to one another in some form and make a chain of necessities for the achievement of a successful status in the market. Askari Bank is no different than any other firm and faces the same challenges on its face ahead. 2.1 Operational Risk Analysis The operational risk analysis indicates the risk of loss to the bank resulting from failed or inadequate people, process, systems and external events. The techniques used by the bank in this regard are Risk and Control Self-Assessment (RCSA), Key Risk Indicators (KRIs), Loss Data Analysis and Scenario Analysis. This tools enlighten the effectiveness of procedures and methods that a firm adopts to carry out and perform its work. Different departments are accordingly formed and tasks are specified properly. 2.1.1 Strengths

Askaris image and reputation in the market is its major strength. Askari has a strong ownership structure. Their motto is inspiring relationships which shows their positive relation and care for their customers and employees, providing them with a diversified portfolio of products. Easy access to the customers at their residential localities because of its suitable location is an added benefit for the customers. The head office is situated in the heart of the city of Rawalpindi.

Askari has always hired motivated and loyal bankers. Best and attractive compensation packages for employees have really improved their commitment, dedication and hard work towards the accomplishment of particular branch objectives. Training sessions further polish their skills so that they can deliver at their best. The bank has an extensive branch network which helps in business booking. The automation within the bank is a major strength which improves the turnaround time. The bank offers customized solutions to its customers across the network.

2.1.2 Weaknesses Although Askari Banks one of the leading banks of Pakistan but it still has some areas for improvement. The network of branches covering the whole area of Islamabad and Rawalpindi is not quite enough to compete with the local giants like NBP, UBL, and MCB.

Askari also needs to improve its IT Information Security Section as fire walls need to be built to secure the system to avoid hoax mail. Service quality and marketing efforts at the branch level also needs improvement for mobilization of CASA deposit.

Recently, there has been a change of ownership and management of the bank. The new management is making a lot of changes in the bank by firing the experienced staff across the bank. This has created dissatisfaction and frustration amongst the staff who are now looking for jobs elsewhere. This is hampering the operations of the bank.

2.1.3 Opportunities International presence should be taken as an opportunity to get more business and to be known all over the world. The network within Pakistan should be expanded since the industry is growing and flourishing. Recently the ownership of the bank has changed from Army Welfare Trust to Fauji Foundation Group. This group is a diversified financial conglomerate with tremendous growth opportunities. The bank needs to capture a significant portion of their business to improve profitability. The bank has recently started branchless banking. However, full potential has not been capitalized as there are unbanked sectors to which the bank needs to increase its outreach and financial inclusion.

2.1.4 Threats There are a significant number of large and middle tier banks which are providing tough competition to Askari bank in terms of capturing low cost deposit, growth in advances, alternate delivery channels etc. These banks provide highly specialized and attractive services to their customers. Growing global technological advancement is another threat because the bank has to keep updated with the latest advancements to stay in competition. 9

Keeping the staff motivated in the environment of uncertainty and change management is a threat to the organization.

2.2 PEST Analysis 2.2.1 Political Analysis Askari Bank is operating in one of the worlds most volatile political environment. On one side there is a very week and unpopular government and on the other there is war against terror going on. Since Askari bank was a part of Army Welfare Trust which is run by Pakistan Army so it has the advantage of not being interfered directly by the government but political forces impact Askaris business through consumers and businesses which are affected directly by political instability. 2.2.2 Economic Analysis The outlook for the Pakistani banking sector remains relatively downbeat despite the potentially vast consumer market in the country. The purchasing power of the customers is seriously hampered because of the weak economic indicators such as high inflation, unemployment, etc. Pakistan has several characteristics that make for a favorable banking sector outlook for instance buoyant demographics, a domestic economy geared towards private consumption and an extremely under-banked population. However, we should not expect rapid sector development over the medium term as these positive factors are neutralized by an unstable security/economic outlook , effecting the repayment capacity of the borrowers , a below-potential growth path for the economy , and domestic/international recession that has put a lot of pressure on the economy. 10

2.2.3 Social Analysis There has been a marked increase in the use of credit cards in Pakistan but the usage is currently limited to educated middle class only. At the same time accelerated by the spread of internet in the country people are more inclined to use the net to do banking transactions specially bill payments and within the bank transactions. Since Askari bank has the reputation of being a conservative bank some consumers are quite loyal and will stay with the bank even under tough economic situation or in the presence of alternatives.

2.2.4 Technological Analysis Technology makes it possible to empower the system and establish a competitive advantage. Pioneering the new ideas, adding the skills and operational excellence are part of the guiding principle of the organization. Askari has recently been investing heavily in information technology. They use state of the art software Flex cube for branch banking which captures almost all the requisite details of the customer and various MIS reports for senior management analysis and decision making can be facilitated from the said software.

