FINANCIAL ANALYSIS:
INTRODUCTION
These section efforts have been made to cover all relevant aspects of the financial
performance of UBL. Overtime comparison and Common Size analysis are carried out
with the view to extract concrete conclusion to describe financial standing and
performance of the bank.
4.1 THE GROUP AND ITS OPERATIONS
The group consists of
a) Holding Company
United Bank Limited, Pakistan
b) Subsidiary Companies
 United National Bank Limited, UK
 United Bank AG (Zurich), Switzerland
 United Executers and Trustees Company Limited
 United Bank Financial Services (Pvt) Limited
4.2 BASIS OF PRESENTATION
The purchase and sales of UBL are restricted to the amount of facility actually utilized
and the appropriate portion of mark up there on. They strictly observe the rules and
regulations as applicable and promulgated by the GOP and or SBP.
4.3 SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition
Returns on advances and investments are recorded on accrual basis. Debts securities
purchased at premium or discount are amortized over their maturity periods.
Dividend income is recognized on accrual basis of declaration of dividend up to the yearend. Returns on classified assets are recorded on receipt basis, rescheduled and
restructured loans are treated in accordance to SBP regulations. Fees/commissions etc. on
Letter of Credit and others are recorded on accrual basis.

Advances
These items are stated net of provisions against non-performing loans as per SBP PR –
IIIV.

Investments:
UBL classify its investments as stated below;
a) Held for trading
b) Held to maturity
c) Available for sale-other than the above two types
In the light SBP regulations quoted securities are shown at market values and any
changes arising are taken to profit and loss account only upon actual realization.
Unquoted securities are valued at the lower of cost and break up value and difference is
charged to income. Provisions for diminution in the values are made after permanent
impairment, if any.

Lending/Borrowing from Financial Institutions
a) Sales under Purchase Obligation: These are reflected as liabilities and the charges
against these are recorded as an expense on pro rata basis.
b) Purchase under Resale Obligation: The differential of the contracted price and
resale price is amortized over the period of their contract and recorded as income.

Fixed Assets and Depreciation
a. Owned
Such assets are showed at their cost or revalued amount less accumulated
depreciation and impairment loss, if any. No depreciation is charged on freehold
land. During the year, amendment related to section 235 of the Companies
Ordinance 1984, surplus on revaluation can now be reversed to the extent of
incremental depreciation charged. As a result such differentials are now
transferred to retained earnings/accumulated losses as per the Securities and
Exchange Commission of Pakistan’s (SECP) clarifications.
Gains and losses on sale of fixed assets are included in income currently, except
that the related surplus on revaluation of fixed assets is transferred directly to
retained earnings/accumulated losses.
b. Leased
Assets under financial leases are stated at cost. The outstanding obligations are shown
as a liability. The finance charges are allocated to accounting periods in a manner so
as to provide a constant periodic rate of charge on the outstanding liability.
 Taxation
a) Current
Provision is based on the taxable income for the year or minimum tax computed on the
basis of turnover, whichever is higher.
b) Deferred
The bank accounts for deferred taxation on major timing differences, using the liability
method in respect of those timing differences, which may reverse in the foreseeable
future. Deferred tax debits are, however, recognized only if there is reasonable
expectation of realization of the amount.
c. Foreign Currencies:
Balances are translated into rupees at the applicable rate of exchange prevailing at the
balance sheet date or where applicable at contractual rates. During year transactions are
converted into Pak rupees applying the exchange rate at the date of respective
transactions. Gains and losses are included in income currently.
d. Deferred Cost and Lease Payments
These are amortized over a period of five years. Rental obligations under operating leases
are charged to profit and loss account as incurred.
4.4 RISK MANAGEMENT
The bank is primarily subject to interest rate, credit and currency risks. The bank has
designated and implemented a frame work of controls to identify, monitor and manage
these risks are as follow;

Currency Risk Management
For the purpose of efficient management of this risk, the group enters into ready, spot,
forward and swap transactions in the inter bank market and with the State Bank of
Pakistan in order to kedge its assets and liabilities and cover its foreign exchange
position.
