Notes To The Consolidated Financial Statements: For The Year Ended December 31, 2008
Notes To The Consolidated Financial Statements: For The Year Ended December 31, 2008
Notes To The Consolidated Financial Statements: For The Year Ended December 31, 2008
The registered office of the Bank is situated in Lahore whereas the principal office is situated at Khayaban-e-Iqbal, Main Clifton Road, Bath
Island, Karachi.
ABL Asset Management Company Limited (the subsidiary company)
ABL Asset Management Company Limited (the company) is a public unlisted company. The company was incorporated in Pakistan as a
limited liability company on October 12, 2007 under the Companies Ordinance, 1984. The company has obtained licenses on December 07,
2007 from the Securities and Exchange Commission of Pakistan (SECP) to carry out Asset Management Services and Investment Advisory
Services as a Non-Banking Finance Company (NBFC) under Non-Banking Finance Companies (Establishment and Regulation) Rules,
2003 as amended through S.R.O.1131[I] 2007 (the NBFC Rules, 2003). The company has received certificate of commencement of business
on December 31, 2007. The registered office of the company is situated at 11-B Lalazar, M.T. Khan Road, Karachi.
2. (a) BASIS OF PRESENTATION
- These consolidated financial statements consist of holding company and its subsidiary company, for the year ended December 31, 2008.
- These are the first annual consolidated financial statements of the Bank. Although the subsidiary was incorporated in previous year, the
Bank did not prepare consolidated financial statements for the year ended December 31, 2007, as it had received an exemption from
SECP. The Bank has prepared these financial statements from the date of incorporation of subsidiary. Therefore, the prior year figures
in these consolidated financial statements include the transactions and balances of the subsidiary after the eliminations of intra group
transactions and balances.
- In accordance with the directives of the Federal Government regarding the shifting of the banking system to Islamic modes, the State
Bank of Pakistan (SBP) has issued various circulars from time to time. Permissible forms of trade-related modes of financing include
purchase of goods by banks from their customers and immediate resale to them at appropriate mark-up in price on deferred payment
basis. The purchases and sales arising under these arrangements are not reflected in these consolidated financial statements as such but
are restricted to the amount of facility actually utilized and the appropriate portion of mark-up thereon.
- For the purpose of translation of US Dollar, the rates of Rs. 79.08 per US Dollar have been used for December 31, 2008.
- The consolidated financial statements are presented in Pakistan Rupees, which is the Bank’s and its subsidiary’s functional and
presentation currency. The amounts are rounded to nearest thousand.
3.2 The SBP, vide BSD Circular No. 10, dated August 26, 2002 has deferred the applicability of International Accounting Standard 39, Financial
Instruments: Recognition and Measurement (IAS 39) and International Accounting Standard 40, Investment Property (IAS 40) for banking
companies till further instructions. Accordingly, the requirements of these standards have not been considered in the preparation of these
consolidated financial statements. However, investments have been classified and valued in accordance with the requirements prescribed by
SBP through various circulars.
3.3 The following new / revised standards, amendments and interpretations of approved accounting standards are applicable in Pakistan from the
dates mentioned below against the respective standard of amendment.
Notes to the Consolidated Financial Statements
for the year ended December 31, 2008
135
Effective date
(accounting
periods beginning
on or after)
The above standards, ammendments and interpretations of approved accounting standards effective for accounting period beginning on or
after January 1, 2009 are either not relevant to the Bank’s and its subsidiary’s operations or are not expected to have significant impact on these
consolidated financial statements other than certain increased disclosures in certain cases.
4. CRITICAL ACCOUNTING JUDGMENTS AND KEY
SOURCES OF ESTIMATION UNCERTAINTY
The preparation of financial statements in conformity with approved accounting standards requires the use of certain critical accounting
estimates, judgments and assumptions that effect the reported amounts of assets and liabilities and income and expenses. It also requires
management to exercise its judgment in the process of applying the accounting policies. Estimates and judgments are continually evaluated
and are based on historic experience and other factors, including expectations of future events that are believed to be reasonable under the
circumstances. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods
affected.
In the process of applying the Bank’s and its subsidiary’s accounting policies, management has made the following estimates and judgments
which are significant to the financial statements.
(a) classification of investments (Note 5.3)
(b) valuation of derivatives (Note 5.15.2)
(c) impairment (Note 5.11)
(d) recognition of taxation and deferred tax (Note 5.6)
(e) provisions (Note 5.3, 5.4, 5.12 and 9.3.2)
(f ) accounting for post employment benefits (Note 5.7 and 35); and
(g) calculation of depreciation, amortization and revaluation of operating fixed assets (Note 5.5)
5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies adopted in the preparation of these consolidated financial statements are the same as those applied in the preparation
of the unconsolidated financial statements of the Bank for the year ended December 31, 2007 and its subsidiary for the period ended
December 31, 2007 and are enumerated as follows:
5.1 Cash and cash equivalents
For the purpose of Cash Flow Statement, cash and cash equivalents include cash and balances with treasury banks and balances with other
banks (net of overdrawn nostro balances) in current and deposit accounts.
In accordance with the requirements of the SBP, quoted securities, other than those classified as held to maturity and investments in subsidiaries,
are carried at market value. Investments classified as held to maturity are required to be carried at amortized cost whereas investments in
subsidiaries are carried at cost less impairment losses, if any.
The unrealized surplus/(deficit) arising on revaluation of the Bank’s and its subsidiary’s held for trading investment portfolio is taken to the
profit and loss account.
The surplus/(deficit) arising on revaluation of quoted securities classified as available for sale is kept in a separate account shown in the balance
sheet below equity. The surplus/(deficit) arising on these securities is taken to the profit and loss account when actually realised upon disposal
or when the investment is considered to be impaired.
Unquoted equity securities are valued at the lower of cost and break-up value. Subsequent increases or decreases in the carrying value are
credited/charged to profit and loss account. Break-up value of equity securities is calculated with reference to the net assets of the investee
company as per the latest available audited financial statements. Investments in other unquoted securities are valued at cost less impairment
losses, if any.
Provision for diminution in the value of securities (except for debentures, participation term certificates and term finance certificates) is made
after considering impairment, if any, in their value. Provision for diminution in value of debentures, participation term certificates and term
finance certificates are made in accordance with the requirements of Prudential Regulations issued by SBP.
Associates as defined under local statutes but not under IAS are accounted for as ordinary investments.
All “regular way” purchases and sales of investments are recognized on the trade date, i.e., the date that the Bank and its subsidiary commits
to purchase or sell the asset. Regular way purchases or sales are purchases or sales of investments that require delivery of assets within the time
frame generally established by regulation or convention in the market place.
5.4 Advances (including net investment in finance lease)
Advances are stated net of general and specific provisions. Specific provision against funded loans is determined in accordance with the
requirements of the Prudential Regulations issued by the SBP and charged to the profit and loss account. General provision is maintained on
consumer portfolio in accordance with the requirements of Prudential Regulations issued by SBP and charged to the profit and loss account.
Leases, where the Bank and its subsidiary transfers substantially all the risks and rewards incidental to the ownership of an asset to the lessee
are classified as finance leases. A receivable is recognized at an amount equal to the present value of the minimum lease payments, including
guaranteed residual value, if any. Finance lease receivables are included in advances to the customers.
Advances are written off when there are no realistic prospects of recovery.
Depreciation is calculated using the straight line method, except buildings which are depreciated using the reducing balance method, to
write down the cost of property and equipment to their residual values over their estimated useful lives. The rates at which the fixed assets are
depreciated are disclosed in note 11.2. The residual values, useful lives and depreciation methods are reviewed and changes, if any, are treated
as change in accounting estimates, at each balance sheet date.
Depreciation on additions is charged from the month the assets are available for use, while no depreciation is charged in the month in which
the assets are disposed off.
Surplus arising on revaluation of fixed assets is credited to surplus on revaluation of fixed assets account. Deficit arising on subsequent
revaluation of fixed assets is adjusted against the balance in the above mentioned surplus account as allowed under the provisions of the
Companies Ordinance, 1984. The surplus on revaluation of fixed assets to the extent of incremental depreciation charged on the related assets,
is transferred directly to unappropriated profit (net of deferred tax).
Revaluation is carried out with sufficient regularity to ensure that the carrying amount of assets does not differ materially from their fair value.
An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal.
Any gain or loss arising on derecognition of the asset is recognized in the profit and loss account in the year the asset is derecognized, except
that the related surplus on revaluation of fixed assets (net of deferred tax) is transferred directly to unappropriated profit.
