Ratio Analysis:

I have calculated twenty ratios , and data taken from the official webside of MCB Limited . Most
of ratios are based upen;

a. Profitability Ratios
b. Investment & Assets Quality Ratios
c. Risk Adequacy Ratios
d. Market Ratios
Sr# Profitability Ratios 2011 2010 2009 2008 2007
1 Profit before tax ratio 46.20% 47.89% 44.86% 54.61% 67.03%
11.68%
2 Gross Yield on Average Earning Assets 12.81% % 12.52% 11.07% 10.00%
3 Coverage Ratio 82.02% 77.13% 67.47% 54.17% 68.31%
4 Non interest income to total income 15.41% 14.54% 13.62% 16.90% 21.23%
5 Return on Equity (ROE) 26.23% 25.91% 27.35% 31.49% 37.66%
6 Return on average assets (ROA) 3.18% 3.13% 3.25% 3.60% 4.06%
7 Return on Capital Employed (ROCE) 26.23% 25.91% 27.35% 31.49% 37.22%
Investment & Assets Quality Ratios
8 Earnings per share Rs.23.23 Rs.20.18 Rs.18.53 Rs.18.39 Rs.18.26
9 Earning Assets to Total Assets Ratio 87.14% 87.15% 87.23% 85.70% 83.60%
Earning assets to Interest bearing Liabilities Times Times Times Times Times
10 1.57 1.62 1.57 1.58 1.48
11 Deposits to shareholder equity 6.22 6.24 6.02 6.32 6.43
12 Total Assets to Equity 8.28 8.2 8.34 8.49 9.04
Times Times Times Times Times
Market Price to book value ratio
13 1.43 2.78 3.02 2.02 2.4
14 CASA to Total Deposits 81.37% 81.44% 82.96% 81.32% 88.98%
Risk Adequacy Ratios
15 Capital Adequacy Ratio (CAR) 21.79% 22.07% 19.07% 16.28% 16.73%
16 Risk Weighted Assets to Total Assets 57.63% 58.17% 66.26% 74.28% 75.07%
Market Ratios
17 Dividend Yield ratio (based on cash dividend) 8.92% 5.03% 5.01% 9.14% 3.13%
18 Dividend Payout ratio 55.97% 56.32% 53.52% 51.08% 51.45%
19 Dividend cover ratio 1.94 1.75 1.68 1.6 1.46

20 Market Capitalization 20.40% 24.10% 22.35% 18.59% 17.50%

a. Profitibility Ratios:

There are seven ratios in my discussion on MCB’s profitibility ratio.

1. Profit Before Tax Ratio:

A profitability measure that looks at a banks profits before the bank has to pay corporate income
tax. This measure deducts all expenses from revenue including markup expenses and non-
markup expenses, MCB’s profit after tax ratio is flucuating since 2007-2011. In 2007, ratio was
67.03% but unfortunately in 2008 ,it was 54.61% . Its mean that due to inflaction ,SBP debt
policies markup & non-markup earned goes down which cause of excess in markupand non-
markup expense. And it keep decling from 44.86%,47.89%,46.20% in 2009, 2010 and in 2011
respectively.

2. Gross Yield on Average Earning Assets:

The main ingrediance in this ratio is yield on eraning assets. Earning assets include such things
as stocks, bonds, certificates of deposit, and generally anything that earns interest or dividends.
Yield is markup earned during the year throgh stocks, bonds, MCB certificates of deposit. Since
2007 till 2011, gross yield on average earning assets are increasing respectively. This indicates
that MCB’s investments return is increasing in these years.
For example in 2007, gross yield on average earning assets was 10% .and it goes till 12.52% in
2009. But in 2010, it slidely goes down to 11.68% which may be provision of loss in investments
of MCB. In 2011, this percentage get little better and goes up to 12.81% as compare to 2010.

This situation can be improve more better if MCB higher management will invest in mutual
funds which will expect to give higher rate of return rate than in MCB’s subsidiaries e.g. Arif
Habib Investments Limited, MNET Services Limited , MCB Financial Services Limited , MCB
Trade Services Limited, MCB Leasing Closed Joint Bank Limited etc.
3. Coverage Ratio:

The coverage ratio is used to determine how easily a bank can pay interest expenses on
outstanding debt. The ratio is calculated by dividing a bank's earnings before interest and taxes

(EBIT) by the bank's makeup expenses for the same period. The lower the ratio, the more the
bank is burdened by debt expense. When a bank's interest coverage ratio is only 1.5 or lower, its
ability to meet interest expenses may be questionable.

The ability to stay current with interest payment obligations is absolutely critical for a bank as a
going concern. While the non-payment of debt principal is a seriously negative condition, a bank
finding itself in financial/operational difficulties can stay alive for quite some time as long as it is
able to service its interest expenses.
MCB is a going concern serving since 50 years and it has capasity to stay even in recession for
50 years more. In 2007 coverage ratio was 68.31% which is a sufficient to pay interest expenses
on outstanding debt. But in 2008, this ratio was came down to 54.17% because of about 4%
increase in marup income which was 21% last year. But in 2009, coverage ratio went upto
67.47% because of betterment in markup earning. And it keep up till 77.13% in 2010 & in 2011
about 82.02%

4. Non Interest Income To Total Income:

Non mark up income is that income which have been earned by a fianacial institution by
Rendering different services e.g. Fee, commission and brokerage, divident and profit on
investment etc.