 Credit Risk Management
Out of the total assets of Rs.183, 139.879M assets subject to credit risk amounted to
Rs.178; 958.323M. The bank’s major credit risk is concentrated in textile sector. To
manage it the bank applies credit limits to its customers and obtains collaterals. Credit
risk in the portfolio is monitored by the CRM who formulate appropriated policies and
procedures to ensure building and maintaining quality credits and efficient credit process.
The bank’s financial institution risk management unit assesses, recommends financial
institutions and also controls cross border/country risk.
 Interest rate Risk Management
The group is mainly exposed to mark up interest rate risk on its deposit liabilities and its
loans and advances and investment portfolios. The asset liability committee of the bank
reviews the portfolio of the bank to ensure that risk is managed within acceptable limits.
Most of the loans and advances portfolio comprises of working capital, which are
reprised on a periodical basis. The group’s interest is limited since the majority of
customer’s deposits are retrospectively reprised on a six monthly basis due to the profit
and loss sharing principles.
4.5 CONCENRATION OF CREDIT AND DEPOSITS1
The major class of business for UBL related to advances is the textile and private sectors.
UBL is advancing 27.2% to textile and 74.5% to private sector. Majority of the
depositors fails in the category of individuals, contributing 65% of the total deposits.
4.6 INVESTMENT PORTFOLIO2
UBL employs diversified investment portfolio. The bank invests its funds both in risk
free assets as well as in risky assets. This enables it to minimize its unsystematic risk to a
great extent.
UBL values its security holding on market value, in accordance with the guidelines given
in SBP circular. Any unrealized surplus/deficit arising on such revaluation is taken
directly to “Surplus/Deficit on revaluation of securities” in the balance sheet. Where an
active market is not available, securities continue to be stated at cost. Provision for
diminution in the value of these securities is made after considering permanent
impairment, if any, in their value.
Where securities are sold subject to commitment to repurchase them at a predetermined
price, they remain on the balance sheet and a liability is recorded in respect of the
consideration received in “Borrowing from Bank” or “Deposits” as appropriate.
1
UBL (2003) Annual Report
2
UBL (2003) Annual Report
Conversely, securities purchased under analogous commitments to resell are not
recognized on the balance sheet and consideration paid is record in “lending to financial
institutions” or “loans and advances” as appropriate.
4.7 PROFITABILITY3
The operating profit before provisions and write offs increased by 80%, where as the
profit before tax and extraordinary items increased by 62% as compared to last year. The
increase is mainly attributed to 14% increase in the net revenue from funds (NRFF), 10%
increase in fee and brokerage income and 75% reduction inn write offs/provisions for
non-performing assets as compared to year 2002.
Performing advances increased by Rs. 2 billion as compared to 2002 while NPAs
decreased by 53%. Presently NPA constitutes 7.4% as compared to 14.6% in 2002 of the
total loan portfolio. The branches reduced to 1077 from 1112. The bank handled over Rs.
96 billion of import and export business during the year, an increase of 24.7% as
compared to last year.
4.8 FINANCIAL ANALYSIS
Financial statements are the principal means of reporting the financial condition and
results of operations of a business entity. These statements are meant to assist various
parties in decision making who are interested in the activities of the business. These
statements are means to an end of helping stakeholders in decision-making. To improve
the quality of decision making proper analysis of these statements helps a lot. Financial
statements analysis helps in determining the financial conditions at any particular points
in time and effectiveness of operations of a firm during a specific period.
The various stakeholders of business are interested in the analysis of financials
statements. But the focus of interest of all is not the same. For example, creditors and
credit reporting agencies are interested in finding out the credit worthiness of the firm to
which they have extended credit or intend to extend credit. Short term creditors are
3
UBL (2003) Annual Report
interested in short term liquidity of the business and long term creditors are interested in
the long term cash flow which the firm can generate over the long period of time.
Investors are interested in the firm’s ability to sustain profitability over a period of time.
Government agencies analyze financial data for tax purposes. The internal users of
financial statements like management also analyze financial data for planning and
control.
4.8.1 COMMON SIZE ANALYSIS OF BALANCE SHEET
Common size analysis is an analysis of financial statements where the total assets divide
all balance sheet items of asset side and all credit side balances divided by all liability
items, and all income statement items are divided by net sales/revenues. Common size
analyses are extremely helpful to highlight changes over the time in financial
performance and financial conditions of the company. The table shows common size
analysis of the balance sheets for the years 2001, 2002 & 2003.