Subsequent cost are included in the asset’s carrying amount only when it is probable that future economic benefits associated with the item
will flow to the Bank and its subsidiary and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the
profit and loss account.
Intangible assets
Intangible assets are carried at cost less any accumulated amortization and impairment losses, if any. The cost of intangible assets is amortized
over their estimated useful lives, using the straight line method. Amortization is charged from the month the assets are available for use at the
rate stated in note 11.3. The useful lives are reviewed and adjusted, if appropriate, at each balance sheet date.
Capital work-in-progress
Capital work– in– progress is stated at cost less impairment losses, if any.
5.6 Taxation
Current
Provision for current taxation is based on taxable income for the year determined in accordance with the prevailing laws for taxation on income
earned. The charge for current tax is calculated using the prevailing tax rates or tax rates expected to apply to the profits for the year. The charge
for current tax also includes adjustments, where considered necessary relating to prior years, arising from assessments finalised during the year
for such years.
Deferred
Deferred tax is recognized on all major temporary differences, tax credits and unused tax losses at the balance sheet date between the amounts
attributed to assets and liabilities for financial reporting purpose and amounts used for taxation purposes. Deferred tax is calculated at the rates
that are expected to apply to the periods when the difference will reverse, based on tax rates that have been enacted or substantially enacted at
the balance sheet date.
Deferred tax assets are recognized only to the extent that it is probable that future taxable profits will be available against which the assets can
be utilized.
The Bank and its subsidiary also recognizes a deferred tax asset/liability on deficit/surplus on revaluation of fixed assets and securities which is
adjusted against the related deficit/surplus in accordance with the requirements of IAS–12 “Income Taxes”.
5.7 Staff retirement and other benefits
Allied Bank Limited (the holding company)
5.7.1 Staff retirement schemes
a) For employees who opted for the new scheme introduced by the management:
An approved pension scheme (defined benefit scheme) under which the benefits on the basis of frozen basic salary service and age as on
June 30, 2002 are payable to all employees whose date of joining the Bank is on or before July 01, 1992, i.e., who have completed 10 years
of service as on June 30, 2002; and
An approved gratuity scheme (defined benefit scheme) under which the benefits are payable as under:
i) For members whose date of joining the Bank is on or before July 01, 1992, their services would be calculated starting from July 01,
2002 for gratuity benefit purposes.
ii) For members whose date of joining the Bank is after July 01, 1992 their services would be taken at actual for the purpose of
calculating the gratuity benefit.
A Contributory Provident Fund scheme with the Bank making equal contribution to that made by employees (defined contribution
scheme).
Annual Report of Allied Bank for the year 2008 Financials
b) For employees who did not opt for the new scheme, the Bank continues to operate the following:
An approved pension scheme (defined benefit scheme) under which the benefits on the basis of frozen basic salary as on June 30, 2002
are payable to all employees opting continuation of the previous scheme and whose date of joining the Bank is on or before July 01, 1992,
i.e., who had completed ten years of service as on June 30, 2002; and
A contributory benevolent fund for all its employees (defined benefit scheme).
c) Post retirement medical benefits
The Bank provides post retirement medical benefits to eligible retired employees. Provision is made annually to meet the cost of such
medical benefits on the basis of actuarial valuation carried out using the Projected Unit Credit Method.
Annual contributions towards the defined benefit schemes are made on the basis of actuarial valuation carried out using the Projected Unit
Credit Method. Actuarial gains/losses arising from experience adjustments and changes in actuarial assumptions are amortized over the future
expected remaining working lives of the employees, to the extent of the greater of ten percent of the present value of the defined benefit
obligations at that date (before deducting plan assets) and ten percent of the fair value of any plan assets at that date.
5.7.2 Other benefits
a) Employees’ compensated absences
The Bank provides for its liability towards compensated absences accumulated by its employees on the basis of actuarial valuation carried
out using the Projected Unit Credit Method. Actuarial gains/losses are amortized over the future expected average remaining lives of the
employees, to the extent of ten percent of the present value of the defined benefit obligations at that date.
The results of operations of foreign branch are translated to rupees at the average rate of exchange for the year.
c) Translation gains and losses
Translation gains and losses are included in the profit and loss account.
d) Commitments
Commitments for outstanding forward foreign exchange contracts disclosed in these consolidated financial statements are translated at
contracted rates. Contingent liabilities/commitments for letters of credit and letters of guarantee denominated in foreign currencies are
expressed in rupee terms at the rates of exchange ruling on the balance sheet date.
Interest or markup recoverable on classified loans and advances and investments is recognized on receipt basis. Interest/return/mark-up
on rescheduled/restructured loans and advances and investments is recognized as permitted by the regulations of the SBP.
Dividend income is recognized when the right to receive the dividend is established.
Gains and losses on sale of investments are recognized in the profit and loss account.
b) Lease financing
Financing method is used in accounting for income from lease financing. Under this method, the unearned lease income (excess of the
sum of total lease rentals and estimated residual value over the cost of leased assets) is deferred and taken to income over the term of the
lease period so as to produce a constant periodic rate of return on the outstanding net investment in lease. Unrealised income on classified
leases is recognized on receipt basis.
Gains/losses on termination of lease contracts and other lease income are recognized when realized.
c) Fees, brokerage and commission
Fees, brokerage and commission on letters of credit/guarantee are recognized on an accrual basis. Account maintenance and service
charges are recognized when realized.
Annual Report of Allied Bank for the year 2008 Financials
c) Retail banking
Retail banking provides services to small borrowers i.e. consumers, small and medium enterprises (SMEs) and borrowers’ agriculture
sector. It includes loans, deposits and other transactions with retail customers.
d) Commercial banking
This includes loans, deposits and other transactions with corporate customers.
e) Payment and settlement
This includes payments and collections, funds transfer, clearing and settlement with the customers.
f ) Asset management
This includes asset management, investment advisory, portfolio management and equity research.
5.18.2 Geographical segments
The Bank and its subsidiary conducts all its operations, including the operations of EPZ Karachi branch, in Pakistan.
6.1 Deposits with the SBP are maintained to comply with the statutory requirements issued from time to time.
6.2 This represents US Dollar Settlement Account maintained with SBP.
6.3 This represents special cash reserve maintained with the SBP. The special cash reserve carries mark-up at the rate of 0.90% (2007: 3.71% and
4.72%) per annum.
Notes to the Consolidated Financial Statements
for the year ended December 31, 2008
141
8.1 This is an unsecured lending to Financial Institution, carrying mark-up at the rate of 15.40% (2007: 10.00% to 12.00%) per annum and will
mature on January 02, 2009.
8.2 These are clean placements with Non-Banking Finance Companies, carrying mark-up at rates, ranging between 18.90% and 20.00% (2007:
9.75% and 10.30%) per annum and will mature on various dates, latest by February 02, 2009.
8.3 These are short-term lendings to various financial institutions against the government securities shown in note 8.5 below. These carry mark-up
at rates ranging between 10.00 % and 14.90 % (2007: 9.10% and 9.40%) per annum and will mature on various dates, latest by January 31,
2009.