11

Chapter 3 Internship Experience

3.1 Concerned department information & Work Experience

I was placed in the Risk Management Division (Credit Risk Department) as a Risk Analyst during my internship period. Credit Risk department basically works to mitigate the credit risk (Risk of borrowers default) faced by the bank by evaluating credit proposals on the basis of State Bank of Pakistans regulations and banks risk management policies set by the senior management. RMD in Askari Bank performs the following basic functions in order to manage the risks across all business segments.

1. Maintaining an effective risk review system that identifies loan with credit weaknesses. 2. Identifying relevant trends affecting collectibles of the loan portfolio and isolate the problem areas. 3. Formulation/review of credit policy and procedures. 4. Identification, reporting measurement, monitoring and controlling all major risks created at all levels through risk quantification based on qualitative and quantitative factors. 5. Recommend in the risk appetite, the tolerance limits in consultation with relevant authorities for various business segments and industries to ensure minimum 12

expected and unexpected losses, under Basel 2 accord and establish a risk based capital framework. 6. Periodic reporting to the board of directors and RMC (Risk Management Committee) about adequate system controls, risk appetite compared to its exposure and any exceptions there to. 7. Review of credit procedure manual for implementation of the policy in coordination with credit division. 8. Periodical review of financial results to determine if changes need to be made to the credit risk policy/risk appetite 9. To address the issue of the prudent size/maximum exposure on the clients, RMD on the basis of risk management guidelines issued by SBP must formulate the following: Define banks overall risk tolerance in relation to credit risk. Banks overall credit risk exposure is maintained at prudent levels and consistent with the available capital of bank. Risk appetite of the bank in relation to client segment, product economic sector, geographical location, currency and maturity. Establish exposure (financing) limits for single obligors and group entities while remaining within the exposure limits set by SBP (State Bank of Pakistan). Target market each lending segment, preferred level of diversification of concentration.

13

RMD has two units for managing credit risk in the bank. These units are credit risk review unit for risk review, credit appraisal unit for loan approval and administration.

1. Risk Appetite/ tolerance A comprehensive risk appetite framework evaluates the proposal at hand in light of risk profile currently on banks portfolio as of now and consequently take the decision within the risk tolerance levels set for similar proposals. Portfolio should be repeatedly benchmarked against the risk profile and deviations and exceptions should be highlighted and justified. For prudent credit management it is vital that portfolio is well diversified. In order to strategically monitor the credit portfolio and reduce risks arising from factors such as concentrations, AKBL is working on the following in house risk limits Industry exposures Business exposures Maximum exposure under various risk grades Borrower Maximum exposure against various collaterals

Going forward in order to set concentration limits, a model has been formed at Askari Bank to calculate borrower wise and industry wise limits. These models are updated on a periodic basis as required by changes in the economic scenarios and internal risk appetite of the bank.

14

2. Risk Pricing Risk pricing is multifactor function where quantitative and qualitative factors should be considered to price a particular product competitively. The function includes the following factors:

Internal and external credit rating Collateral offered Industry positioning Term Structure Prevailing interest rate scenario Minimum acceptable return on capital deployed

3. Credit Risk Review RMD will review a sample of credit exposures in order to reassess the financial condition of the company as well as the outlook for these borrowers. The purpose of the review is reassessing the risk profile of the borrower and to reevaluate the credit risk implied in the banks credit exposure to the company.

15

3.1.1 Responsibility of RMD The proposal initiating units compile information in the proposals, evaluate them and assign the initial credit grades. The relevant credit committee assesses these proposals and approves or rejects them. The function of RMD is to identify risk in banks credit portfolio by undertaking the following: o Conducting post facto reviews of loans to identify loans with credit weaknesses so that timely action can be taken to minimize credit loss; o Identifying relevant trends affecting the collectability of the loan portfolio and isolate potential problem areas. o Ensure investment grade changes are made when needed or where necessary to assess loan provisions. o Assess the adequacy of, and adherence to, loan policies and procedures, and to monitor compliance with relevant laws and regulations. Following are the general considerations for credit proposal and the procedure adopted by Askari Bank for the credit approval and review process.

3.1.2 Factors involved in consideration of Credit Proposals The bank before granting any credit facility to its customers usually analyzes the following factors.