MCB non-markup income improved to Rs. 8 billion in 2011 from Rs. 6 billion in 2010,
increasing by 29%. Therefore, in 2011 The ratio of nonmarkup income to net revenue has
improved over the year to 15.41% from 14.54% in 2010. Fee, commission and brokerage income
of Rs. 4.9 billion continued to be the key factor to this increase and registered a growth of Rs.
792 million in 2011. Which was 13.62% in 2009 & 16.90% in 2008. Dividend income posted a
healthy increase mainly on account of mutual fund investments made during the year. Capital
gains registered a significant increase of 84% over 2010. Major components of the increase in
fee, commission and brokerage income were commission earned on remittances that increase by
Rs. 218 million, rise in corporate finance fee of Rs. 107 million, and Rs. 112 million increase in
commission on Bancassurance.

5. Return on Equity:

ROE of a bank's net income divided by its average stockholder's equity. The numerator of the
return on equity formula, net income MCB Net income after tax in 2007 was Rs. 15,266 million
with an increse 27% in 2008 with amount Rs. 15375 million .But because of average equity from
2006 which was Rs. 35657 million, ROE ratio is 37.66% in 31.49%in 2008. And it keep falling
in 2009 with 27.35% and in 2010, 25.91%.
But in 2011, due to incraese in shareholders equity about 87 % and 25% increase in Net incoem
after tax , ROE ratio has goes up to 26.23% .

6. Return on Average Assets (ROA):

ROA is the indicator of profitability of the business relative to the value of its assets, calculated
by dividing the net profit after tax to the average total assets for the period. Average assets in
2007 Rs, 376,297 million and Rs. 15,266 million therefore , ROA ratio was 4.06% which was
not so sufficient because its means that MCB total assets are not optimizingly utalize to earn
profit . Similarly, in 2008 3.60%, means its much less than in 2007. And it kept decrease in 2009
with 3.25% and in 2010 with ROA ratio 3.13% and But now in 2011 MCB management felt the
critical situation of this return over its total assets and they have pay attention by reducing its
personnel cost and admintrative cost than previous years. Therefore, in 2011 ROA has increase
with 3.18% wich is progressive within one year . But can also be grow with stateigcally.

The difference between return on equity and return on assets can be found in the denominators of
each formula. For return on assets, the denominator is average total assets and for the return on
equity formula, the denominator is average stockholder's equity.

7. Return on capital employed (ROCE):

As the primary objective of business is to earn profit, higher the return on capital employed, the
more efficient the firm is in using its funds. ROCE can be found for a number of years so as to
find a trend as to whether the profitability of the bank is improving or otherwise.

Return on capital employed ratio is considered to be the best measure of profitability in order to
assess the overall performance of the business. It indicates how well the management has used
the investment made by owners and creditors into the business. It is commonly used as a basis
for various managerial decisions.
MCB ROCE in 2007 was 37.22% which was a sufficient return on capital deployed in business.
But in 2008, ROCE had a decrease amount up till 31.49% which is about 5.73% less than 2007.

This fall in ROCE means that MCB is facing extreme business fluctuation due to debt policies
established by SBP e.g. decrease in debt rate. Return on capital employed establishes the
relationship between the profit and the capital employed. And due to recession in economy
financial institution has been greatly influenced and its result can be seen in 2009’s 27.35% . One
major decrease in ROCE is continuously increase in interest bearing liabilities of MCB which
were Rs. 232,398m in 2007 and in 2008 it Were Rs.240,470m ,and it keep increasing in 2009
with amount Rs. 283,369m , in 2010 305,902m, and finally in 2011 Rs. 362,843m.Which
ultimately effects adjusted profit for calculation of ROCE. the It indicates the percentage of
return on capital employed in the business and it can be used to show the overall profitability and
efficiency of the business.

b. Investment & Assets Quality Ratios:

Investment & Assets Quality Ratios includes the following ratios.

8. Earnings Per Share(EPS):

When you are considering the price of a stock, it will hardly give you any idea whether it is a
good stock to invest in or not. The current stock price will tell you at what price you can buy the
stock or what will you get after you sell the stock. The earning of the bank though is an indicator
of the financial standing of the bank it doesn’t give you a chance to compare one bank to the
other to judge which one is a better bank to invest in. Theoretically a bank with less number of
shares is more successful if compared with a bank that has got more number of shares and with
the same earnings. That is why EPS or earnings per share ratio is the ideal formula to compare
both the shares in a common platform.

MCB Net profit after payment to preferred shareholders in Rs. 15,266 m and weighted no. of
share were 836,236,476 and EPS for the year of 2007 is 18.26 means that on each share , MCB is
earning Rs. 18.26 which is not up to mark .The reason is MCB has a large no. of share e.g.
836,236,476

Moving forward, in 2008 EPS increases to Rs. 18.39, because Net profit after tax is Rs. 15,375m,
while weighted no. of share were remain same .Similarly in 2009 Net profit after tax was Rs.
15,495m which cause of increase up to 18.53 and in 2010 20.18 and in 2011 it was 23.23 which
keep increasing from last 4 years. There is no fixed criteria for ideal EPS. But generally it is
assume that it should be 50% of market value of share to ensure feasible investment for
investors.
9. Earning Assets to Total Assets Ratio:

An asset that produces money for a bank without any work needing to be done. Earning assets
include such things as stocks, bonds, certificates of deposit, and generally anything that earns
interest or dividends. In other words, any asset generating Interest or yielding Fee income-the
major source of a bank's net income. Included are loans and leases, but not Unearned Interest
income. MCB ‘s earning assets as well as its total assets are also increasing in these analytical
year e.g. 2007-2011 which cause of high earning assets to total assets ratio.
For Example, in 2007 this ratio was 83.60% which indicates that MCB earning assets are 83.60%
of total assets to earn earns interest or dividends. Similarly, in 2008 this ratio goes up to 18.39%,
which is considered as low increase but in 2009 18.53%, which is a better jump towards
betterment. As well as in 2010 earning assets to total assets ratio 20.18%, its which is due to
increase in earning assets . But the actual achievement has been seen in 2001 in which this ratio
increase in goes up 23.23%.