The common size analysis given in the table shows that there have been improvements in
the current assets in 2003 as compared to 2002, about 17%. But there has been decrease
in fixed assets of about 16%. The main reason for this change is increase in short term
investment showing a constant increase as a percentage to total assets. This implies that
the bank is concentrating now more on non-interest income and the interest rates are
constantly falling.
Short-term advances have shown a significant change of 15% whereas total advances
show a total change of only 6.3%. This is very significant to note that major decrease has
occurred in long-term performing and non-performing advances.
There is decrease in long term assets of about 17% which mainly cause the decrease in
long term advances which are about 13% and 6% decrease in long term investment.
On the liability side the total current liability has shown change of about 4%. The main
reason for which is increase in current deposits, which are about 6%. The long-term
liability of the organization is also decreased by 4%. The main reason for this is that fixed
deposits of organization are decreased by 6%, which shows that there is a slight change in
the organization’s position by decrease in fixed deposits.
Table:4-1 Common size analysis of consolidated Balance Sheet
assets
Cash/Bal. With Banks
lending to F.Is
Investment (ST)
Advances-Performing (ST)
Other Assets
Total Current Assets
Investment (LT)
Advances-Performing (LT)
Advances-Non performing (LT)
Operating fixed Assets
Deferred Tax Assets
Total L.T Assets
Total Assets
Liabilities
B/Payables
Borrowings ST
Deposits - Current
Lease and Others
Total Current Liabilities
Fixed Deposits
Other Long term Liabilities
Total LT Liabilities
Total Liability
Shareholder's Equity
Share Capital
Reserves
Accumulated Losses/Profits
Minority Interest
Surplus on revaluation
Total
2001
3609108
4370006
9190430
39489369
8641263
97782157
19388131
28477494
11813855
2864018
8297500
70840998
168623155
Rs in '000
2002
70463707
3627557
33883311
43632117
2641471
118177074
33623058
26423058
5739798
2831534
5026459
73643958
191821032
2003
35591280
19050791
29580252
89292490
3509351
177024164
25007413
10312297
3671991
3884990
5486357
48363048
225387212
Common size (%)
2001
2002
21.5
17.93
2.6
1.89
5.5
17.66
23.4
22.75
5.1
1.38
58
61.61
11.5
17.53
16.89
13.77
7.01
2.99
1.7
1.48
4.92
2.62
42
38.39
100
100
2003
15.79
8.45
13.12
39.61
1.55
78.54
11.09
4.57
1.62
1.72
2.43
21.45
100
1540592
4004130
102568752
8838842
116952316
38747422
21264831
49219400
166171716
1847025
174533
118167469
9986608
130175635
43998916
5212755
49211671
179387306
2991269
174533
152580240
5933743
161679785
37252204
10883720
48135924
209815709
0.91
2.37
60.83
5.24
69.36
22.98
6.21
29.19
98.55
0.96
0.09
61.6
5.2
67.86
22.94
2.72
25.65
93.52
1.32
0.07
67.69
2.63
71.73
16.52
4.82
21.35
93.09
22481680 5180000 5180000
3960453 4258947 4712569
-27282709
-722387
454403
1168264 1271700 1412932
2123751 2445466 3811599
24541439 12433726 15571503
13.33
2.35
-16.18
0.69
1.26
1.45
2.7
2.22
-0.38
0.66
1.27
6.48
2.3
2.09
0.2
0.62
1.69
6.9
Source: UBL (2003) Annual Report
Cash/Bal. With Banks
TOTAL CURRENT ASSETS
lending to F.Is
2%
20%
Investment (ST)
11% Advances-Performing
(ST)
50%
17%
Other Assets
FIXED ASSETS DISTRIBUTIONInvestment (LT)
Advances-Performing (LT)
8%
8%
11%
Advances-Non performing
(LT)
52%
21%
Operating fixed Assets
Deferred Tax Assets
SHORT TERM LIABILITIES
4% 2%
0%
B/Payables
Borrowings ST
Deposits - Current
Lease and Others
94%
LONG TERM LIABILITES
Fixed Deposits
39%
50%
11%
Other Long term
Liabilities
Total LT Liabilities
The trend of switching over the investing in share market or other businesses instead of
committing money in advances it is because of fall in interest rates.