16

3.1.3 Optimization of risk return trade off The extension of credit facilities to a customer should focus on maximization of profitability while keeping risk at minimum. 5. 3.1.4 Five Cs of Credit The bank makes sure that there is sufficient assurance that the customer can and will pay back a loan. In this regard the management considers the five Cs of credit each time a loan is processed. They briefly are the following:

Character The integrity of the borrower is of paramount importance and can take precedence over the value of securities offered. The sponsors and management shall be the persons of undoubted integrity. Information should be obtained as to whether they have been known to keep their commitments or have been defaulters in respect of any facility allowed in the past by the bank or any other bank. It shall also be ensured that none of the concerns in which they have been actively engaged has been liquidated or has not a bad reputation. Independent enquiries from the market/suppliers, other banks, Government departments may be tapped by credit officers in this respect.

Capacity (Source of Repayment) While sanctioning a credit facility one of the prime concerns is the source of repayment. It is expected that the facility extended by the bank should be utilized in a productive manner for business purpose and repayment of the loan is through internal 17

cash generation of the entity. Repayment capacity of the borrower can be analyzed by its cash flow projections. Analysis of the cash flow projections would depict the inability / ability of the business to repay the advances as per repayment schedule through internal cash generation. Capital (Equity Contribution) The customer should have sufficient funds as his own stake in the business. Prudent bankers are reluctant to finance borrowers who do not invest enough of their own in the business. A credit proposal should, among other considerations, be judged from the angle of the borrowed funds to equity ratio to establish customers stake in the business. Collateral / Security To protect the interest of the bank against any risk, the credit facilities should be adequately secured. Security accepted should be enforced in accordance with the laws and practice of the country. The security ideally should be readily realizable and to which bank has unhindered access. Conditions Business and economic conditions such as strikes and acts of God are often outside our control and hard to quantify. However, the bank shall analyze the possible impacts of worst case scenario on the business of the borrower. 3.1.5 Purpose and amount of facility The purpose and amount of advance shall be within the policy of the bank and should be according to the external and internal regulatory requirements. It should be ensured that the advance is not to be used for any speculative purpose. In case of limited liability companies it 18

shall be established that the purpose of the facilities is within the scope of the business of the company as set out in the memorandum and articles of the company. 3.1.6 Ethics Askari Banks image can be affected by transactions in which it takes part. The bank sets the very highest standards of integrity and complies with all the ethical, regulatory, legal and tax rules established in the country. Askari Bank respects the rights of all external parties. 3.1.7 Settlement Risk This category of credit risk represents the potential loss in the event that the counterparty/borrower defaults prior to the settlement of the contract/obligations. The banks therefore keep in view the settlement risk and ensure adequate securities against them to protect the bank from the potential loss. 3.1.8 Credit Initiation Process in Askari Bank Credit initiation process in Askari Bank is briefly discussed in the following paragraphs.

A thorough credit and risk assessment exercise is conducted prior to the granting of loans and thereafter annually for all facilities. The result of this assessment is in a credit approval. The RM (Regional Manager) should be the first owner of the customer relationship and to ensure the accuracy of the entire CA (Credit Approval) submitted for approval at the time of initiation of proposal it must be ensured that all the banks lending guidelines are meticulously complied and due diligence on borrower/guarantors is carried out.

19

It is essential that RMs know and ensure compliances to Askari banks know your customer (KYC) and money laundering guidelines, and all the instruction circulars issued from time to time. Credit approvals should summarize the results of the RMs risk assessment and include, as a minimum the following details Amount and type of loan proposed Purpose of loans Loan structure Security arrangements

In addition the following risk areas should be addressed in CAs:

Relationship managers will be responsible for credit initiation and for accuracy of information in the CA package. Preparation of the CA package will involve the following broad steps:

1. Establish and maintaining contact with clients. 2. Receiving credit requests from clients. 3. Collecting required information from applicants and independent sources. 4. Analyzing financial and market position of applicants. 5. Assessing security and support being offered. 6. Negotiating appropriate pricing and terms and conditions. 7. Incorporating required information into respective forms. 8. Compliance with prudential regulation and credit policy. 9. Ensure that any errors omissions and deviations from the above are highlighted. 20

10. Assign CA reference numbers and ensure all relevant documents are attached e.g. BBFS (Borrowers Basic Fact Sheet detailing all the basic essential facts about the potential borrower). It is a regulatory requirement by SBP and contains information regarding the business, its sponsors and management. It is imperative that the Credit In charge attaches a correctly filled BBFS with each fresh proposal to avoid violation of SBP instructions. Credit Memo (Detailing the purpose of the credit ensuring it is aligned with the business of the customer and its needs) Risk Rating Scorecard. Risk rating sheet derives an risk rating for the borrower on the qualitative and quantitative information. Rating is a scientific method of assessing the credit risk associated with new credit applications. Statistical models derive predictive relationships between application information and the likelihood of satisfactory repayment. Models are empirically designed in this respect that is they are entirely developed from information gained through prior experience. Therefore, rating is an objective risk assessment tool opposed to subjective methods. CIB Report (Consumer Information Bureau Report which shows customers previous credit history and the current credit position of the customer) is obtained from the State Bank of Pakistan. This report sheds light on the veracity of the customer as it informs about the over dues or defaults by the business entity / directors with other lending organizations. For any credit request CIB not older than one month would be acceptable.