10. Earning Assets to Interest bearing Liabilities:

As I discussed early earning assets include such things as stocks, bonds, certificates of deposit,
and generally anything that earns interest or dividends. And Interest bearing liabilities includes
deposits excluding current accounts and borrowings help by MCB’s Balance Sheet.
This ratio defines the proportion between the earning assets and Interest bearing liabilities. This
ratio also indicates to plan how much its earning assets are rather than its liabilities to payoff. In
2007, earning assets were 1.48 times than 1.0 of deposits excluding current accounts and
borrowings. And in 2008, this ratio goes up because of high rate of increase in Earning assets
than interest bearing liabilities with 1.58 times. Similarly, in 2009 less increase in earning assets
are about 1.16times while the increase in deposits & borrowings are about 1.17 times therefore
ratio for 2009 is 1.57 times .As the nominator increases, the denominator is also increasing.

Moving forward in 2010 MCB’s earning assets to interest bearing liabilities was 1.62 which
increased about 1.03 times more than 2008 indicates that it earning assets capacity has been
increased which is a good sign for its growth. But in 2011 due to low increase in earning assets
rather than its denominator which is interest bearing liabilities the ratio is fall from 1.62 and fit in
1.57 times. Therefore, MCB management need to grow its earning assets to earn better ratio.

11. Deposits to Shareholder Equity:

Deposits & Other accounts includes Basic Banking Accounts, Current Accounts, Business
Accounts etc. During 2007 till 2011, total deposits & other accounts and shareholders figures has
been increasing every year. This ratio defines the ratio of deposits with shareholder’s equity. .
Deposits to Shareholder Equity ratio in 2007 was 6.43 times. Its mean that deposits are 6.43
more than 1 .0 portion of equity which shows success of Customer Care department of MCB
who has achieved their targets to bring new deposits for bank.

Afterword, in 2008 this ratio had been decrease about 0.11 times about 6.32 which is mainly
cause of simultaneously increase both amounts e.g. deposits & other accounts and shareholders.
As the nominator increases, the denominator is also increasing .Which is good for MCB financial
position. In 2009 ratio further decrease 6.02, also in 2010 Deposits to Shareholder Equity ratio
was 6.24 and finally decrease in 2011uptill 6.22 times respectively.
12. Total Asset to Equity:

Total assets of MCB includes the followings;

a) Cash & Balances with treasury banks

b) Balances with other banks
c) Lending to Financial Institutions
d) Investments
e) Advances
f) Operating Assets
g) Other assets

And shareholders equity is the investment done by general public and BODs etc through shares,
bonds.

13. Market Price To Book Value Ratio:

This ratio used to compare a stock's market value to its book value. It is calculated by dividing
the current closing price of the stock by the latest quarter's book value per share. Also known as
the "price-equity ratio". A lower P/B ratio could mean that the stock is undervalued. However, it
could also mean that something is fundamentally wrong with the bank. As with most ratios, be
aware that this varies by industry. This ratio also gives some idea of whether you're paying too
much for what would be left if the bank went bankrupt immediately.

The market price to book value ratio of MCB is continuously fluctuating during 2007 to 2011.
The main reason of this up & down is economic recession which got extreme in Oct, 2007
especially in Pakistan. Therefore, the Stocks markets of Karachi, Lahore, and Islamabad are
continuously facing shortfall of foreign investment in Pakistan. And ultimately it also effecting
MCB Market price of shares.
In 2007, market price to book value ratio was 2.4 times while Book value was 1.0 times. Its
means that market value in 2.4 times higher than book value. Furthermore, in 2008 this ratio falls
up till 2.02. Because the Bear Trend in Pakistan’s Stock Exchange. But in 2209, MCB
achievement can be seen in market value 1 which was 1.0 times more than 2008. In 2009 MCB

had tried to make its repute better in market and its market value goes up 3.02 times more than
book value. But unfortunately, this ratio can’t be maintained in 2010 and fall down about 0.24
times than 2009 and come 2.78 times only. , And finally in 2011 this ratio further down till 1.43
times which is 1.35 fall than the market value of 2010.

14. CASA to Total Deposits:

The CASA is the abbreviation of Current & Savings Account is the ratio of deposits in the
current and savings accounts of a bank to its total deposits. A high CASA ratio indicates that a
higher portion of the banks deposits come from current and savings accounts. This means that
the bank is getting money at low cost, since no interest is paid on the current accounts and the
interest paid on savings account is usually low.

Current and Saving Accounts are demand deposits and therefore pay lower interest rates
compared to term deposits where the rates are higher. Thus higher CASA ratio means that more
of the money deposited in the bank is in the demand deposits i.e. the CASA, thus bank is getting
the money at lower cost.

MCB‘s CASA in 2007 were 88.98% which is a tremendous achievement. It also indicates that
working capital of MCB will be better because current and saving accounts are demand deposits
and therefore pay lower interest rates compared to term deposits where the rates are higher. But
this achievement can’t be maintained for longer time and ratio fall about 8% with 81.32% in
2008.Further due to on-time attention of accounts department of MCB has again gained about
1.64% increase and ratio reached at 82.96%. But still it’s not a big achievement. And again in
81.44% in 2010 changes the increasing trend of CASA over deposits. In 2011 this ratio gets
more down 81.37%. The overall I can say that MCB CASA to deposit ratio is sufficient to
achieve its strategic targets.

c. Risk Adequacy Ratios:

15. Capital Adequacy Ratio (CAR):
It determines the capacity of the bank in terms of meeting the time liabilities and other risks such
as credit risk, operational risk, etc. CAR below the minimum statutory level indicates that the

bank is not adequately capitalized to expand its operations. The ratio ensures that the banks do
not expand their business without having adequate capital.