The share capital of the company is static while in 2002 the share capital was decreased
because of losses faced by the company.
4.8.2 COMMON SIZE ANALYSIS OF INCOME STATEMENT
The common size analysis of income statement is given in the table. Which shows that
the UBL has been able to control its interest or mark up expense. As a result of decrease
in mark up expense as a percentage of total revenues the gross profit margin has shown a
trend of continuous increase. The increasing G/P Margin shows efficiency of the bank in
controlling cost of sales (Markup expense) and better strategy of pricing, products and
services.
The provision for non-performing loans has a decreasing trend making no provision for
non-performing loans and diminution in value of investment, which increases the profit
of current year. The reduction in provision is a good sign, which shows that the bank is
recovering its disbursed advances. It shows the good credit management of the bank.
There is a great increase in non-markup income, which is about 23%. Among its
individual components investment income has shown a large increase as a percentage of
sales.
Non markup expenses also show a rising trend in absolute amount though the common
size in percentages have shown a mixed trend due to the changes in revenue figures. The
non-performing expanses also increased to about 25%, which is a very high percentage,
but the other aspect of this is that it increased the efficiency and credit management of the
staff.
Like gross profit the net profit margin before tax has also increased with 24% rate. The
extraordinary item expanse has not occurred in 2003 that caused a slight increase in the
net income. The tax expanse is increased about 7% because of the increase in profit. Loss
brought forward from previous year is reduced by 14%.
The common size analysis of the UBL is clearly showing that the bank has shown a lot of
improvement in its performance. The organization shows profit for the first time in the
last 5 years which is a positive sign and it will build up the moral of the employees by
which they can work more effectively and efficiently increasing the performance of the
bank.
Table: 4-2 Common size analysis of consolidated Income Statement
Rs in Millions
ITEMS
Common size (%)
2001
2002
2003
2001
2002
2003
Mark up revenue
11468
11385
9269
100
100
100
mark up expense
6347
5476
1931
55.35
48.09
20.83
gross profit
5121
5909
7338
44.65
51.9
79.89
provisions and B/Debts
1263
746
564
11.02
6.55
6.08
Net Mark up Income
3858
5163
6773
33.64
45.34
73.07
Commission & Brokrage
1097
2008
2142
9.57
17.63
23.1
Dividends/Exchange and Others
1818
1514
2803
15.85
13.3
30.24
Total Non Mark up Income
2915
3522
4945
25.42
30.94
53.34
Total Income
6773
8686
11718
59
76.2
126.42
4669
5879
6639
40.71
51.64
71.62
Other Provision and Charges
632
51
556
5.15
0.44
6
Total non mark up Expenses
5301
5930
7197
46.22
52.08
77.64
Profit Before Extraordinary Items
1472
2756
4521
12.84
24.2
48.77
Extraordinary Items
-7200
25
0
62.78
0.21
Profits before tax
-5728
2781
4521
49.95
24.44
48.77
1739
1319
1704
15.16
11.59
18.38
-7467
1462
2818
65.11
12.84
30.39
6
10
21
0.06
0.09
0.22
19821
27283
722
172.2
210.64
7.78
0
25202
0
221.36
0
Surplus on revaluation of Assets
0
238
0
2.1
0
Transfer to Statutory Reserve
2
332
527
0.02
2.91
5.68
27283
722
454
237.9
16.34
4.9
Non Mark up Return
Non Mark Up Expense
Administrative
Taxation
Profit/Loss after tax
Share of Minority Interest
Accumulated Loss Brought Frd.
Adjustment against sh. Capital
Appropriation and Transfers
Accumulated Loss Brought Frd.