21

Trade and Credit Checking. Market checking and credit worthiness of the borrowers are one of the most critical decisive factor in credit decision making. In this regard the third party credit checking provides key information about the borrowers character, repayment behavior, market reputation, relationship with suppliers and history of business dealings.

Prudential Regulations (PR) Compliance Check off list. Adherence to Prudential Regulations is a mandatory requirement. In case there are exceptions to the compliance of the said regulations they should be clearly mentioned.

Financials of the client preferably audited and in case where exposure is more than 200 million (Proposed lending>200M) then financials should be audited by the firm having satisfactory QCR (Quality Control Review) conducted by the ICAP. (Institute of Chartered Accountants of Pakistan)

Furthermore AKBL has developed its own standardize credit line description which should be strictly followed by all the credit initiation units in order to bring uniformity in the credit initiation process. The ability to initiate and manage a credit relationship entirely depends upon the credit officers and RMs in depth knowledge of the customers and their businesses. The importance of customers knowledge cannot be further stressed upon. It is the responsibility of the credit officers and managers to gather as much information about their existing and potential customers as it is possible at the time of initiation of a relationship and keep it current at all times thereafter.

22

The credit application must also be submitted in other circumstances including but not limited to when deteriorating conditions make it necessary to reevaluate credit facilities extended to a client interim proposals for requests on one off basis, restructuring of facilities and for temporary extensions and for annual reviews.

1. Borrower analysis The majority shareholders, management team and group or affiliate companies should be assessed. Any issues regarding lack of management depth, complicated ownership structures or intergroup transactions should be addressed to mitigate the risk. 2. Industry analysis The key risk factors of the borrowers industry should be assessed. Any issues regarding the borrowers position in the industry, overall industry concerns or competitive forces should be addressed and the strengths and weaknesses of the borrower relative to its competition should be identified thereby giving the Credit Approval authority an in depth analysis and the power of foresight for any possible circumstance of default. 3. Supplier/ buyer analysis Any customer or supplier concentration should be addressed as these could have a significant impact on the future viability of the borrower.

23

4. Historical financial analysis An analysis of the minimum 3 years historical audited financial statements of the borrower should be presented. Where reliance is placed on corporate guarantors, guarantors financial statements should also be analyzed. The analysis should address the quality and sustainability of earnings, cash flows and the strength of the borrowers balance sheet. Specifically cash flow, leverage and profitability must be analyzed.

5. Projected financials Where term facilities are being proposed a projection of the borrowers future financial performance should be provided matching with the term of the loan, indicating an analysis of the sufficiency of cash flow to service debt repayments. Loans should not be granted if projected cash flow is insufficient to repay debts.

6. Account conduct For existing borrowers, the historic performance in meeting repayment obligations, obligors previous track record, trade and credit checking, payments behaviors, principal etc. is assessed.

7. Adherence to lending guidelines / prudential regulations Credit approvals should clearly state whether or not the proposed application is in compliance with banks lending guidelines and other regulatory requirements.

24

8. Risk mitigating factors Mitigating factors for risk identified in the credit assessment should be identified. Possible risks include but are not limited to Possession of collateral (Security against which loan is issued). physical damage to collateral Margin sustainability and or volatility Technology obsolete collateral High debt load overstocking or debtor issues Rapid growth acquisition or expansion. New business line expansion Management changes or succession issues Customer or supplier concentrations and lack of transparency or industry issues.

9. Loan structure The amounts and tenors of financing proposed should be justified based on the projected repayment ability and loan purpose. The long tenor or excessive amount relative to business needs may pose the risk of diversion in funds and may adversely impact the borrowers repayment ability.

25

10. Security Current valuation of collateral should be obtained and the quality and priority of security being proposed should be assessed. Financing is considered with two ways out first cash flow of the company and second secured against tangible, easily realizable security in the shape of land and building etc. loans should not be granted based solely on security. Adequacy and the extent of the insurance coverage should be assessed.

3.1.9 Credit Risk Management in Askari Bank Credit risk management will be viewed as an ongoing activity where credit risks are regularly identified and assessed. It determines the quality of credit portfolio and assists line management in optimizing risk reward tradeoffs. The role of risk management department is completely independent from credit initiation, there is minimal customer contact and the reporting is directly to the senior management.