16. Risk Weighted Assets to Total Assets:

This sort of asset calculation is used in determining the capital requirement or Capital Adequacy
Ratio (CAR) for a financial institution. Usually, different classes of assets have different risk
weights associated with them.. Some assets, such as debentures, are assigned a higher risk than
others, such as cash or government securities/bonds. Since different types of assets have different
risk profiles, weighing assets based on the level of risk associated with them primarily adjusts for
assets that are less risky by allowing banks to discount lower-risk assets.

In 2007 RWA to total assets ratio was about 75.07% which means that risk weighted assets were
75% over total assets which is quite a higher percentage. While in 2008 this percentage had been
reduced up till 74.28% which is still a critical situation . This may be cause of highly inflated
economy and recession in banking and industrial sector cause less investment if MCB’s stocks
etc. But betterment in this percentage can be seen in 2009 in which it got low up till 8.02% less
than the previous year. And this progress and out of recession stage can be seen of MCB in 2010
in which it reached 58.17%. It indicates that management of MCB has focused on critical
situation of risk weighted assets and develop trust on stakeholders and willing to invest in MCB
stocks. But a slide decrease can be seen in 2011 with 57.63% respectively.

d. Market Ratio:
Market ratios define the good will of MCB and its earning on stocks.

17. Dividend Yield Ratio:

Dividend yield is the ratio of dividend per share to current share price. It is a measure of what
percentage an investor is earning in the form of dividends. Dividend yield is a measure of
investor return. While dividend payout ratio judges the amount of dividend in relation to the
bank's earnings for the period, dividend yield ratio provides a comparison of amount of dividend
in relation to investment needed to purchase its share. A bank might be paying out 50% of its
earnings but if the bank's current share price is too high the investors might not be attracted by
even the high payout ratio. A high share price will lead to low dividend yield and vice versa.

MCB‘s Dividend yield on cash basis means how much MCB is paying dividend to its
shareholders. In 2007 MCB was paying 3.13% which means that MCB paid Rs. 3.13 on Rs.
399.95 of its market price of share per share which is an average and disappointing on
shareholders’ point of view. Because shareholders are keen interested to receive more gain over
each share . But in 2008 this percentage had increased up till 9.14 % which is a tremendous
increase in one year. Moving forward in 2009 this ratio decreased about 5.01because market
price per share had decrease in 2009 with Rs. 219.68 rather than Rs. 125.81. But in 2010 the
dividend earned on each share was 5.03% which is almost same of 2009. And a great dividend
yield in cash in 2011 is 8.92% which is the higher yield since 2007-2011.

18. Dividend Payout Ratio:

The dividend payout ratio is the amount of dividends paid to stockholders relative to the amount
of total net income of a MCB . The amount that is not paid out in dividends to stockholders is
held by the Bank for growth. The amount that is kept by the company is called retained earnings.

In 2007, MCB’s dividend payout ratio was 51.45% which is sufficient ratio indicates the paying
power from net income of MCB. Similarly in 2008 this ratio goes down little but not too
much 0.37% and remain paid 51.08% and in 2009, 2.44% increase can be seen which means
that MCB is paying 53.52% on its net income after deducting all expenses which is a good ratio.

19. Dividend Cover Ratio:

20. Market Capitalization:

Market capitalization (or market cap) is the total value of the issued shares of a publicly traded
bank; it is equal to the share price times the number of shares outstanding. As outstanding stock
is bought and sold in public markets, capitalization could be used as a proxy for the public
opinion of a bank's net worth and is a determining factor in some forms of stock valuation.
Preferred shares are included in the calculation.

Market capitalization reflects the theoretical cost of buying all of a bank's shares, but usually is
not what the bank could be purchased for in a normal merger transaction. To estimate what it
would cost for an investor to buy a bank outright, the enterprise value calculation is more
appropriate.

It is important to note that market capitalization (sometimes called "market cap") is not the same
as equity value, nor is it equal to a bank's debt plus its shareholders' equity (although that is
sometimes referred to as simply the bank's capitalization).

Thus market capitalization is a better measure of size than worth. That is, market capitalization is
not the same as market value, which can generally only be assigned when the bank is actually
sold
 Balance Sheet Horizontal Analysis:
For five year trend analysis, I have taken 2011 as base year for comparing with other four year’s
financial performance.

11 Vs 11 Vs
11 Vs 10 11 Vs 08
Financial Position Statement 2011 2010 09 2009 2008 07 2007
Rs M % Rs M % Rs M % Rs M % Rs M

Assets
Cash and balances with treasury
banks 53123 17% 45407 37% 38775 34% 39631 34% 39684
Balances with other banks 2,281. 54% 1,479. -62% 6,010. -44% 4,043. -40% 3808
Lending to financial institutions 955. -78% 4,402. -68% 3,000. -77% 4,100. -9% 1051
Investments 316,652. 49% 213,061 89% 167134 228% 96,632. 180% 113089
Advances 225,801. -11% 254552 -11% 253249 -14% 262135 3% 218961
Operating fixed assets 22,008. 5% 20,948. 22% 18,015. 27% 17,264. 37% 16,024.
Other assets 32,413. 17% 27,706. 41% 23,040. 64% 19,810. 81% 17,869.