Source: UBL (2003) Annual Report
INCOME COMPOSITION
Total Revenue
Mark up Expense
20.83%
6.08%
30.39%
Bad Debts
Administrative Exp
18.30%
6.90%
Othere Exp
71.62%
Taxes
Profit after Taxes
4.8.3 FINANCIAL RATIO ANALYSIS
The user of financial statements finds it helpful to calculate ratios when they interpret
company’s financial statements. A financial ratio is simply one quantity divided by
another. Ratios focus on special relationship between two items of balance sheet, income
statement or one from each. Ratios make it easier to understand a specific relationship
between various items of financial statements then looking simply at the raw numbers
themselves. The number of financial ratios that might be created is virtually limitless, but
there are certain basic ratios that are frequently used, these ratios can be placed into six
different classes.
 Liquidity Ratio
 Asset Turnover Ratio
 Leverage Ratios
 Coverage Ratios
 Profitability Ratios
 Market Value Ratios
The calculation and interpretation of these ratios of financial statements of UBL are as
follows.
Table:4-3 Financial Ratio analysis
YEARS
Current Ratio
Asset Turnover
Debt to Asset
Debt to Equity
Coverage Ratio
Gross Profit Margin
Net Profit Margin
Return On Investment
2001
0.84
0.07
0.99
14.54
0.1
44.65%
-65.12%
-4.43%
2002
0.91
0.06
0.94
14.4
1.15
52.50%
12.69%
0.76%
2003 FORMULA
1.15 Current Assets / Current Liabilities
0.04 Markup Revenure / Total Assets
0.93 Total Debt / Total Assets
13.47 Total Equity / Total Assets
3.34 EBIT / Interest Expense
79% Gross Profit / Revenue * 100
30% Net Profit / Revenue * 100
1.24% Net Profit / Total Assets * 100
Return On Equity
-887.99%
Advances to Deposit
56.46%
Investment to Deposit
20.22%
Cash Ratio
9.59%
16.78%
46.74%
41.63%
9.23%
18% Net Profit / Total Equity * 100
45% Advances / Deposits * 100
28% Investment / Deposits * 100
28% Cash / Current Liabilities * 100
Source: UBL (2003) Annual Report
4.8.3.1 CURRENT RATIO:
UBL’s current ratio is increasing over the time. Higher the current ratio higher the ability
to meet the short-term obligations as they come due. The UBL’s current ratio is increased
by 0.18% as compared to 2002. this in turn decreases the risk of insolvency. The change
is occurring due to increase in short term investment and decrease in short term
borrowings.
Current Ratio
1.5
1
0.5
0
Current Ratio
0.84
0.91
1.15
1
2
3
0.84
0.91
1.15
Current Ratio
4.8.3.2 ASSETS TURNOVER:
This shows revenue generated per rupee investment in total assets. UBL’s assets turnover
ratio has shown a little decrease. This is because of increase in total assets with
proportionate increase in revenue. Banks have relatively low ATR capital, as they are
selective in advancing loans and generating smaller sales.
Asset Turnover
0.1
0.07
0.06
0.04
0.05
0
Asset Turnover
1
2
3
0.07
0.06
0.04
Asset Turnover
4.8.3.3 DEBT TO ASSET RATIO:
The analysis of total debt to assets ratio, there has been decrease of one percent as
compared to 2002 and 6% to 2001. in 2001 every rupee one of assets was being financed
by rupees 0.098 or debt and in 2002 it is 0.94 while in 2003 it is reduced to 0.93 worth of
debt per rupee of asset. Although the decrease is not large enough but it is a good sign for
bank’s creditors. The decrease may be attributed to the substantial decrease in borrowings
from financial institutions but the affect was weakened by an increase in bills payable and
other liabilities.
Debt to Asset
1
0.99
0.94
0.95
0.9
Debt to Asset
0.93
1
2
3
0.99
0.94
0.93
Debt to Asset
4.8.3.4 DEBT TO EQUITY:
This ratio measures how the company is leveraging its debt against the capital employed
by its shareholders. Analysis of debt to equity ratio indicates that the current position for
the debt to equity is that for every one rupee in equity provided by the shareholders the
bank has Rs. 13.5 as a debt. This shows that the bank is heavily relying on debt financing.
The reason for huge difference stated in the table is because of losses occurred in 2001
and 2002.