An effective credit review program helps improve the quality of the banks loan portfolio, provide early warning of loan quality deterioration and contribute to profitability by reducing losses attributed to anticipated bad loans.

Committees originally approving the exposure forwards one copy of approved CA to risk management division for its review. Documents submitted for post facto review are as follows: 26

1. Complete set of approved CA package 2. Financials 3. Valuation reports 4. Call/Visit reports 5. Accounts turn over/statistics 6. Yield etc.

Post facto review includes: a. Identification of loans with credit weaknesses so that timely action can be taken to minimize credit loss; b. Assessment of adequacy of, and adherence to, loan policies and procedures and to monitor compliance with relevant laws and regulations.

Committees performing post facto review will identify the weakness/flaws in credit initiation approval process, credit maintenance, adequacy of security/support, utilization of credit etc. and highlight the issues and assign target date for regularization.

Loan review finding will be forwarded to respective approving units for their review and implementation of observations if any, at the time of approval.

I was given the role of Risk Analyst and my job description was mainly to identify and evaluate the credit risk in the credit approvals in the region and highlight them by reporting to my senior staff. I evaluated the following benchmarks while analyzing the credit approvals. 27

1. Borrowers Industry and macroeconomic factors By subscribing to investment research firms the credit risk review department monitors industry and economic up dates of the environment where the borrower operates. Any deteriorating scenario needs to be thoroughly evaluated and examined whether it will affect the borrowers ability to repay in the future and what are the steps he has taken to overcome these deteriorating situations.

2. The purpose of credit and source of repayment Thorough review of the proposal content of credit approval account being reviewed, referring to credit proposal of any other customer operating in that industry, general financing requirement of similar size entity operating in the industry and analyzing the business model of the counterparty, analyst establishes the genuineness, the purpose and adequacy of the limit amount and source of repayment.

3. The track record / repayment history of the borrower Analyst will review the repayment behavior with the Bank and also looks at the latest financial statements and e-CIB for apparent delayed payment/defaults.

28

4. The proposed terms / conditions and covenants along with adherence to internal policies and procedures, and applicable laws and regulations Review unit goes through the proposal clauses to assess if any additional clause needs to be included and also assess, from expectation report and financial statements, that customer is adhering to these conditions and covenants or not.

5. Assets / evaluate the repayment capacity of the borrower Analyst revisits the financial commentary in the CA. Proposal initiating authority should pursue for the latest financial statements. The Risk Analyst evaluates the financial worth of the borrower by using a range of techniques like ratio analysis, reviewing future cash flow projections etc.

6. Adequacy and enforceability of Collaterals (Security) Adequacy of collateral in terms of value and salability will be ascertained. Perfection of charge will also be ascertained from exception report.

7. Approval from appropriate authority Adherence to approving authority is also checked and should be as per the policies and protocol set by Askari Bank.

8. Adequate pricing Net return on capital as per yield statement must be greater than cost of funds. Comparison is also made with the Weighted Average Cost of Capital. 29

While conducting the post facto review of an account, Credit Risk Rating is also recalculated to verify the score assigned by the field. In case a difference arises during such review, the risk assigned by RMD prevails and in case, the RMD feels that the concerned branch has deficiencies in calculation of risk rating, it then instructs the relevant Area Office to review all ratings assigned by that branch and take appropriate remedial actions.

During the period I served, I reviewed many credit approval accounts on the concepts and procedures adhered by Askari Bank and were a great learning experience. My skills of using MS office really helped in enhancing my performance and i learned a whole lot of new things in MS office which further substantiated my skills in using it. I had the chance to see the practical implementation of the concepts studied in financial

30

Chapter 4
4.1 Financial Analysis

*Audited financial statements Assets

2012 2011 2010 2009 2008 ---------------------Rs in Millions*----------------------

Cash and balances with treasury banks 24,435 26,168 22,565 19,386 16,030 Balances with other banks 8,864 6,235 3,785 8,364 3,955 Lending to financial institutions 6,319 1,592 9,172 4,614 4,480 Investments 145,378 133,757 102,260 67,046 35,678 Advances 143,727 150,711 152,784 135,034 128,818 Operating fixed assets 8,841 9,349 9,988 9,262 8,266 Other assets 15,491 15,945 14,190 10,621 8,964 Liabilities Bills payable Borrowings' Deposits and other accounts Sub-ordinated Loans Deferred tax liabilities Other liabilities Profit and Loss Mark up / return / interest earned Mark up / return / interest expensed Provision against non performing loans Non Markup interest income Profit before taxation