December 31, December 31,
2008 2007
Rupees in ‘000
Audited Un-audited
8.4 Particulars of lending
In local currency 15,793,183 18,419,241
In foreign currencies - -
15,793,183 18,419,241
Annual Report of Allied Bank for the year 2008 Financials
Market Treasury Bills 14,957,183 - 14,957,183 12,924,241 - 12,924,241
9. INVESTMENTS
December 31, 2008 December 31, 2007
Held by Given as Held by Given as
Note Bank collateral Total Bank collateral Total
Rupees in ‘000
Audited Un-audited
9.1 Investments by types
Held-for-trading securities
Units of open end mutual funds 96,416 - 96,416 - - -
Ordinary shares of listed companies - - - 33,860 - 33,860
96,416 - 96,416 33,860 - 33,860
Available-for-sale securities
Market Treasury Bills 26,512,476 8,197,541 34,710,017 24,936,479 12,543,383 37,479,862
Pakistan Investment Bonds 445,580 - 445,580 444,758 - 444,758
Ordinary shares/certificates of
listed companies 6,863,698 - 6,863,698 1,601,605 - 1,601,605
Preference shares of listed companies 250,000 - 250,000 275,000 - 275,000
Units of open end mutual funds 12,761,149 - 12,761,149 19,606,845 - 19,606,845
Ordinary shares of unlisted companies 544,822 - 544,822 82,099 - 82,099
Ordinary shares of unlisted companies
- (related parties) 447,853 - 447,853 451,219 - 451,219
Pre IPO investments 35,000 - 35,000 2,514,900 - 2,514,900
Privately placed investments - - - 1,890,918 - 1,890,918
Sukuk Bonds 2,686,250 - 2,686,250 2,420,000 - 2,420,000
Term finance certificates (TFCs) 7,733,386 - 7,733,386 736,636 - 736,636
58,280,214 8,197,541 66,477,755 54,960,459 12,543,383 67,503,842
Held-to-maturity securities
Pakistan Investment Bonds 9,084,116 - 9,084,116 11,108,762 - 11,108,762
Foreign Currency Bonds (US$) 137,767 - 137,767 160,010 - 160,010
TFCs, Debentures, Bonds and
Participation Term Certificates (PTCs) 10,682,356 - 10,682,356 4,903,356 - 4,903,356
19,904,239 - 19,904,239 16,172,128 - 16,172,128
Investment at cost 78,280,869 8,197,541 86,478,410 71,166,447 12,543,383 83,709,830
Less: Provision for diminution
in value of investments 9.3 (2,015,042) - (2,015,042) (192,290) - (192,290)
Investments (Net of Provisions) 76,265,827 8,197,541 84,463,368 70,974,157 12,543,383 83,517,540
Unrealized gain / (loss) on revaluation of
Held-for-trading securities 9.5 3,201 - 3,201 (1,463) - (1,463)
(Deficit) / surplus on revaluation of
Available-for-sale securities 9.3.2 & 21.2 (2,032,608) 37 (2,032,571) (40,628) (16,986) (57,614)
74,236,420 8,197,578 82,433,998 70,932,066 12,526,397 83,458,463
Notes to the Consolidated Financial Statements
for the year ended December 31, 2008
143
9.2.3 These represent 17,500,000 (2007: 20,000,000) KIBOR plus 2% Cumulative Preference Shares of Masood Textile Mills Limited, with Call
Option available to the issuer and Conversion Option available to the Bank, after completion of four years from the date of issue, i.e., June
29, 2005 and 7,500,000 (2007: 7,500,000) KIBOR plus 2.5% Cumulative Preference Shares of Fazal Cloth Mills Limited having redemption
term within 60 days after completion of 5 years from the date of issue, i.e., May 13, 2006.
9.2.4 Information relating to investments in shares of listed and unlisted companies, redeemable capital, debentures and bonds, required to be
disclosed as part of the financial statements under SBP’s BSD Circular No. 4 dated February 17, 2006, is given in Annexure “I”.
9.3.2 The Karachi Stock Exchange (Guarantee) Limited (“KSE”) placed a “Floor Mechanism” on the market value of securities based on the closing
prices of securities prevailing as on August 27, 2008. Under the “Floor Mechanism“, the individual security price of equity securities could
vary within normal circuit breaker limit, but not below the floor price level. The mechanism was effective from August 28, 2008 and remained
in place until December 15, 2008. Consequent to the introduction of “Floor Mechanism” by KSE, the market volume declined significantly
during the period from August 27, 2008 to December 15, 2008. There were lower floors on a number of securities at December 31, 2008. The
equity securities have been valued at prices quoted on the KSE on December 31, 2008 without any adjustment as allowed by the State Bank
of Pakistan (SBP) BSD Circular Letter No. 2 dated January 27, 2009.
Furthermore, SBP BSD Circular No. 4 dated February 13, 2009 has allowed to follow Securities and Exchange Commission of Pakistan
(SECP) notification vide SRO 150 (1)/2009 dated February 13, 2009 allowing that the impairment loss, if any, recognized as on December
31, 2008 due to valuation of listed equity investments held as “Available for Sale’ to quoted market prices may be shown under the equity. The
amount taken to equity including any adjustment/effect for price movements shall be taken to Profit and Loss Account on quarterly basis
during the year ending December 31, 2009.
The amount taken to equity at December 31, 2008 shall be treated as a charge to Profit and Loss Account for the purposes of distribution as
dividend.
The impairment loss based on market values as at December 31, 2008 has been determined at Rs. 3,664.169 million. In view of the “Floor
Mechanism” as explained above and current economic conditions in the country, the management believes that these are “rare circumstances’’
and the plunge in equity markets cannot be considered to be a fair reflection of equity values. Since full recognition of impairment for ‘Available
for Sale’ equity securities through Profit and Loss account will not reflect the correct financial performance of the Bank and its subsidiary,
therefore the management on the basis of their estimates and prudence has made a provision of Rs. 1,745.774 million against the above
amount.
The recognition of impairment loss based on the market values as at December 31, 2008 would have had the following effect on these financial
statements:
December 31,
2008
Rupees in ‘000
Increase in ‘Impairment Loss’ in Profit and Loss Account 1,918,395
Decrease in tax charge for the year 650,740
Decrease in profit for the year - after tax 1,267,655
Rupees
Decrease in earnings per share -after tax (basic and diluted) 1.96
Rupees in ‘000
Decrease in deficit on revaluation of available for sale securities 1,918,395
Decrease in unappropriated profit 1,267,655
Notes to the Consolidated Financial Statements
for the year ended December 31, 2008
145
10.4 Advances include Rs. 13,771.895 million (2007: Rs. 11,354.923 million) which have been placed under non-performing status as detailed
below:-
December 31, 2008
Classified Advances Provision Required Provision Held
Category of
Classification Domestic Overseas Total Domestic Overseas Total Domestic Overseas Total
Rupees in ‘000
Audited
Other Assets Especially
Mentioned * 40,689 - 40,689 - - - - - -
Substandard 3,805,228 - 3,805,228 950,134 - 950,134 950,134 - 950,134
Doubtful 722,223 - 722,223 361,111 - 361,111 361,111 - 361,111
Loss 9,203,755 - 9,203,755 9,201,191 - 9,201,191 9,201,191 - 9,201,191
13,771,895 - 13,771,895 10,512,436 - 10,512,436 10,512,436 - 10,512,436
10.5.2
December 31, 2008 December 31, 2007
Note Specific General Total Specific General Total
Rupees in ‘000
Audited Un-audited
Opening balance 9,958,681 13,123 9,971,804 7,657,737 14,047 7,671,784
Charge for the year 2,246,227 - 2,246,227 3,277,330 - 3,277,330
Reversals (871,009) (3,063) (874,072) (708,743) (924) (709,667)
Charged to profit and loss account 1,375,218 (3,063) 1,372,155 2,568,587 (924) 2,567,663
Amounts written off 10.6.1 (821,463) - (821,463) (267,643) - (267,643)
Closing balance 10,512,436 10,060 10,522,496 9,958,681 13,123 9,971,804
10.5.3 Particulars of provisions against
non-performing advances
December 31, 2008 December 31, 2007
Specific General Total Specific General Total
Rupees in ‘000
Audited Un-audited
Details of loans and advances to associates, subsidiary and other related parties
are given in note 40.
R
upees in ‘ 000
Annual Report of Allied Bank for the year 2008
Audited
Financials
equipment
Vehicles 349,060 106,495 - (13,310) 235,302 137,302 40,688 - (10,580) 93,007 142,295 20
(206,943) (74,403)
Building improvements
(rented premises) 111,070 70,270 - (24,705) 153,915 28,133 23,824 - (14,565) 35,778 118,137 20
(2,720) (1,614)
Total 8,196,469 1,880,199 1,264,606 (222,269) 10,750,480 1,516,155 409,831 (248,107) (201,558) 1,256,060 9,494,420
(368,525) (220,261)
Cost/Revaluation Accumulated Depreciation
R
upees in ‘ 000
Un-audited
Land-Freehold 2,801,396 341,098 - - 3,128,041 - - - - - 3,128,041 -
(14,453)
Land-Leasehold 902,771 7,390 - - 910,161 - - - - - 910,161 -
Buildings-Freehold 585,004 41,541 - - 626,545 42,105 32,038 - - 74,143 552,402 5
for the year ended December 31, 2008
Building improvements
(rented premises) 52,095 58,975 - - 111,070 13,320 14,813 - - 28,133 82,937 20
11.4
As at December 31, 2008, the Bank arranged for valuation of properties from five independent valuers (Akbani & Javed Associates, Progressive
Architects & Engineers, Jasper & Jasper, Hasib Associates (Pvt.) Ltd. and Consultancy Support & Services). The revalued amounts of proper-
ties have been determined on the basis of Fair Value Model. The revaluation resulted in net increase in the carrying values of the properties
by Rs. 1,512.713 million, as at December 31, 2008. Had there been no revaluation, the carrying amount of revalued assets would have been as
follows:
December 31, December 31,
2008 2007
Rupees in ‘000
Audited Un-audited
11.6 Effect in the current year on profit and loss account of surplus
arising on revaluation of buildings carried out in the year 2005 21.1 26,987 28,408
11.7 Restriction/discrepancy in the title of property
having a net book value of 71,975 26,311
11.8 Carrying amount of temporarily idle property
and equipment 24,438 46,978
11.9 The gross carrying amount of fully depreciated/amortized assets that
are still in use
Furniture and fixtures 92,172 153,850
Electrical, office and computer equipment 406,480 556,370
Vehicles 12,989 36,799
Intangible assets - software 17,752 4,668
11.11 Fixed assets include a plot at carrying value of Rs. 31 million, which is acquired with the funds of the Bank and held in the name of Moham-
mad Waseem Mukhtar, a Director of the Bank.