Total Assets 653,233 0 567,555 0 509,223 0 443,615 1 410,486

Liabilities
Bills payable 9,467. -8% 10,266 15% 8,201 -10% 10,551. -10% 10,479.
Borrowings 39,100. 52% 25,685 -12% 44,662 73% 22,664. -1% 39,407.
Deposits and other accounts 491,189. 14% 431,372 34% 367,605 49% 330182 68% 292098
Sub-ordinate loan - - - - - - - 100% 479
Deferred tax liabilities 6,295. 28% 4,934 97% 3,197 1,341% 437. 433% 1,180.
Other liabilities 18,380. 14% 16,092 16% 15,819 -14% 21,346. 57% 11,722.
Total Liabilities 564,431. 16% 488,349 28% 439,484 47% 385180 59% 355366

Net Assets 88,802. 12% 79,204 27% 69,740 19.% 58,436. 55,120.
Represented by;
Share capital 8,362. 10% 7,602. 21% 6,911. 33% 6,283. 0.0 6,283.
Reserves 42,186. 5% 40,163. 10% 38,386. 15% 36,769. 8.% 34,001.
Inappropriate profit 28,366. 32% 21,416. 80% 15,779. 209% 9,193. 79.% 5,131.
Surplus on revaluation of assets
- net of tax 9,887. -1% 10,024. 14% 8,664. 60% 6,191. -36.% 9,706.
88,802. 12% 79,204. 27% 69,740. 52% 58,436. 6.% 55,120.

Analysis of Trends:
Assets
Total assets increased by 15% during 2011 over 2010, primarily based on deposit growth.
Increase in balance sheet volume is a healthy trend apparently, but it needs further investigation.
The balance sheet figures are reported on the day, books are closed. These figures are not based
on averages; neither financial statement discloses changes during the year. Specific transactions
may be carried out on the day to show favorable balances. For instance on the day of closing of
accounts, paying off bills payable will improve the working capital or current ratio. In the
following paragraphs assets have been analyzed segments wise.

1. Cash and balances with treasury banks:

This head of balance sheet experienced a phenomenal (base year 2011) increase of around 17%
as compared to 37% which is decrease in the year 2009.While in 2008, cash and balances with
treasury banks it was 34% and about 33.6% almost 34% decreased than 2011.

Apparently, cash and balances are increasing since 2007 -2010 in 2011.But it’s not a better
utalization of cash resources. Because this is a statutory practice by commercial banks to deposit
extra amount of cash with State Bank of Pakistan. Branches deposit their extra cash with head
office, which subsequently deposits this amount with centr.al bank wallets, if not utilized by the
Bank in the mean time.

2. Balances with other banks:

The amount standing at around 2281 million of Rupees has increased by 54% in 2011 as
compared to decrease in 2009 by -62%. Which is a not satisfactory indication. The account is
chiefly held with foreign banks both in form of current account and deposit account. The account
is utilized for import and export transactions with foreign banks. The balances with other banks
in normal circumstances carry an interest .the services funded by these accounts have some
worth. The Reduction in this account can be associated with watchful economic activity because
of depending international recessionary trends.

Further in analysis of MCB’s balances with other banks for 2011, decreased as compare to 2008
by 44%, and 2007 by 40%. This shows that MCB has decreasing its balance with other treasury
banks for utilization of import and export transactions with foreign banks. Which is not so good.

3. Lending to financial institution:

Lending to financial institution has increased in 2011 by 78% as compared to 68% decrease in
2010.Simiraly in comparing with 2011, lending to financial institution balance is continuously
decreasing 77% from 2008, and 40% from 2007.

So lending to financial institutions is highly liquid and very serious because it is also a kind of
short term investment because MCB has received interest income from this account. Therefore,
need to reaffirm the Bank’s conservative policy of credit.

4. Investments

Commercial banks investments essentially include government debt securities, to minimize

credit risk. In Pakistan the capital and money markets have not matured enough to generate funds
for projects. The investments have been categorized by their classes:

i. Available-for-sale Securities.
ii. Held-to-maturity Securities.
iii. Subsidiaries.
iv. Associated Undertakings.

Investments at the face of balance sheet amounted to around Rs 316,652 million in 2011.
Investments increased by 49% in 2010 as compared to an increase of 89% in 2009. But as
compare 2008, MCB has jumped over 228% increase from 2008 which a highest jump in these 5
year’s analysis and similarly in 2011 MCB investments has been increase about 180% from
2007.

Almost 85% of the investments are held in available-for-sale securities, which show the strong
liquidity position of the Bank. These securities include Market Treasury Bills, Federal
Investment Bonds, Pakistan Investment Bonds, Listed TFCs, Shares in Listed Companies etc.,
which are generally, considered very safe mode of investment. Among these securities T-Bills
are highly liquid. Interest rate carried by these securities is not very high but the main concern is
the liquidity sought for prudent banking Securities given as collateral has evidenced a sharp

There is no out of usual provision for diminution in the value of investments, which indicate the
overall stability in the money market. Among the securities held-to-maturity, half of the lot
include TFCs, Debentures, Bonds, PTCs, which carry as high as 18% interest rate.

The new entry in subsidiaries was introduction of MNET Services (Pvt) Ltd. it is the second
technological initiative in a row, after the successful operation of ATM network. Investment in
associated undertakings remained unchanged.

5. Advances:

The total amount of advances stood at Rs. 225,801 million in 2011. Advances decreased 11%
from previous year 2010, which was almost similar decease from 2009. But the serious point in
the decreasing percentage of 2011 advances than 2008 which is about 14% .

The only increase has been seen in 2011 then to compare with the advances of 2007 by 3%.

The decrease can be attributed to two major factors. One was the decrease in demand for credit
from the manufacturing and export clients due to the situation prevailing after offer the govt.
good economic policies (increase in foreign exchange reserves). And second was the lower
steadiness demand for seasonal financing. Short term advances are more than Long-term
advances by Rs. 50 billion. MCB can predict the lower pace of long-term development projects
from this piece of statistics.

The bank further needs to low MCB the mark-up rate, broaden their deposit base, and a bit
relaxation in conservative credit policy.