3,700 2,756 3,090 2,946 2,585 8,373 17,273 25,555 19,300 15,190 306,937 291,503 255,937 205,970 167,677 6,987 6,990 5,993 5,995 2,996 118 83 86 334 13 7,252 7,374 8,081 4,833 4,759

32,402 22,974 2,342 4,117 1,730

32,766 22,700 1,630 2,903 2,413

27,329 17,937 2,319 2,800 1,273

22,587 13,554 2,324 2,707 461

18,393 10,651 3,825 2,707 461

31

Horizontal Analysis

Horizontal Analysis Assets Cash and balances with treasury banks Balances with other banks Lending to financial institutions Investments Advances Operating fixed assets Other assets Liabilities Bills payable Borrowings' Deposits and other accounts Sub-ordinated Loans Deferred tax liabilities Other liabilities Profit and Loss Mark up / return / interest earned Mark up / return / interest expensed Provision against non performing loans Non Markup interest income Profit before taxation

2012 Vs 2011 Vs 2010 Vs 2009 Vs 2008 Vs 2011 2010 2009 2008 2007 -17% 42% 297% 9% -5% -5% -3% 16% 65% 83% 31% -1% -6% 12% 16% -55% 99% 53% 13% 8% 34% 21% 111% 3% 88% 5% 12% 18% 20% 13% -69% -10% 28% 61% 62%

34% -52% 5% 0% 43% -2%

-11% -32% 14% 17% -3% -9%

5% 32% 24% 0% -74% 67%

14% 27% 23% 100% 2471% 2%

-2% -13% 17% 0% -97% 48%

-1% 1% 44% 42% -28%

32

20% 27% -30% 4% 90%

21% 32% 0% 3% 176%

23% 27% -39% 0% 0%

21% 23% -2% -41% -80%

Vertical Analysis

Vertical Analysis Assets Cash and balances with treasury banks Balances with other banks Lending to financial institutions Investments Advances Operating fixed assets Other assets Liabilities Bills payable Borrowings' Deposits and other accounts Sub-ordinated Loans Deferred tax liabilities Other liabilities Profit and Loss Mark up / return / interest earned Mark up / return / interest expensed Provision against non performing loans Non Markup interest income Profit before taxation

2012 7% 3% 2% 41% 41% 3% 4% 100% 1% 3% 92% 2% 0% 2% 100% 100% 71% 7% 34% 5%

2011 8% 2% 0% 39% 44% 3% 5% 100% 1% 5% 89% 2% 0% 2% 100% 100% 69% 5% 34% 7%

2010 7% 1% 3% 32% 49% 3% 5% 100% 1% 9% 86% 2% 0% 3% 100% 100% 66% 8% 33% 5%

2009 8% 3% 2% 26% 53% 4% 4% 100% 1% 8% 86% 3% 0% 2% 100% 100% 60% 10% 28% 2%

2008 8% 2% 2% 17% 62% 4% 4% 100% 1% 8% 87% 2% 0% 2% 100% 100% 58% 21% 35% 3%

33

Horizontal Analysis Assets Cash and bank balances with treasury banks decreased to -7% in 2012 as compared to 2011. Highest increase in balances with treasury banks can be seen in 2009 compared to 2008. Balances with other banks depict an increase of 42% in 2012 as compared to 2011 and shows 65% increase in 2011 as compared to 2012. The main reason behind this increase can be associated with high deposit rates. Lending to financial institutions increased by 297% in 2012 as compared to 2011. The highest increase during the previous five years due to high deposit rates offered to the bank. Advances decreased by 5% in 2012 as compared to 2011. In 2010 there was an increase of 13% from 2009. Recession in overall economy was the main factor for the current decline and banks policy to hold further advances due to increase in non-performing portfolio in textile and other sectors as a result of power shortfall. Therefore the bank has followed a cautious lending strategy keeping in view its risk appetite. The investment portfolio of the bank is showing a continuous rising trend .This is mainly because of banks policy to consolidate and invest funds in less risky portfolio. i.e. government securities. Operating fixed and other assets also depict a declining position mainly due to sale of assets in current and recent financial years.