11.12 The details of disposals of assets whose original cost or book value exceeds rupees one million or two hundred and fifty thousand rupees re-
spectively, whichever is lower, are given in Annexure “III”.
11.13 Information relating to sale of fixed assets (otherwise than through a regular auction) made to chief executive or a director or an executive or
a shareholder holding not less than ten percent of the voting shares of the Bank or any related party, as required by SBP’s BSD circular no. 4
dated February 17, 2006, is given in Annexure “III”.
Notes to the Consolidated Financial Statements
for the year ended December 31, 2008
151
Audited Un-audited
Surplus on revaluation of fixed assets (198,948) 9,942 - (189,006) 9,446 (169,030) (348,590)
Accelerated tax depreciation /
amortization (109,239) (110,051) - (219,290) (206,209) - (425,499)
Excess of investment in finance
lease over written down
value of leased assets (97,643) 14,084 - (83,559) 36,123 - (47,436)
(405,830) (86,025) - (491,855) (160,640) (169,030) (821,525)
638,169 10,366 13,881 662,416 (132,989) 501,622 1,031,049
12.2 Through Finance Act 2007, a new section 100A read with the 7th Schedule (the Schedule) was inserted in the Income Tax Ordinance, 2001
for the taxation of banking companies. The Schedule seeks to simplify the taxation of banking companies and is applicable from the tax year
2009 (financial year ending on December 31, 2008).
The 7th Schedule does not contain transitory provisions to deal with the disallowances made upto the year ended December 31, 2007. This
issue has been taken up with the tax authorities through Pakistan Bankers Association for formulation of transitory provisions to deal with the
items which were previously treated differently under the then applicable provisions.
The deferred tax asset on the deductible temporary differences disallowed as a deduction in the past up to December 31, 2007 is being kept as
an asset as the Bank is confident that transitory provisions would be introduced to set out the mechanism of claiming where benefit of these
allowances can be claimed.
Annual Report of Allied Bank for the year 2008 Financials
13.1 Market value of non banking assets acquired in satisfaction of claims 96,523 -
13.2 Provision against other assets
Opening balance 703,530 595,075
Charge for the year 214,284 458,206
Reversals - (338,627)
Net charge 214,284 119,579
Written off (30,676) (11,124)
Closing balance 887,138 703,530
14. CONTINGENT ASSETS
There were no contingent assets of the Bank as at December 31, 2008 and December 31, 2007.
15. BILLS PAYABLE
In Pakistan 2,948,435 3,490,329
Outside Pakistan 4,055 4,055
2,952,490 3,494,384
16. BORROWINGS
In Pakistan 27,645,245 22,878,061
Outside Pakistan 132,906 55,595
27,778,151 22,933,656
16.1 Particulars of borrowings with respect to Currencies
In local currency 27,645,245 22,878,061
In foreign currencies 132,906 55,595
27,778,151 22,933,656
Notes to the Consolidated Financial Statements
for the year ended December 31, 2008
153
Unsecured
Call borrowings 16.6 8,600,000 2,100,000
Overdrawn nostro accounts 132,906 55,595
8,732,906 2,155,595
27,778,151 22,933,656
16.3 The Bank has entered into various agreements for financing with the State Bank of Pakistan (SBP) for extending export finance to customers.
As per agreements, the Bank has granted the SBP the right to recover the outstanding amount from the Bank at the date of maturity of the
finance by directly debiting the current account maintained by the Bank with the SBP. These carry interest at the rate of 7.5% (2007: 6.5%)
per annum. These borrowings are repayable within six months from the deal date.
16.4 This represents Long Term Financing against Export Oriented Projects (LTF-EOP) availed by the Bank for further extending the same to its
customers for export oriented projects, for a maximum period of 7.5 years. The loan repayments to SBP correspond the respective repayment
from customers. The loan carries mark-up at the rate of 7% (2007: ranging between 4% and 5%) per annum.
16.5 These represent funds borrowed from the local interbank market against government securities, carrying mark-up at rates, ranging between
9% and 14% (2007: 9.35% and 10.00%) per annum maturing on various dates, latest by January 13, 2009.
16.6 These represent unsecured borrowings from the local interbank market, carrying mark-up at rates, ranging between 13.5% and 16.5% (2007:
9.30% and 10.25%) per annum maturing on various dates, latest by April 01, 2009.
22.14.1
The Income tax assessments of the Bank have been finalized up to and including Tax Year 2008 for local operations and Azad Kashmir Opera-
tions.
a) While finalizing income tax assessments up to the assessment year 2000-2001, the Income Tax Authorities made certain add backs with
a tax impact of Rs. 219 million. As a result of appeals filed by the Bank before the Appellate Authorities, these add-backs were set-aside
with a tax impact of Rs. 125 million. The appeal effect orders with regard to the above matters are pending.
b) While finalizing income tax assessments from Assessment Year 2001-2002 to Tax Year 2006, the Income Tax Authorities made certain
add backs with tax impact amounting to Rs. 6,500 million. As a result of appeals filed by the Bank before the Appellate Authorities, these
add-backs were deleted and set-aside, by Appellate Authorities, with tax impact of Rs. 4,102 million and Rs. 2,398 million respectively.
The appeal effect orders with regard to the above matters are pending.
c) The assessment for Tax Year 2007 and 2008 have been finalized with net additional tax liability of Rs. 2,798 million. The Bank has filed
appeals against the orders before the Appellate Authority.
Pending the finalization of the above-referred matters, no provision has been made by the Bank in an aggregate sum of Rs. 7,448 million
in these consolidated financial statements. This sum includes tax liability, aggregating to Rs. 4,102 million, already deleted by the Appellate
Authorities. Against most of the deleted and set-aside issues Income Department is in appeal before higher appellate authorities. The manage-
ment is hopeful that the outcome of these appeals will be in favor of the Bank.
22.14.2 As a result of a compromise decree granted by the Honourable High Court of Sindh in August 2002, Fateh Textile Mills Limited pledged
16,376,106 shares of ABL with the Bank as security consequent to the default by Fateh Textile Mills Limited on the terms of the decree. The
Bank published a notice on June 23, 2004 in accordance with the requirements of section 19(3) of the Financial Institutions (Recovery of
Finances) Ordinance, 2001 and invited sealed bids from interested parties to purchase the pledged shares. The bidding process was scheduled
for July 23, 2004 and the Bank had fixed a reserve price of Rs. 25 per share. On the bid date, the highest offer for these shares was received at a
rate of Rs. 25.51 per share. The bid was approved and the successful bidder had deposited an amount of Rs. 417.75 million with the Bank.
Fateh Textile Mills Limited had filed a suit against the Bank in the High Court of Sindh challenging the sale of the above shares. The High
Court had not granted a stay order on the process of sale of shares. However, the matter is still pending in the Court.
Forward Exchange Contract (FEC) is a product which is offered to the obligor who transact internationally. These traders use this product to
hedge themselves from unfavorable movements in a foreign currency, however, by agreeing to fix the exchange rate, they do not benefit from
favorable movements in that currency.
An FEC is a contract between the Obligor and the Bank in which both agree to exchange an amount of one currency for another currency at
an agreed forward exchange rate for settlement more than two business days after the FEC is entered into (the day on which settlement occurs
is called the value date). FEC is entered with those Obligors whose credit worthiness has already been assessed.
If the relevant exchange rate moves un-favourably, the Bank will loose money, and Obligor will benefit from that movement because the Bank
must exchange currencies at the FEC rate. In order to mitigate this risk of adverse exchange rate movement, the Bank hedges its exposure by
taking forward position in inter-bank FX.
Equity Futures
An equity futures contract is a standardized contract, traded on a futures counter of the stock exchange, to buy or sell a certain underlying scrip
at a certain date in the future, at a specified price.