6. Operating Fixed Assets:

MCB operating assets are

Land (Free & Leasehold)

Buildings (Free & Leasehold)
Computers & Machinery
Vehicles

Operating fixed Assets in 2011 has been increased by 5% from Rs. 20,948 million to Rs. 22,008
million as compare to 2011. But since 2009, the increase in fixed assets is 22%, 27% from 2008

and 37% from 2007 respectively. The reason of this higher increase in operating foxed assets is
MCB has expand its network of over 900 branches, over 750 of which are Automated Branches,
over 222 MCB ATMs in 41 cities nationwide and a network of over 12 banks on the MNET
ATM Switch. Therefore, the need of operating assets are essential. But the negative aspect of
increase in fixed assets is the blockage of money.

7. Other Assets:

Other assets increased by 17% in 2011 from previous year, as compared to an increase
41% in the previous year 2009. The major portion of this item comprises of taxation and
Income or markup accrued on advances and investments. No explanation could be found
Regarding the amount of taxation, which is Rs12,058 million of worth. This amount may
Including advance taxes paid and tax rebates and refunds. But as compare with 2008 MCB
has increased other assets 64% and 81% from 2007. This comparison worth more because
From these assets, non-mark up income will generate.
Liabilities:
Total Liabilities:

Total liabilities increased by 16% in 2011 over 2010, while compare 2011 with 2009 by 28%.
But the higher rate of total liabilities increase about 47% and 59% in 2008 and 2007 as compare
to base year. MCB management should be focus on higher velocity.

1. Bills Payable:

Bills payable decreased in 2011 by around 8% as compared to 2010 which was 15% increase in
the year of 2009. It shows an improved working capital of the business. Bank is able to pay its
short term liabilities at time. Similarly, in comparison with the 2008, MCB has reduced its bills
payable up to 10% and almost same decrease as compare to 2007.Which is a healthy sign to pay
off its current portion of liabilities.
2. Borrowings from financial institutions:

Borrowing from financial institutions has increased by 52% in 2011 as compared to an decrease
of 12% in 2009. Further segmentation reveals that the major increase happened in repurchase
agreement borrowings i.e. around Rs. 8 billions. The account is basically a contra account of
repurchase agreement lending and the amounts in these accounts fluctuate very rapidly.
Borrowings from State Bank of Pakistan under the head of export refinance were the second
major account to undergo the increase of around Rs. 3 billions. This account is used for
extending the export finance to customers, as giving the right to SBP to recover outstanding
amount from the Bank by directly debiting current account maintained by the Bank with the
SBP. The increase reveals high demand for export refinance by customers due to higher activity
in foreign trade.

On the other hand, borrowings of MCB in 2011 are more about 73% than 2008. While in 2007
MCB has only decreased 1% in the year of 2011.

3. Deposits and Other Accounts:

A profound increase in deposits is the main cause of increase in Balance Sheet footings. Deposits
and other accounts MCB are at Rs491,189 million in 2011 , increased by 14% from previous
year. Moving forward, 34% increased has been noticed in 2011 as compare to 2009. For a
banking concern it is a norm to have such a composition of balance sheet.

Most of the deposits i.e. 93.4% are held by customers in local currency. Deposits in local
Currency have increased move as contrary to the slight increase in foreign currency deposits
during previous years. Major portion of deposits comprises of saving deposits i.e. 60% of total
deposits. Fixed deposits are 15% and current accounts are 23% of total Deposits. It is important
to note that deposits increased despite a decrease in PLS rates. But deposits of MCB are more in
2011 than 2008and in 2007 by 49% and 68% respectively. The major increase has been
evidenced in saving deposits, which can be attributed to targeted sales of products like ATM, and
some attractive saving schemes.

4. Sub-ordinate Loan:
Only in 2007 loan to sub-ordinate has been recorded which was about Rs. 479 Million but as
SBP has been restricted the loan policy for sub-ordinates. Therefore, this amount was recovered
in 2008 and till then there is no more transaction since 2008.

5. Deferred tax Liabilities:

An account on a bank's balance sheet that is a result of temporary differences between the bank's
accounting and tax carrying values, the anticipated and enacted income tax rate, and estimated
taxes payable for the current year. This liability may or may not be realized during any given
year, which makes the deferred status appropriate.

Deferred tax liabilities in 2011 has increased about 28% than 2011 which is a normal percentage
because more tax means more profit. A deferred tax liability records the fact that the bank will,
in the future, pay more income tax because of a transaction that took place during the current
period, such as an installment sale receivable. But stunning point is the comparison between
figures of 2009 and 2011 by increase 97% 2008 Vs 2011 increase by 1341% and for 2007 it was
only Rs. 1180 million. Which is alarming condition for MCB. It shows that management of
MCB is wrongly editing their actual accounts which cause of highest difference between tax
carrying values.

6. Other Liabilities:

Other liabilities includes interest payable in local currency, interest payable in foreign currency,
accrued expense, unclaimed dividend, staff welfare fund, insurance payable on assets, provisions
for employees compensated benefits etc.

As compare to 2010, MCB other liabilities increased by 14% which a normal course of business.
Similarly, with 2009 comparison of 2011, the percentage of other liabilities has been increased
By16%. But in 2008, other liabilities were Rs. 21,346 million while in 2011, Rs. 18,380 million.
So beneficially decreased in 2011 Vs 2008 is 14%.

1. Share Capital:

The amount of share capital was at Rs 8,362 million in 2011, with increase of 10% from
previous year. Further 21% increase in 2011 in compare with 2009. And about 33% increase of
base year in 2008. The only reason for the increase in share capital is the issue of Rs. 220 million
worth of bonus shares during the year. But in 2007 there was no change in share capital.

2. Reserves:

MCB reserves includes share premium, exchange translation reserve, stator reserves and general
reveres. The reserves of the bank registered an increase of only 5% in the year 2010 than 2011
which is least increase in reverse. While in the year 2009, MCB had seen an increase of 10% in
the bank’s reserves. Similarly 15% has been recorded in 2008 as compare to 2011 and in 2007 its
8% increase. MCB management can increase this percentage .