34

Liabilities The major chunk of the liabilities portion relates to deposits and other accounts (Rs 306,937 Mn). Customer deposits as on Dec 31, 2012 registered a growth of around 5.3% over last year. The major increase was in current and saving accounts (CASA), which climbed by 14.5% while term deposits registered a decrease of 15.5%. The average deposit size almost maintained its level. It is a deliberate attempt by the bank to reduce its cost of deposit to improve profitability. Profit and Loss Operating profit of the Bank registered an increase of 4.1 percent in 2012 despite reduction in net interest spreads as cut in policy rates introduced by the SBP in the second half of 2012 negatively affected the net interest margins of the Bank. However, profit before and after taxation declined by 28.3% and 22.9% compared to 2011 mainly due to 46.8% increase in provision against non-performing assets, charged to the revenues provision against non-performing loans (NPLs) increased by 43.8% while provision / impairment on investments surged by 71.6%. The increase in provision against NPLs is attributable to (a) net reduction in the benefit of forced sale value (FSV) of collaterals amounting to Rs 597 Mn, (b) increase in NPLs by 12.1% and (c) further downgrading in the categories of classifications requiring additional provisions. Despite slowdown of trading volumes and dwindling margins on this business, the Bank managed to post a health increase of 41.8% in non-markup income in 2012 as compared to 2011. The main contributors of this increase were a one off dividend income with an increase of 258% and gain on sale of investments that increased by 121.9% over 2011.

35

Income from dealing in foreign currencies recorded an increase in of 14.5%. The fee and commissions and other income remained more or less at the last years level.

Vertical Analysis Common size Analysis, also called Vertical Analysis, or Component Percentage, or 100 percent Statements as the total assets are taken 100% in the balance sheet each individual item is stated as a percentage of 100%.Similarly in income statement the total revenue is expressed as 100% and other items are indicated as percentage of 100. Assets Cash and bank balances with treasury banks amounted to 7% of the total assets of the bank and this percentage is pretty consistent in the range of 7-8% during the five years period. Investments constituted 41% of the total assets of the bank in 2012. Substantial increase is noted in investments as it was only 17% in 2008. Advances also constituted 41% of the total assets in 2012 but it is a declining trend mainly due to recession in economy and nonperforming assets. Operating fixed assets and other assets depict same proportion in the range of 4-5% of total assets consistently during the past five years. Liabilities Deposits form the major chunk of the total liabilities 92% in 2012 and the same trend approximately is seen from 2008-2011 as well in the region of 85-90%. The major increase was in current and saving accounts (CASA), which climbed by 14.5% while term deposits registered a decrease of 15.5%. The average deposit size almost maintained its level. 36

Profit and Loss Mark up expense increased as a percentage of mark up earned during 2012 as compared to previous years proportion of total mark up earned mainly due to increase in deposit rates offered by the bank. Provision against non-performing loans was 7% as compared to 5% in 2011 which shows deteriorating position of non-performing assets. Non mark up interest income was 34% of the total markup earned during the year. Its trend remained consistent over the five years. Profit before taxation shows a declining trend of the markup earned. The main reason is due to increase in operating expenses as well as increase in provisioning of nonperforming loans. Taxation rate remained the same throughout the five years.

Ratio Analysis Profitability Ratio Net Profit after Tax Ratio = Earnings after tax / Interest earned 2012 Profit after tax Interest earned % 1,255 32,402 4% 5% 2011 1,628 32,766 3% 2010 943 27,329 5% 2009 1,108 22,587 2% 2008 386 18,393

37

Profitability Ratio
5% 4% 3% 2% 2% 1% 0% 2012 2011 2010 2009 2008 4% 5% 5% 3%

Interpretation: Profitability ratio of 2012 is 4% which is less than compared to 2011. But there is an increase from 2% in 2008.

Gross Spread Ratio

. Gross Spread Ratio = Net Mark-up Income / Gross Mark-up Income 2012 Net mark up income Gross mark up income % 9,428 32,402 29% 2011 10,067 32,766 31% 2010 9,392 27,329 34% 2009 7,743 22,587 34% 2008 7,743 18,393 42%

38

Gross Spread Ratio

50% 40% 30% 20% 10% 0% 2012 2011 2010 2009 2008 29% 31% 34% 34% 42%

Interpretation: Gross spread has decreased during the five years from 42% to 29%. Main factors behind this deteriorating trend are increase in deposits and increase in deposit rates during the five years. Return on equity

Return on Equity Ratio (ROE) =Earnings After Tax /Total Share Holder Equity

2012 Profit after tax Total shareholders equity % 1,255 17,677 7%

2011 1,628 16,509 10%

2010 943 14,821 6%

2009 1,108 13,143 8%

2008 386 12,035 3%

39

Return on equity
10% 8% 6% 4% 2% 0% 2012 2011 2010 2009 2008 3% 7% 10% 8% 6%

Interpretation: Return on equity decreased during the period as result of decrease in profit after tax from 2012 to 2011. The remaining periods also show a mixed trend for return on equity.