The Bank uses equity futures as a hedging instrument to hedge its equity portfolio, in both held for trading and available for sale, against
equity price risk. Only selected shares are allowed to be traded on futures exchange. Equity futures give flexibility to the Bank either to take
delivery on the future settlement date or to settle it by adjusting the notional value of the contract based on the current market rates. Maximum
exposure limit to the equity futures is 10% of Tier I Capital of the Bank.
The accounting policies used to recognize and disclose derivatives are given in note 5.15.2. The risk management framework of derivative
instruments is given in note 42.
December 31, December 31,
2008 2007
Rupees in ‘000
Audited Un-audited
24. MARK-UP/RETURN/INTEREST EARNED
On loans and advances 21,944,917 14,471,070
On investments in:
Available for sale securities 5,185,187 3,332,119
Held to maturity securities 1,442,152 1,465,451
6,627,339 4,797,570
On deposits with financial institutions 76,505 122,037
On securities purchased under resale agreements 1,526,640 1,114,717
On certificates of investment 45,362 296,385
On letters of placement 108,600 205,119
On call money lending 264,657 194,524
30,594,020 21,201,422
29.1 During the year, the Bank offered Voluntary Retirement Scheme (VRS) to its employees. 318 employees of the Bank opted for retirement
under this scheme. Total liability for these employees under this scheme for pension, gratuity, leave encashment, medical, benevolent and salary
compensation benefits is worked out to Rs. 1,170 million. As a result the Bank has incurred Rs.486 million which is provided by the Bank
during the year and is included in salaries, allowances etc.
29.3
None of the directors, executives and their spouses had any interest in the donations disbursed during the year except for donation to National
Management Foundation where one of the Bank’s director is also member of Board of Governors of the organization. Donations paid in excess
of Rs. 100,000 to a single party during the year are as follows:
Note December 31, December 31,
2008 2007
Rupees in ‘000
Audited Un-audited
The Karachi Education Initiative 40,000 -
National Management Foundation 20,000 20,000
Capital City Police Force 13,990 -
Book group and Zindagi Trust 2,500 -
Care Foundation 1,000 200
Liver Foundation Trust 1,000 2,500
Agha Khan Hospital and Medical College Foundation 1,000 -
Abdus Sattar Edhi Foundation 500 -
Tamir Welfare Organization 500 248
M/s Lahore business Association 500 -
Ms.Mahwish Khan 300 -
Khooj Society for People’s Education 250 -
M/s Tehzeeb Social Welfare 250 -
Shaukat Khanum Memorial Cancer Hospital and Research Centre - 2,500
DHQ Hospital Dera Ghazi Khan - 2,000
30. OTHER CHARGES
Penalties imposed by SBP 215,641 256,869
Charge for workers’ welfare fund 125,060 -
Education cess 7,000 -
Fixed assets written off 20,711 -
Other assets written off 14,299 -
Investments written off 8,166 -
390,877 256,869
31. TAXATION
Current - for the year 1,830,073 1,888,318
- for prior years - -
1,830,073 1,888,318
Deferred 132,988 (10,366)
1,963,061 1,877,952
31.1 Relationship between tax expense and accounting profit
Accounting profit for the current year 6,056,922 5,956,029
Tax on income @ 35% (2007 : 35%) 2,119,923 2,084,610
Effect of permanent differences 145,474 170,404
Effect of exempt income - (298,268)
Adjustments in respect of tax at reduced rates (387,161) (18,824)
Others 84,825 (59,970)
Tax charge for the current year 1,963,061 1,877,952
32. EARNINGS PER SHARE - BASIC AND DILUTED
Rupees in ‘000
Profit after taxation 4,093,861 4,078,077
Number of shares
Weighted average number of ordinary shares outstanding during the year 32.1 646,364,325 646,364,325
Number of shares
Earnings per share - basic and diluted 6.33 6.31
There is no dilution effect on basic earnings per share.
32.1
The comparative figure of weighted average number of shares outstanding has been restated to include the effect of bonus shares issued by the
Bank during the year.
Notes to the Consolidated Financial Statements
for the year ended December 31, 2008
161
Number
34. STAFF STRENGTH
Permanent 8,325 8,181
Temporary/on contractual basis/trainee 102 55
Bank’s own staff strength at the end of the year 8,427 8,236
Outsourced 2,681 2,061
Total staff strength 11,108 10,297
35 DEFINED BENEFIT PLANS
35.1 General description
The Bank operates a funded gratuity scheme for all employees who opted for the new staff retirement benefit scheme introduced by the
management with effect from July 1, 2002. For those employees who did not opt for the new scheme, the Bank continues to operate a funded
pension scheme.
The Bank also operates a contributory benevolent fund (defined benefit scheme - funded) and provides post retirement medical benefits (un-
funded scheme) to eligible retired employees.
Present value of defined benefit obligations 35.6 3,400,000 557,547 474,679 1,521,833
Fair value of plan/scheme’s assets 35.7 (4,319,903) (304,031) (617,643) -
Net actuarial (losses) not recognized (438,865) (162,671) (140,452) (244,078)
(1,358,768) 90,845 (283,416) 1,277,755
Benefit of the surplus not available to the Bank - - 141,708 -
(1,358,768) 90,845 (141,708) 1,277,755
Present value of defined benefit obligations 35.6 3,461,993 574,685 557,296 1,624,176
Fair value of plan/scheme’s assets 35.7 (5,738,722) (475,357) (692,158) -
Net actuarial gains/(losses) not recognized 1,107,236 (8,483) (82,552) (448,404)
(1,169,493) 90,845 (217,414) 1,175,772
Benefit of the surplus not available to the Bank - - 108,707 -
(1,169,493) 90,845 (108,707) 1,175,772
35.4.1 The latest actuarial valuation of Benevolent Fund, carried out as at December 31, 2008 highlighted a surplus amounting to Rs. 141.708 million
attributable to the Bank. The Bank has maintained 100% provision against it.
35.4.2
The effect of increase of one percentage point and the effect of decrease of one percentage point in the medical trend rates on the present value
of medical obligation as at December 31, 2008 would be Rs. 102.309 million (2007: Rs. 105.745 million) and Rs. 79.223 million (2007: Rs.
88.026 million) respectively.
35.5 Movement in (receivable from) /payable to defined benefit plans
December 31, 2008
Post
Benevolent retirement
Note Pension fund Gratuity fund fund medical
Rupees in ‘000
Audited
35.9.1
The effect of increase of one percentage point and the effect of decrease of one percentage point in the medical trend rates on the aggregate
of the current service cost and interest cost components of net period post-employment medical costs would be Rs. 9.589 million (2007: Rs.
10.575 million) and Rs. 8.099 million (2007: Rs. 8.803 million) respectively.
December 31, December 31,
2008 2007
Rupees in ‘000
Audited Un-audited
35.10 Actual return on plan assets
- Pension fund (552,965) 964,785
- Gratuity fund (160,575) 10,722
- Benevolent fund (71,434) 54,681
35.11 Five year data of defined benefit plan and experience adjustments
Pension fund
2008 2007 2006 2005 2004
Rupees in ‘000
Present value of defined benefit obligation 3,400,000 3,461,993 3,295,249 3,244,547 3,862,879
Fair value of plan assets (4,319,903) (5,738,722) (5,155,897) (5,475,648) (5,635,568)
Surplus (919,903) (2,276,729) (1,860,648) (2,231,101) (1,772,689)
Experience adjustments on plan obligations / assets
Actuarial gain / (loss) on obligation (117,235) (219,179) (63,723) 636,805 428,741
Actuarial gain / (loss) on assets (1,264,567) 449,195 (529,840) (360,464) 310,488
Gratuity fund
2008 2007 2006 2005 2004
Rupees in ‘000
Present value of defined benefit obligation 557,547 574,685 463,564 376,520 294,852
Fair value of plan assets (304,031) (475,357) (393,999) (286,159) (211,816)
Deficit 253,516 99,328 69,565 90,361 83,036
Experience adjustments on plan obligations / assets
Actuarial gain / (loss) on obligation 60,479 (22,810) 1,848 1,362 101,325
Actuarial gain / (loss) on assets (216,667) (28,678) 19,193 (1,362) 7,318
Benevolent fund
2008 2007 2006 2005 2004
Rupees in ‘000
Present value of defined benefit obligation 474,679 557,296 532,218 559,397 545,574
Fair value of plan assets (617,643) (692,158) (610,811) (563,483) (504,731)
(Surplus) / deficit (142,964) (134,862) (78,593) (4,086) 40,843
Experience adjustments on plan obligations / assets
Actuarial gain / (loss) on obligation 94,790 1,424 51,450 (2,126) 50,519
Actuarial gain / (loss) on assets (153,801) (6,400) (27,417) 2,126 (49,592)
Post retirement medical
2008 2007 2006 2005 2004
Rupees in ‘000
Present value of defined benefit obligation 1,521,833 1,624,176 1,458,865 1,292,221 1,224,870
Fair value of plan assets - - - - -
Deficit 1,521,833 1,624,176 1,458,865 1,292,221 1,224,870
Post
Benevolent retirement
Pension fund Gratuity fund fund medical
Rupees in ‘000
Expected (reversal) / charge for the next year (128,161) 151,466 4,062 277,527
Note December 31, December 31 December 31, December 31 December 31, December 31,
2008 2007 2008 2007 2008 2007
Rupees in ‘000
The maturity and repricing profile and effective rates are stated in notes 42.3.1 and 42.2.4 respectively.