3. Unappropriated profit:

The Unappropriated profit for the year 2011 registered an increase of 32% with the amount Rs.
28,366 compared to 2010, but in 2009 , 80 % increase in unappropriated profit make a
remarkable increase .

But the situation of 2011 is much better than 2008 percentage which now increased 209%.

While in 2007 amount was less than 2011 with was about 79% that is also satisfactory but least
than other years.
4. Surplus on revaluation of assets:

The bank shows MCB a surplus of Rs. 9,887 million at the end of the year 2011, after the
revaluation of its assets; an decrease of 1% over last year’s figures. But in compare with 2009,
14% increase in 2011. The fixed assets of the bank showed an increase of Rs. 165.3 million
while the securities held by it registered a significant increase of Rs. 4.8 billion in their value.

Moreover, 60% increase has been seen in 2011 than 2008 and 36% decrease than 2007. The
revaluation of assets was carried out by Iqbal Nanjee & Co., Valuation and Engineering
Consultants on the basis of their professional assessment of the market values.
 Five Years’ Horizontal Analysis of Profit & Loss Account 2007-2011:
For five year trend analysis, I have taken 2011 as base year for comparison with other four year’s
Profit & Loss Account.

2011 (Base
2010 P1 2009 P2 2008 P3 2007 P4
Year) P0

Rs M % Rs M % Rs M % Rs M % Rs M

Mark-up earned 68,147. 24% 54,821. 32% 51,616. 70% 40,044. 114% 31,787.

Mark-up expensed (23,620) 31% (17,988) 49% (15,837) 104% -11561 200% (7,866)

Net mark-up income 44,526. 21% 36,834. 24% 35,779. 56% 28,483. 86% 23,921.
 -
Provisions & write off (4,168) 13% (3,685) 44% (7,465) 3% (4,042) 36% -3,061
Net mark-up income after
provisions 40,358. 22% 33,148. 43% 28,314. 65% 24,441. 93% 20,860.

Non-mark-up income 8,112. 29% 6,265. 44% 5,643. 40% 5,791. 26% 6,448.

Non-mark-up expenses (16,987) 29% (13,160) 57% (10,801) 103% (8,365) 183% (6,000)

Profit before taxation 31,483. 20% 26,253. 36% 23,155. 44% 21,868. 48% 21,308.

Taxation (12,058) 29% (9,380) 57% (7,660) 86% (6,493) 100% (6,042)

Profit after taxation 19,425. 15% 16,873. 25% 15,495. 26% 15,375. 27% 15,265.

Discussion on Horizontal Analysis of Profit & Loss Account 2007-2011:

1. Mark-up Earned:

MCB as a commercial banks renders financial services such as loans granted to individual and
corporate customers, project financing, working capital financing etc. So by these services, MCB
charges mark-up which is its earning.
Mark-up earned by MCB in 2011 is Rs. 68,147 million which increase 24% than the previous
year with Rs. 54,821. In economic recession, 24% is considered to be a normal increase. Because
in comparison with 2009, 2011 mark-up earning is 32% respectively. This means that financial
year 2011 is quite beneficial year for MCB which shows an increase in 2008’s earning about
70% with amount Rs. 40,044 million that was a lower figure than 2011.But the efficiency of
MCB can be shown in comparison with 2007 with the highest increase in 2011about 114%.

2. Mark-up Expenses:

Mark-up expenses cause of current & saving deposits and borrowings. Since 2007 till 2011 the
amount of CASA and borrowings are increasing. Therefore, mark-up expenses are also
increasing in the normal business routine.

When to compare with base year 2011, mark-up expenses are Rs. 23,620 million with increase
about 31% than 2010. The reason of this increase is borrowings in 2011 about 52% more than
the previous year. Similarly, because of increase in 34 % in deposits in 2011, mark-up expense in
49% more than 2009. Futher, simultaneous increase in deposits & borrowings in 2011 in
comparison with 2008 about 49% and 73% , mar-up earning has gone up till 104% in 2011.

While in 2007, mark-up expenses were 200% less than 2011. Which was the highest percentage
till 2007.

3. Net Mark-up Income:

The difference between mark-up earned and mark-up expense is the net mark-up income. As in
my above mentioned discussion on mark-up earned and mark-up expense, the rate of increase of
both elements are continuously increasing. So consequently, the net difference will also be
higher than previous year.

In comparison of 2011 with 2010, net mark-up income has been increased by 21%. While in
2009, 24% increase has been noticed in 2011. Similarly, 2011 Vs 2008 56% increase in the net
mark-up income has been found. Lastly in 2011 Vs 2007, Rs. 44,526 million and 23,921 million
shows 86% increase in net mark-up income.

4. Provision & Write-off:

Both items are the kind of expense but it is an estimated figure which may be fluctuated .A
provision is an expense set aside as an allowance for bad loans, customer defaults, or terms of a
loan have to be renegotiated etc are called provisions. A write-off may usually be deducted from
one's taxable income.

In highly inflationary and recession infected economy like Pakistan, the amount of provisions
and write off will automatically fluctuated. Similarly this happen with MCB. In comparison with
base year 2011, the amount of provisions and write off is 13% increase than 2010. Which cause
is obviously inflation rate fluctuation. But during 2009, provisions and write off were higher than
2011 from Rs. 7,465 million and in 2011 this figure came down to Rs. 4,168 million and reduce
44% than 2009. Moving on, the provisions and write off are more in 2011 than 2008 with
increase of 3%. Which is very normal and part of business. But 2011 figure of provisions and
write off seems more than 2007with an increase of 36%.