Return on assets

Return on Assets Ratio (ROA) = Profit after Tax / Total Assets

2012 Profit after tax Total assets % 1,255 353,056 0.36%

2011 1,628 343,756 0.47%

2010 943 314,745 0.30%

2009 1,108 254,327 0.44%

2008 386 206,191 0.19%

40

Return on assets
0.50% 0.40% 0.30% 0.20% 0.10% 0.00% 2012 2011 2010 2009 2008 0.19% 0.36% 0.30% 0.47% 0.44%

Interpretation: The return on assets of the bank for the year 2012 decreased by around 13bps mainly due to 22.9 percent decline in profits after taxation along with increase in average assets by 5.8 percent of the bank during 2012.

Activity Ratio Total Assets Turn over = Net Sale / Total Assets

2012 Net mark up income Total assets % 9,428 353,056 2.67%

2011 10,067 343,756 2.93%

2010 9,392 314,745 2.98%

2009 7,743 254,327 3.04%

2008 7,743 206,191 3.76%

41

Activity Ratio
7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 2012 2011 2010 2009 2008 2.67% 3.76% 2.93% 2.98% 3.04%

Interpretation: These ratios (Activity ratio) also known as efficiency or turnover ratios, measure how effectively the organization is using its assets. Total asset turnover shows that by investment of Rupee One in average total assets, of the entity how much sale is generated. There is decreasing trend in total assets turnover ratio from 2008 to 2012 due to growth in assets and reduction in net mark up income.

Earnings per share Earnings per share = Earnings after Tax / Total Outstanding Share 2012 2011 1,255 813 1.54 2.30 1,628 707 2010 943 643.00 1.47 2009 1,108 507.00 2.19 2008 386 406.00 0.95

Profit after tax Total assets Earnings/share

42

Earnings per share

3.00 2.50 2.00 1.50 1.00 0.50 0.00 2012 2011 2010 2009 2008 1.54 2.30 1.47 0.95 2.19

Interpretation: Earnings per share decreased during the year 2012 as compared to 2011 as a result of provisioning / impairment of non performing advances.

Credit Rating by External Agency Askari Bank has been assigned the long term rating of AA and short term rating of A1+ by the Pakistan Credit Rating Agency (Pvt) Limited (PACRA). The ratings reflect the Banks strong capital structure supported by sound profitability. Taking note of the fast changing banking dynamics, the management has put in place a well-conceived strategy to improve the Banks performance and ensuring its strong standing within the sector.

43

Chapter 5
5.1 Conclusion. In my view Askari Bank should introduce new products & services which will have to be introduced in the bank by analyzing the customer needs and market demands which will build the image and prestige of the Bank among the customers. Bank has lot of potential to become a leader in the banking sector.

The experience in working as an intern was very informative and I learned a lot about the functions and responsibility of oversight performed by the Risk Management Division of Askari Bank especially in credit risk area. I was given ample time and opportunity to learn and my supervisors were very satisfied with my performance.

I was also helped with the fact that my supervisors were very supportive and helped me all along in understanding any complexity I encountered. So, overall it was a great experience for me to work in Askari Bank and it helped me in nurturing my professional upbringing, which is still in its infancy stage as I am a full time student of business at the university.

This internship report compiles the experience gained by me during the course of my internship period with Askari Bank. I sincerely appreciate them for giving me this opportunity.

44

5.2 Recommendations This is a fact that in this universe nothing is perfect. In every field of life there are some pluses and minuses. But the best institutions are those, which learn from the changing environment and competition. So it is necessary for them to remain updated with the changing environment. I recommend the following improvements to askari bank , which if followed can improve the efficiency and performance of the bank.

Marketing department is very active but the feedback or the follow up of the customers should be improved.

The ATM service should be provided 24 hours. Because customers feel upset when most of the times the machine is out of order.

Complaints handling mechanism must be refined and clear policies and procedures be set out in order to smooth the process and provide quick relief to the customer complaining about any product. This will favorably increase the repute of the organization.

Further increase their network of branches to capture more business and increase their market share.

45

Low performing branches suppress overall network performance and reduce return on invested capacity. Appraisals should be linked directly to the performance targets of employees which automatically assigns them responsibility for the achievement of those targets. This in turn would increase profitability.

High performing employees must be applauded for their efforts and incentive schemes must be aligned with their achievements which would encourage the rest of the work force and motivate them to work more efficiently.

Decision makers count on having unimpeded access to the right information at the right time, in the right format. Therefore a mechanism of timely reporting to the senior management should be in place to help the decision makers in this dynamic and ever changing business environment.

More social gatherings and annual award ceremonies should be arranged and managers of different branches of Askari from all over Pakistan should be invited. This will boost the motivational level of the workforce.

46