Debt to Equity
14.54
15
14.4
14
13.47
Debt to Equity
13
12
Debt to Equity
1
2
3
14.54
14.4
13.47
4.8.3.5 COVERAGE RATIO:
This ratio shows the number of times a company can cover or meet its financial charges
or obligations. One of the most commonly used ratio is the interest coverage ratio that
measures the number of times the income is available to pay interest charges. The UBL
interest coverage ratio has shown significant improvement in these three years. The ratio
is increased from 0.10 to 3.34.
Coverage Ratio
3.34
4
2
1.15
Coverage Ratio
0.1
0
Coverage Ratio
1
2
3
0.1
1.15
3.34
4.8.3.6 GROSS PROFIT MARGIN:
Gross profit margin is the difference between the revenue and cost of goods sold. Gross
profit is critical because it represents the amount of money remaining to pay operating
expanses financing cost and taxes. UBL’s gross profit margin per rupee has shown rising
trend in last three years. There is an increase of 27% in 2003 as compared to 2002. this
shows efficiency of the bank to control the cost of sales.
Gross Profit Margin
100.00%
50.00%
0.00%
Gross Profit
Margin
79%
44.65%
52.50%
1
2
3
44.65%
52.50%
79%
Gross Profit Margin
4.8.3.7 NET PROFIT MARGIN:
This ratio shows the profit that is available from each rupee of the sale. After all expanses
have been paid. Net profit margin is also showing an increasing trend. UBL has improved
net profit margin in the current years. The net profit margin has reached to 30% as
compared to 2002 in which it was only 12.69%. While in 2001 it was in negative figure.
It shows a good impact on the UBL’s Balance Sheet.
Net Profit Margin
50.00%
12.69%
30%
0.00%
Net Profit Margin
-50.00%
-100.00%
Net Profit Margin
-65.12%
1
2
3
-65.12%
12.69%
30%
4.8.3.8 RETURN ON INVESTMENT:
This ratio measures the profitability per rupee of investment in assets. UBL’s return on
investment has shown an improvement more than 100%. In 2003 the ratio is 1.24% while
in 2002 it was 0.76% and in 2001 it was in –ive figures. Although the assets have
increased but the operational recovery of the bank is main cause of increasing this ratio.
Return On Investment
5.00%
0.76%
1.24%
0.00%
-5.00%
Return On
Investment
Return On Investment
-4.43%
1
2
3
-4.43%
0.76%
1.24%
4.8.3.9 RETURN ON EQUITY:
This ratio shows the profit as a proportion of the book value of the common shareholders.
The return on equity is also shown a great deal of positive change. In 2003 the ratio is
45% while in 2002 it was only 16% and in 2001it was in negative figures.
Return On Equity
200.00%
16.78%
18%
2
3
0.00%
-200.00%
1
-400.00%
Return On Equity
-600.00%
-800.00%
-1000.00%
-887.99%
4.8.3.10 ADVANCES TO DEPOSIT RATIO:
This ratio shows the companies advances employed per unit of deposit. This ratio of UBL
over the recent three years shows a decreasing trend. In 2001 it was 56% while in 2002 it
was 46% and in 2003 it is 45%.
Advances to Deposit
100.00%
56.46%
46.74%
50.00%
0.00%
Advances to
Deposit
45%
1
2
3
56.46%
46.74%
45%
Advances to Deposit
4.8.3.11 INVEST TO DEPOSIT:
This ratio shows the company’s investment employed per unit of deposit. This ratio
increased in 2002 as compared to 2001 but in 2003 it again decreased. It is because of
industrial development factors in the country by which lending have been increased and
investment is slightly decreased.
Investment to Deposit
41.63%
50.00%
28%
20.22%
0.00%
Investment to
Deposit
Investment to Deposit
1
2
3
20.22%
41.63%
28%
4.8.3.12 CASH RATIO:
It is the ratio of cash and cash equivalent of current liabilities. It shows that how much
cash is available to meet the current liabilities. In 2003 this ratio has increased by 2%.
The balance of bank is increased with 20%. Although the current liabilities also increased
but the increase in cash is very high.
Cash Ratio
28%
30.00%
20.00%
0.00%
Cash Ratio
Cash Ratio
9.59%
9.23%
1
2
3
9.59%
9.23%
28%
10.00%