In the opinion of the management, the fair value of the remaining financial assets and liabilities are not significantly different from their car-
rying values since assets and liabilities are either short-term in nature or in the case of customer loans and deposits are frequently repriced.
Notes to the Consolidated Financial Statements
for the year ended December 31, 2008
167
Audited
Un-audited
* The segment return on net assets and cost of funds are based on average assets and average liabilities for the year.
Annual Report of Allied Bank for the year 2008 Financials
Contributions to the accounts in respect of staff retirement benefits are made in accordance with actuarial valuation (terms of contribution
plan).
Details of transactions with related parties except those under the terms of employment and balances with them as at the year end were as
follows:
December 31, 2008 December 31, 2007
Key Key
Associated management Other related Associated management Other related
Directors Companies personnel parties Directors Companies personnel parties
Rupees in ‘000
Audited Un-audited
Nature of related party transactions
Loans
Loans at the beginning of the year 11,783 - 75,899 2,053,508 386 - 43,490 -
Loans given during the year 25,612 - 200,809 8,907,741 17,686 - 42,846 -
Loans repaid during the year (10,355) - (22,747) (7,163,460) (6,289) - (10,437) -
Loans at the end of the year 27,040 - 253,961 3,797,789 11,783 - 75,899 -
Deposits
Deposits at the beginning of the year 3,763 87,452 19,976 2,953 1,701 58,082 3,790 -
Deposits received during the year 1,005,141 2,490,881 208,653 5,810,587 4,978,161 1,163,102 139,731 -
Deposits repaid during the year (1,004,059) (2,523,251) (216,320) (5,688,539) (4,976,099) (1,133,732) (123,545) -
Deposits at the end of the year 4,845 55,082 12,309 125,001 3,763 87,452 19,976 -
Net receivable from
staff retirement benefit funds - - - 1,393,152 - - - 1,153,044
Staff retirement fund deposits - - - 3,317,336 - - - 1,863,389
Investments in Shares - 235,969 - 306,884 - 235,969 - 47,527
Nostro Balances - 372,416 - - - 86,820 - -
Rent Payable - - - 1,328 - - - -
Mark-up earned on loans 857 - 9,535 410,286 - - 3,152 -
Income on placements - 1,110 - - - - - -
Income on lendings - 116 - - - - - -
Dividend income - - - 9,855 - - - -
Mark-up expense on deposits 37 - 170 312,998 67 185 102 26,003
Interest expense on borrowings - 468 - - - 1,374 - -
Directors’ meeting fee 1,750 - - - 515 - - -
NIFT charges - - - 60,662 - - - 52,213
Management fee - - - 8,123 - - - -
Launching Expenses - - - 2,187 - - - -
Rent expense - - - 7,971 - - - -
Bank Charges Levied - - 5 - - - - -
Charge / (reversal) in respect of staff
retirement benefit funds - - - (184,522) - - - 2,802
The other balances, held with related parties, outstanding at the end of the current year and transactions made during the year are included in
notes 7.1, 20.2 and 37 to these consolidated financial statements.
Notes to the Consolidated Financial Statements
for the year ended December 31, 2008
169
Tier 1 capital, which includes fully issued, subscribed and paid up capital, balance in share premium account, reserve for bonus issue, general
reserves as per the financial statements and net un-appropriated profits, etc after deduction of deficit on revaluation of available for sale
investments.
Tier 2 capital, which includes general provisions for loan losses (up to a maximum of 1.25 % of risk weighted assets), reserves on the revaluation
of fixed assets and equity investments (up to a maximum of 45% of the balance in the related revaluation reserves) and subordinated debt (up
to a maximum of 50%).
The Bank has issued unsecured subordinated Term Finance Certificates, which contributes towards Tier II capital for minimum capital
requirements (MCR) to support the Bank’s growth. All the regulatory approvals were obtained in December 2006. Liability to the TFC
holders is subordinated to and ranked inferior to all other debts of the bank including deposits and is not redeemable before maturity without
prior approval of the SBP. The rate of return is based on Karachi Interbank Offer Rate (KIBOR) prevailing on the last working day before
the beginning of each semi annual redemption period plus 1.9% (no floor, no cap) 0.24% of the principal shall be redeemable in the first 72
months and the remaining principal shall be redeemable in 4 equal semi-annual installments of 24.49% each of the issue amount respectively,
starting from the 78th month.
Other salient features of the issue are as follows:
SBP through its BSD Circular No. 30 dated November 25, 2008 has asked Banks to achieve the minimum Capital Adequacy Ratio (CAR) of
9% on standalone as well as on consolidated basis latest by December 31, 2008. Banks are expected to raise their minimum Capital Adequacy
Ratio (CAR) of 9% to 10% by December 31, 2009.
The paid up capital and CAR of the Bank stands at Rs. 6.464 billion and 11.07% of its risk weighted exposure as at December 31, 2008.
The Bank has complied with all externally imposed capital requirements throughout the period.
(g) Claims on Public Sector Entities in Pakistan 26,834,934 11,053,910 4,836,284 3,721,804
(h) Claims on Banks 3,252,220 2,726,585 650,788 545,402
(i) Claims, denominated in foreign currency, on banks with original maturity of 3 months or less 2,096,496 668,165 419,299 133,633
(j) Claims on banks with original maturity of 3 months or less denominated in PKR
and funded in PKR 15,369,450 18,244,047 680,741 1,580,804
(k) Claims on Corporates (excluding equity exposures) 143,650,472 123,966,733 99,494,500 105,842,719
(l) Claims categorized as retail portfolio 50,302,802 29,422,167 36,816,422 20,746,279
(m) Claims fully secured by residential property 4,682,458 4,376,075 1,638,860 1,531,626
(n) Past Due loans:
1. The unsecured portion of any claim (other than loans and claims secured against eligible
residential mortgages as defined in section 2.1 of circular 8 of 2006) that is past due for
more than 90 days and/or impaired:
1.1 where specific provisions are less than 20 per cent of the outstanding amount of the
past due claim. 40,689 32,765 61,034 49,148
1.2 where specific provisions are no less than 20 per cent of the outstanding amount of the
past due claim. 3,682,715 1,730,531 3,682,715 1,730,531
1.3 where specific provisions are more than 50 per cent of the outstanding amount of the
past due claim. 2,564 109,165 1,282 54,583
2. Loans and claims fully secured against eligible residential mortgages that are past due
for more than 90 days and/or impaired - - - -
3. Loans and claims fully secured against eligible residential mortgage that are past due by
90 days and /or impaired and specific provision held thereagainst is more than 20% of
outstanding amount 23,788 14,078 11,894 7,039
(o) Listed Equity investments and regulatory capital instruments issued by other banks
(other than those deducted from capital) held in the banking book. 4,937,044 22,899,182 4,937,044 22,899,182
(p) Unlisted equity investments (other than that deducted from capital) held in banking book 1,022,387 916,063 1,533,581 1,374,094
(q) Investments in venture capital - - - -
(r) Investments in premises, plant and equipment and all other fixed assets 11,038,863 7,551,848 11,038,863 7,551,848
(s) Claims on all fixed assets under operating lease - - - -
(t) All other assets 4,645,024 2,759,832 4,645,024 2,759,832
Direct Credit Substitutes/ Lending of securities or posting of securities as collateral 13,352,386 12,271,071 9,796,023 6,871,188
Trade Related contingencies/Other Commitments with original maturity of one year or less 75,991,802 83,037,690 8,757,607 9,759,882
Total eligible regulatory capital held (Note 41.2) (a) 23,475,566 21,573,018
Categories of Risk
The Bank generates most of its revenues by accepting Credit, Country, Liquidity and Market Risk. Effective management of these four risks is
the decisive factor in our profitability. In addition, the Bank is subject to certain consequential risks that are common to all business undertak-
ings. These risks are grouped under two headings: Operational and Reputational Risk. The Framework is organized with reference to these five
risk categories, as detailed below:
Credit Risk This risk is defined as the possibility of loss due to unexpected default or a deterioration of credit worthiness of a busi-
ness partner.
Credit Risk includes Country Risk i.e., the risks that counterparty is unable to meet its foreign currency obligations as
a result of adverse economic conditions or actions taken by governments in the relevant country.
Market Risk The risk of loss generated by adverse changes in the price of assets or contracts currently held by the Bank (this risk is
also known as price risk).
Liquidity Risk The risk that the Bank is unable to meet its payment obligations when they fall due and to replace funds when they are
withdrawn; the consequences of which may be the failure to meet obligations to repay depositors and fulfill commit-
ments to lend.
Operational Risk Operational Risk is the risk of loss resulting from inadequate or failed internal processes, people, and systems or from
external events. The definition excludes reputational risk.
Reputational Risk The risk of failing to meet the standards of performance or behavior required or expected by stakeholders in commercial
activities or the way in which business is conducted.
Risk Responsibilities
- The Board of Directors is accountable for overall supervision of the risk management process. This is discharged by distributing respon-
sibilities at Board level for their management and determining the manner in which risk authorities are set. The Board is also responsible
for approval of all risk policies and ensuring that these are properly implemented. Further, the Board shall also seek appointment of
senior management personnel capable of managing the risk activities conducted by the Bank.
- The Board Risk Management Committee (BRMC) is responsible for ensuring that the overall risk strategy and appetite of the Bank is
appropriately defined in the Strategic Plan and recommend the same to the Board of Directors.
- The BRMC recommends for approval to the Board of Directors the policies proposed by MANCO (Management Committee of the
Bank) which discharges various responsibilities assigned to it by the BRMC.
- The CEO and Group Chiefs are accountable for the management of risk collectively through their membership of risk committees, i.e.,
Management Committee and the Asset & Liability Committee. Independent supervision of risk management activities is provided by
the Audit Committee.
- The Risk Management Group is headed by a Group Chief responsible to set-up and implement the Framework of the Bank.
Risk Management Group Organization
Risk management functions have been segregated by business specialization, i.e., Credit Risk, Credit Administration, Risk Architecture, Risk
Analytics, Operational Risk and Market Risk. All these functions are operating in tandem to improve and maintain the health of assets and
liabilities.
Notes to the Consolidated Financial Statements
for the year ended December 31, 2008
173
Reflecting a preference for minimizing exposure to counterparty credit risk, the Bank maintains eligibility criteria that link the exposure
limits to counterparty credit ratings by external rating agencies. For example, the minimum rating for counterparties to be eligible for a
banking relationship with the Bank is BBB.
Country Risk
The Bank has in place a Country Risk Management Policy which has been approved by the Board. This policy focuses on international expo-
sure undertaken by the Bank. The Bank utilizes country risk rating assessment reports published by Dun & Bradstreet Limited (an interna-
tional credit rating agency) which use political, commercial, macroeconomic and external risk factors in assigning a country risk rating. The
country risk limits used by the Bank are linked to the Dun & Bradstreet ratings and FID is responsible for monitoring of country exposure
limits.
Credit Administration
Credit Administration is involved in minimizing losses that could arise due to security and documentation deficiencies. The Credit Adminis-
tration Division constantly monitors the security and documentation risks inherent in the existing credit portfolio through six regional credit
administration departments located all over the country.
Risk Analytics
To ensure a prudent distribution of asset portfolio, the Bank manages its lending and investment activities within a framework of Borrower,
Group and Sector exposure limits and risk profile benchmarks.
Internal Risk Rating Models
The Bank has developed internal risk rating models to assign credit risk ratings to its Corporate and Institutional borrowers. These models are
based on expert judgment, comprising of both quantitative and qualitative factors. The ratings are assigned at Risk Analytic’s Level and are
given due weightage while extending credit to these asset classes. The Bank intends to comply with the requirements of Foundation Internal
Ratings Based approach for credit risk measurement under Basel II, for which services of a consultant have been solicited to assist the Bank
in carrying out statistical testing and validation of the rating models.
Stress Testing
The Bank is also conducting stress testing of its existing portfolio, which includes all assets, i.e., advances as well as investments. This exercise
is conducted on a semi-annual basis through assigning shocks to all assets of the Bank and assessing its resulting affect on capital adequacy.
Annual Report of Allied Bank for the year 2008 Financials
In some cases, an account may even be downgraded directly from a Regular to Sub-Standard or worse on subjective basis based on the severity
of the trigger involved.
While expanding the advances portfolio, efficient portfolio diversification has been a key consideration. The diversification takes into account
the volatility of various sectors by placing concentration limits on lending to these sectors thereby ensuring a diversified advances portfolio.
Composition of the Bank’s advance’s portfolio is significantly diversified. Textile, Cement, Agriculture and Electric Generation are major
contributors to the advances portfolio. These sectors are considered to be the biggest contributors towards country’s GDP as well.
42.1.1 Segmental Information
42.1.1.3 Details of non-performing advances and specific provisions by class of business segment
Rupees in ‘000
Audited Un-audited
Rupees in ‘000
Audited Un-audited
Public/Government 689,039 276,270 506,947 322,828
Private 13,082,856 10,236,166 10,847,976 9,635,853
13,771,895 10,512,436 11,354,923 9,958,681
42.1.1.5 Geographical Segment Analysis
December 31, 2008
Profit Total Net Contingencies
before assets assets and
taxation employed employed commitments
Rupees in ‘000
Pakistan 6,056,922 366,568,444 22,235,899 126,060,778
The Standardised Approach to credit risk sets out fixed risk weights corresponding, where appropriate, to external credit assessment levels or
for unrated claims.
Selection of ECAIs
The Bank selects particular ECAI(s) for each type of claim. Amongst the ECAIs that have been recognised as eligible by SBP, the following
are being used against each respective claim type.
Sovereigns Exposures: For foreign currency claims on sovereigns, the Bank uses country risk scores of Export Credit Agencies (ECA) par-
ticipating in the “Arrangement on Officially Supported Export Credits” available on OECD’s website.
Exposures to Multilateral Development Banks (MDBs): For exposures on MDBs not eligible for a 0% risk weight, ratings of Moody’s, S&P
and Fitch are being used to calculate risk-weighted assets.
Annual Report of Allied Bank for the year 2008 Financials
Exposures to Public Sector Entities (PSEs): For PSE exposures, ratings of PACRA and JCR-VIS are used to arrive at risk weights.
Bank Exposures: For foreign banks (i.e., incorporated outside Pakistan), ratings of Moody’s, S&P and Fitch is being used to arrive at risk
weights. However, for local banks (i.e., incorporated in Pakistan) ratings of PACRA and JCR-VIS are used.
Corporate Exposures: Ratings assigned by PACRA and JCR-VIS are used for claims on Corporates (excluding equity exposures).
42.1.2.2 Credit Risk: Disclosures with respect to Credit Risk Mitigation for Standardized Approach
The Bank has adopted the Simple Approach of Credit Risk Mitigation for the Banking Book. Since, the trading book of the Bank only
comprises equity investments; therefore no Credit Risk Mitigation benefit is taken in the trading book. In instances where the Bank’s
exposure on an obligor is secured by collateral that conforms with the eligibility criteria under the Simple Approach of CRM, then the Bank
reduces its exposure under that particular transaction by taking into account the risk mitigating effect of the collateral for the calculation of
capital requirement i.e. risk weight of the collateral instrument securing the exposure is substituted for the risk weight of the counter party.
The Bank accepts cash, lien on deposits, government securities and eligible guarantees etc. under the simple approach of Credit Risk Mitiga-
tion. The Bank has in place detailed guidelines with respect to valuation and management of various collateral types. In order to obtain the
credit risk mitigation benefit, the Bank uses realizable value of eligible collaterals to the extent of outstanding exposure.
Since no specific asset is available by way of security in the context of unfunded credit protection, the creditworthiness and reliability of the
provider and the validity and enforceability of that party’s obligations is of paramount importance. Therefore, unfunded credit protection is
only “eligible” if it is provided by an appropriate counterparty which may include National Government, Central Bank etc.
42.2 Equity position risk in the banking book
The Bank makes investment for variety of purposes. Some of the investment positions of equity holding are made for revenue generation as
part of strategic initiatives, while other equity holdings are held to earn capital gain to support the Bank’s business activities.
Classification of investments
Under SBP’s directives, equity investment may be classified as “Held For Trading (HFT)”, “Available for Sale (AFS)” or “Investment in Sub-
sidiaries and Associates”. Some of the equity investments are listed and traded in public through stock exchanges, while other investments
are unlisted and therefore illiquid.
Policies, valuation and accounting of equity investments
In accordance with the requirements of the SBP, quoted securities are carried at market value whereas investments in subsidiaries are ac-
counted for in accordance with the relevant International Accounting Standard as applicable in Pakistan.
The unrealized surplus / (deficit) arising on revaluation of the bank’s held for trading investment portfolio is taken to the profit and loss
account. The surplus / (deficit) arising on revaluation of quoted securities classified as available for sale is kept in a separate account shown in
the balance sheet below equity. The surplus / (deficit) arising on these securities is taken to the profit and loss account when actually realised
upon disposal.
Unquoted equity securities are valued at the lower of cost and break-up value. Subsequent increases or decreases in the carrying value are
credited / charged to profit and loss account. Break-up value of equity securities is calculated with reference to the net assets of the investee
company as per the latest available audited financial statements. Investments in other unquoted securities are valued at cost less impairment
losses, if any. Provision for diminution in the value of securities is made after considering impairment, if any, in their value.
Profit and loss on sale of investments is included in income currently.
Annual Report of Allied Bank for the year 2008 Financials
The cumulative realized gain / (loss) arose of Rs. 150,537 from sale of equity securities; however unrealized loss of Rs. 2,032.571 million was
recognized in the balance sheet in respect of “AFS” securities.
Trading Book
A trading book consists of positions in financial instruments held either with trading intent or in order to hedge other elements of the trad-
ing book. To be eligible for trading book, financial instruments must be held with the intent of trading and free of any restrictive covenants
on their tradability. In addition, positions need to be frequently and accurately valued and the portfolio should be actively managed.
The Bank’s trading book includes equity securities classified as ‘Held for Trading’. These positions are actively managed by the capital market
desk. Bank’s trading book constitutes capital market equities therefore, they are exposed to equity price risk.
Due to the diversified nature of investments in banking book, it is subject to interest rate and equity price risk.
Stress Testing
The Bank also conducts Stress Testing of the Bank’s investment portfolio to ascertain the impact of various scenarios on the capital adequacy
and sustainability of the Bank. The exercise assumes various stress conditions, with respect to Market Risk (Rise or Fall in Interest Rates,
leading to interest rate risk), Equity Price Risk resulting from Stock Market movements, FX Rate Risk leading from adverse movements in
exchange rates and Liquidity Risk (ability to meet short-term obligations if there is a run on deposits).
Concentration Risk
ALCO is responsible for making investment decisions in the capital market and setting limits that are a component of the risk management
framework. Portfolio, Sector and Scrip wise limits are assigned by the ALCO to guard against concentration risk and these limits are reviewed
and revised periodically. The capital market desk ensures compliance of concentration limits set by ALCO. Limit monitoring is done on a daily
basis. Limit breaches if any are promptly reported to ALCO with proper reason and justification.
Price Risk
Trading and investing in equity securities give rise to price risk. ALCO and Treasury’s Capital Market Unit both ensure that through prudent
trading strategy and use of equity futures, the equity price risk is mitigated, albeit to a certain extent.
Annual Report of Allied Bank for the year 2008 Financials
42.2.4.1 Reconciliation of Assets and Liabilities exposed to Yield/Interest Rate Risk with Total Assets and Liabilities
December 31, December 31,
2008 2007
Rupees in ‘000
Audited Un-audited
Other than customer’s deposits, the Bank’s funding source is the inter-bank money market. Change in the government monetary policy and
market expectations of interest rate are all important factors that can adversely affect our key funding source. Efficient and accurate planning
plays a critical role in liquidity management. Our MIS provides information on expected cash inflows/out flows which allow the Bank to take
timely decisions based on the future requirements.
Gap analysis, stress testing and scenario analysis is done on periodic basis to capture any adverse effect of market movements on liquidity posi-
tion. Based on the results produced, ALCO devise the liquidity management strategy to maintain sufficient liquidity to deal with any related
catastrophe.
Rupees in ‘000
Audited
Assets
Cash and balances
with treasury banks 23,653,754 23,653,754 - - - - - - - -
Balances with other banks 2,097,611 2,097,611 - - - - - - - -
Lendings to financial institutions 15,793,183 15,493,183 300,000 - - - - - - -
Investments 82,433,998 23,503,057 10,584,842 2,948,294 14,133,383 7,331,791 6,272,740 11,400,259 6,200,092 59,540
Advances 213,020,108 46,634,673 43,500,172 32,941,300 24,919,045 17,811,621 11,931,894 15,475,689 15,694,013 4,111,701
Operating fixed assets 11,150,129 44,047 88,369 132,141 264,282 1,961,658 339,904 529,909 631,042 7,158,777
Deferred tax assets 1,031,049 6,291 44,913 23,353 119,486 120,386 125,241 129,351 462,028 -
Other assets 17,388,612 6,625,435 1,417,460 3,371,105 4,568,473 101,758 100,891 203,172 500,159 500,159
366,568,444 118,058,051 55,935,756 39,416,193 44,004,669 27,327,214 18,770,670 27,738,380 23,487,334 11,830,177
Liabilities
Bills payable 2,952,490 2,952,490 - - - - - - - -
Borrowings 27,778,151 12,066,612 4,619,375 8,664,840 592,122 1,132,936 260,004 317,651 124,611 -
Deposits and other accounts 297,474,543 55,160,320 59,306,769 33,656,366 37,491,014 32,255,660 25,496,452 16,779,473 19,656,671 17,671,818
Sub-ordinated loans 2,498,000 - - 500 500 1,000 1,000 1,248,000 1,247,000 -
Other liabilities 13,629,361 4,707,966 6,348,412 202,116 220,938 195,880 181,654 305,185 733,605 733,605
344,332,545 74,887,388 70,274,556 42,523,822 38,304,574 33,585,476 25,939,110 18,650,309 21,761,887 18,405,423
Net assets/(liabilities) 22,235,899 43,170,663 (14,338,800) (3,107,629) 5,700,095 (6,258,262) (7,168,440) 9,088,071 1,725,447 (6,575,246)
Share capital 6,463,644
Reserves 5,804,776
Unappropriated profit 8,475,791
Surplus on revaluation
of assets - net of tax 1,491,688
22,235,899
Annual Report of Allied Bank for the year 2008 Financials
42.3.1.1 When an asset or liability does not have any contractual maturity date, the period in which these are assumed to mature has been taken as the
expected date of maturity.
42.4 Operational Risk
The Bank, like all financial institutions, is exposed to many types of operational risks, including the potential losses arising from internal activi-
ties or external events caused by breakdowns in information, communication, physical safeguards, business continuity, supervision, transaction
processing, settlement systems and procedures and the execution of legal, fiduciary and agency responsibilities.
The Bank maintains a system of internal controls designed to keep operational risk at appropriate levels, in view of the bank’s financial strength
and the characteristics of the activities and market in which it operates. These internal controls are periodically updated to conform to industry
best practice.
The Bank is currently in the process of implementing internationally accepted Internal Control-Integrated Framework published by the Com-
mittee of Sponsoring Organizations of the Tread way Commission (COSO), with a view to consolidate and enhance the existing internal
control processes
The Bank is also in the process of developing a Business Continuity Plan applicable to all its functional areas, with assistance of a consultant.
Further the Bank has appointed a consultant to assist in implementation of Operational Risk Framework. Various policies and procedures with
respect to this framework were developed in 2008, and the same are planned for approval and subsequent implementation during 2009.
Currently the Bank uses the Basic Indicator Approach for assessing its operational risk capital charge. However, migration to Standardised
Approach is planned for future. For this purpose the bank is in the process of acquiring and implementing required systems and technology.
Notes to the Consolidated Financial Statements
for the year ended December 31, 2008
183
43. RECLASSIFICATION
Following corresponding figure has been reclassified for the purpose of better presentation.
December 31,
2007
From To Rupees in ‘000
45. GENERAL
45.1 These accounts have been prepared in accordance with the revised forms of annual financial statements of the banks issued by the State Bank
of Pakistan through its BSD Circular No. 04 dated February 17, 2006.
46. DATE OF AUTHORIZATION FOR ISSUE
These financial statements were authorized for issue on February 27, 2009 by the Board of Directors of the Bank.
Chief Financial Officer President and Chief Executive Director
Director Director