5. Net Mark-up Income after Provision:

After deduction Net mark-up income from provisions and write off, we get net mark-up income
after provision. Obviously if Net mark-up income & provisions and write off, will be more year
by year, In comparison with 2011, Rs 7,210 million has been increased than 2010 with 22%.
Which means that after deducting expenses, MCB has gained Rs.40,358 million which indicated
a healthy sign of going concern. But major increased can be seen in 2011 as compare to 2009
with 43% goes up and this increase strengthens of MCB. While in 2008, Rs. 28,314 million were
the output after deduction Net mark-up income from provisions and write off which least than
2011 about 65% and 93% more than 2007 respectively. No doubt MCB is a successful
organization.

6. Non Mark-up Income:

Non mark-up income is the income/incomes earned by MCB by rendering non financing services
to its customers. Thriving on its vast pool of low cost deposits and higher operational efficiency,
MCB Bank Limited the country’s fourth largest bank by asset size, rewarded its shareholders
with fat bottom-line. The growth in profitability stems from a combination of higher non mark-
up income. In 2011, MCB earned increased by 29% than 2010 which is a distinguished increased
in just one year. Similarly, 2011 non mark-up income is more in comparison with 2009‘s low
amount Rs. 6,265 million than Rs. 8,112 million 44% more. But in 2011 Vs 2008 this ratio
became down to 40% and 26% decrease in 2011 Vs 2007 than previous year.

7. Non Mark-up Expenses:

Non mark-up expenses includes administrative expensive e.g. salaries, utilities bills, general
expenses, rents, repairs etc. MCB has a solid foundation of over 50 years in Pakistan, with a
network of over 900 branches, over 750 of which are Automated Branches, over 222 MCB
ATMs in 41 cities nationwide. Therefore, Non mark-up expenses will also be increase. In 2011,
29% expenses increase than 2010. Which is quite higher in one year . But on the other hand, it
cause of more business for MCB. But as compare to 2011 Vs 2009 Rs. 13,160 million is much
more than 2009, which increased about 57% which is stunning and need management’s
attention. Similarly in 2008, Non mark-up expenses were 103% less than 2011 and 183%
increased from 2007 which is highest increase portion in 5 years analysis.

8. Profit Before Tax:

A profitability measure that looks at a bank's profits before the bank has to pay corporate income
tax. This measure deducts all expenses from revenue including interest expenses and operating
expenses. MCB has earned Rs. 31,483 million profit before tax in 2011 which is 20% more than
2010. Moreover as compare to2011, year 2009 earned 36% less profit after tax. Similarly 2008
profit before tax was Rs. 23,155 million which is 44% of 2011 earning. But true achievement

can be seen in 2011 percentage when to compare with 2007 which were Rs. 21,308 million and
48% of 2011.

9. Taxation:
A means by which governments finance their expenditure by imposing charges on corporate
entities. Governments use taxation to encourage or discourage certain economic decisions. When
taxes need to be paid out by the bank, the bank will record the amount of taxes in a payable
account. Since 2011-2007 the income and expenses are almost more so in result taxation expense
will also be more. For example in 2011 taxation expense is Rs. 12,058 million which is more
29% than 2010. This sudden increase is quite more but also a healthy sign because more the
income, more the tax. Similarly in 2009 the amount of tax expense is 57% less than 2011. And in
2011 the amount of tax is 86% more than 2008 which was Rs. 6,493 million and almost 100%
more than 2007 taxation expense has been recorded in 2011.

10. Profit After Tax:

Profit after tax mean the Net profit after deducting all expenses including administrative, mark-
up expenses and tax etc. In other words, a profitability measure that looks at a bank's profits
before the bank has to pay corporate income tax. This measure deducts all expenses from
revenue including interest expenses and operating expenses, but it leaves out the payment of tax.

MCB has earned highest profit after tax as can be seen since 2011-2007. For example in 2011
Rs. 19,425 million has been earned that is about 15% more than the previous year which is a
great achievement and indicates the growth of MCB. Similarly in 2009 profit after tax is less
than the base year about 25%. And MCB profit after tax is continuously decreasing than 2011 in
2008 and 2007 by 1%. In other words, MCB has earned in 2011 most higher profit after
taxation.

Vertical Analysis of Balance Sheet:

For The Period of Financial Years 2011-2007

Discussion on Analytical Trends of Balance Sheet

For the Financial Years 2011-2007:

a) Assets:
Here in vertical analysis, total assets of each year has been taken in comparing the changing
trends. Here point is to be considered that this percentages are calculated not in compare of each
other’s amounts but this comparison is between the concerned account and same year total
assets.

1. Cash and Balances with treasury banks:

In 2011, cash and balances with treasury banks are 8.1% of to total assets. Which is a sufficient
amount and about Rs. 53,123 million. While in 2010, the figure is 0.1% down from 2011
about Rs. 45,407 million . Similarly, 2009 maintained the lowest percentage of cash and
balances with treasury banks which is 7.6% of its total assets. While in 2008 and 2007, this
situation was quite better than the previous years. Means that in 2008, cash and balances with
treasury banks were 8.9% and in 2007 9.7% of their total assets. There is no fixed percentage
for cash and balances with treasury banks but every bank must don’t have cash shortage during
customer dealing time.

2. Balance with other banks:

The balances with other banks are 0.3% of total assets in 2011 and 2010 which is not so
sufficient because this account is chiefly held with foreign banks both in form of current
account and deposit account. The account is utilized for import and export transactions with
foreign banks. The Reduction in this account can be associated with watchful economic activity
because of depending international recessionary trends. Move on to 2009 which maintained
1.2% of total assets that is better than 2011 & 2010. But still not sufficient because banks have
to pay the payments for import & export purposes. Similarly, in 2008 & 2007 almost the same
percentage was maintained on account of cash and balances with treasury banks with 0.9%
each year respectively.

2. Lendings to Financial Institution: