FINANCIAL ANALYSIS

FINAL REPORT

“Merger of JS Bank & JS Investment bank.”

Submitted To:

MR. Muhammad Ahmed

Submitted by:
Muhammad ADeel Waheed 5102

Section # BH-4

TABLE OF CONTENT

Financial Analysis (Merger & Acquisition) Page 1

  ACKNOWLEDGEMENT

 MERGER AND ACQUISITION

o MERGER

o ACQUISITION

 DISTINCTION BETWEEN MERGERS AND ACQUISITIONS

 DATE OF MERGER OF JS BANK AND JS INVESTMENT

 REASON FOR MERGER OF JS BANK AND JS INVESTMENT

 ARTICLES ON PROFITABILITY
o ARTICLE 1
o ARTICLE 2
o ARTICLE 3

 PROFITABILITY RATIOS

 NP RATIO

 GP RATIO

 ROE RATIO

 RETURN ON ASSETS RATIO

 OPERATING E XPENSE RATIO

 CONCLUSION

 APPENDIX

Financial Analysis (Merger & Acquisition) Page 2

 ACKNOWLEDGEMENT

All praises and thanks to the grace of ALLAH

ALMIGHTY Who is the ultimate source of all
knowledge to mankind. He bestowed man with
intellectual power and understanding and gave
him spiritual insight enabling him to discover his
‘Self’ know his Creator through His wonders and
conquer nature. Bow in obedience, I before my
Lord, who bestows me to fortitude and impetus
to accomplish this task and elucidate a drop of
already existing ocean of knowledge with quality
of doing something adventurous, novel, thrilling,
sensational, and path bearing.

I am greatly indebted to Specially Mr.

Muhammad Ahmed for their valuable
suggestion, sympathetic attitude and cordial co-
Financial Analysis (Merger & Acquisition) Page 3
 operation throughout the research process of
this Project.

MERGER AND ACQUISITION

Merger:
In businesses mergers and takeovers (or acquisitions) are very similar corporate
actions - they combine two previously separate firms into a single legal entity.
Significant operational advantages can be obtained when two firms are combined
and, in fact, the goal of most mergers and acquisitions is to improve company
performance and shareholder value over the long-term. A company that
combines itself with another can experience boosted economies of scale, greater
sales revenue and market share in its market, broadened diversification and
increased tax efficiency.

Acquisition:
An acquisition occurs when one company takes a controlling ownership interest
in another firm, a legal subsidiary of another firm, or selected assets of another
firm such as a manufacturing facility. An acquisition may involve the purchase of
another firm’s assets or stock.

Financial Analysis (Merger & Acquisition) Page 4

 Distinction between Mergers and Acquisitions:

The major difference between a merger and an acquisition is their mode of

finance. There are several ways to structure a merger. In a forward merger, the
target merges into the acquirer’s company, and the selling shareholders receive
the acquirer’s stock. In a reverse merger, the acquirer merges into the target
company and gets the target company’s stock. In a subsidiary merger, an
acquirer incorporates an acquisition subsidiary and merges it with the target
company. In a triangular merger, the target company’s assets are conveyed to
the acquirer’s company in exchange for the acquirer’s stock.

Date of Merger of JS Bank and JS Investment:

Name of Company: Jahangir Siddiqui Inv. Bank Ltd

New name of the company / merged with: JS Bank Limited

Date of Merger: 30/12/2006

Paid-up Capital: 853.125 Million

Ratio: [ 1 : 3.24 ]

Reason for merger of JS Bank and JS investment:

JS Bank Limited has been formed after the merger of Jahangir Siddiqui Investment
Bank Limited and commercial banking operations of J S Bank Ltd Pakistan. J S
Bank Limited commenced operations in Pakistan as a fully scheduled bank on
December 30, 2006. Pakistan’s banking sector has experienced significant growth
since 2003, reflected in increased deposit mobilization and development of
consumer banking products. The banking market has become highly competitive
as privatization of state-owned large banks was followed by mergers and
acquisitions of local private banks by domestic and international banks. The
emphasis is increasingly on retail-based branch banking with a wide consumer
product line driven by technology and nationwide accessibility to services.

Financial Analysis (Merger & Acquisition) Page 5

JS Bank is well positioned to take advantage of this highly competitive yet
consolidating phase of the banking industry in Pakistan by leveraging the
'JS' brand reputation, extending its existing branch network and combining JS
Group's other financial services and product offerings to offer a "one-stop-shop"
for customers wealth management needs.

Articles on Profitability:

Article 1:

Financial Sector Reforms & Soundness of Banks

Operating
In Pakistan
*
Ishaque Ahmed Ansari
Statistics & DWH Department, State Bank of Pakistan

Author describes the impact of Financial Sector Reforms on the Soundness of

Banks Operating in Pakistan over the last two decades. The paper attempts to
answer the question; does financial sector reforms have any impact on the
soundness of banks? Consequently, it is found that financial sector reforms,
introduced in late 1980s, made significant impact on the Soundness of Banks.
There has been a consolidation and merger of banks, capital adequacy ratios look
much stronger, asset quality has been improved stemming the flow of Non
Performing Loans (NPLs), and management has been strengthened by the
induction of professionals at the top and second tiers. An important achievement
in the last decade has been the transformation of a largely state-owned and weak
banking system into healthier, primarily privately owned system. This has been
facilitated by restructuring of major banks, ongoing corporate governance, and
credit culture. The analysis strongly points toward the need for continuity of
banking sector reforms. Though major efforts have been undertaken by the
governments to update and improve the legislative framework, there remains a
need to repeal, amend and update laws.

There exists a vast literature on modeling and estimating the impact of

financial sector reforms on financial markets. Following the renewed interest by
Financial Analysis (Merger & Acquisition) Page 6
policy makers in bank soundness (Aditya Narain and Saibal Ghosh- 2003), ongoing
international efforts towards development of minimum standards and
harmonization have come into focus. After the banking crises, in several Asian
economies, weaknesses in the application of prudential standards by banks and
the inefficacy of the supervisory framework were cited as one of the main causes.

EARNINGS AND PROFITABILITY

Throughout the period, return on assets remained around 1 %, which reflected the
inefficiency of the banking industry. Return on equity remained below 25 % while
earning to assets ratio found below 12 % during the period. That was the upshot
of falling share of earning assets in that period, which could be attributed to
mounting burden of NPLs coupled with increased provisions.
The falling of earning and profitability ratios in the pre-reform period improved
slightly during 1988-90. Return on equity increased from 15.7 % in 1988 to 16.6
% in 1990.
Earning to assets ratio showed inclining trend with its increase from 11.9 % in
1988 to
14.5 % in 1990.
The slightly improved profit to asset and equity ratios of the pre-reform period
showed downward trend during the reform period. The earning to assets ratio
remained almost constant during 1991-96.
Return on assets reduced from 1.2 % in 1991 to -0.7 % in 1996. Return on equity
also declined from 19.0 % in 1991 to -11.7 % in 1996. Earning to assets remained
almost stagnant from 13.1 % in 1991 to 13.4 % in 1996 in that period.
Except in 1999 and 2001, net profit to equity increased from -25% in 1997 to 20.3
% in 2002. Return on equity ratio was remarkably increased from -25.0 % in 1997
to 20.3 % in 2002. It was a remarkable achievement by banks to improve their
return on equity. Earning to assets reduced from 13.1 % in 1997 to 8.9 % in 2000.

Article 2:
Banking Survey 2007
PROFITABILITY
For banks, under review profit before tax decreased by 8.3% to Rs. 110.7 billion in
2007 compared to Rs. 120.7 billion in 2006 and Rs.91.3 billion in 2005. Among
Large Size Banks, BAF registered an increase of 162.5% in profit before tax, MCB
19% and NBP 7.1%. In terms of amount NBP posted the highest profit figure of Rs.
28.5 billion which is approximately 28.5% of total profit before tax of the Large
Size Banks followed by MCB and HBL with Rs. 22.5 billion and Rs. 15.1 billion
respectively. The main reasons for reduction in the profitability were additional
provision against NPL due to the elimination of benefit of FSV and downturn in
consumer and individual banking. The additional provision made due to

Financial Analysis (Merger & Acquisition) Page 7

withdrawal of FSV benefit against most types of advances amounted to
approximately Rs. 25 billion.

Medium Size Banks

Among Medium Size Banks, HMB recorded the highest increase in profit before tax
in terms of percentage i.e. 33.7% and in terms of amount, followed by BAH
by12.8% increase. Most of the Medium Size Banks remained in positive zone with
the exception of ABN and NIB.

Small Size Banks

Among Small Size Banks, AHB led the group by posting 554% increase in profits
followed by DB 351.2% and AIB 85.3%. In terms of amount MB remained at the
top by registering a profit of Rs. 1.5 billion (63.8% increase) followed by DB and
AHB with Rs. 0.8 billion and Rs. 0.3 billion respectively.

Article 3:
X-efficiency Analysis of Commercial Banks in
Pakistan: A Preliminary Investigation
MOHAMMAD HANIF AKHTAR*
Author tries to attempt in an important area of the financial sector of the
economy, where banking sector has gone through institutional and structural
reforms and efficient role of commercial banks is demanded to encourage
investment for economic growth. The banking sector has already started some
results of financial sector reforms and banking regulations. Recently we have
observed privatization of nationalized commercial banks, mergers and acquisition,
excess liquidity management task with these banks, diversion towards consumer
banking and information technology (IT) role has been enhancing in terms of e-
banking. These all factors demand nothing but efficient operation of banks. This
paper does the X-efficiency analysis of commercial banks in Pakistan, which
considers both technical efficiency and allocative efficiency. As for as the paper is
concerned the value of the paper, potential and importance of the topic for policy
implications is reflected only in the last conclusion section where the author has
provided a proposal for future research. The paper is well conceptualized and
motivated; however, I have some observations:
 The generalization of results on the basis of only 1998 data is risky because
1998 has been very sensitive with respect to many financial and economic
events like foreign currency account freeze and nuclear tests etc.
 To establish a hypothesis that process of deregulation and liberalization led
towards and efficient banking system using intermediation approach where

Financial Analysis (Merger & Acquisition) Page 8

 deposits are converted to loans, the non-performing loans are important
component, author has not mentioned anything about the same.
 Comparing the bank efficiency with world banking system efficiency may
not be very meaningful without comparing the diversification of output in
these countries, level of default of non-performing loan and size of
operation etc. I would like to submit some suggestions:
 As author pointed that it will be interesting and relevant if more terminal
points could be included to compare the bank efficiency before, after and
during the reform period.
 In choosing methodology, the author has mentioned that efficiency results
are sensitive to methodology. To resolve the same author either can give
the pros and cons of these methodologies. Or alternatively one should be
careful in choosing the methodology and draw policy implications from
 The author may look into latest study “Bank Reforms and Bank Efficiency in
Pakistan” done by IMF researchers namely: Daniel, C. Hardy et al. (2002).
Karachi.

Profitability Ratios:

NP RATIO:
Net Profit Ratio of JS Bank & JS Investment Bank before & after merger is as
follows;

Bank name JS bank J S Investment Bank J S Bank after Merger

Year JS 2005-2006 JS Inv. 2004-2006 JS after merger 2007-2008

Net Profit Ratio -20% 45.70% 2.91%

Financial Analysis (Merger & Acquisition) Page 9

 ChartTitle
50%

40%

30%

20%

10%

0%
Net Profit Ratio
-10%

-20%

-30%

JS2005-2006 JSInv. 2004-2006 JSafter merger 2007-2008

GP RATIO:
Gross Profit Ratio of JS Bank & JS Investment Bank before & after merger is as
follows;

Bank name JS bank J S Investment Bank J S Bank after Merger

Year JS 2005-2006 JS Inv. 2004-2006 JS after merger 2007-2008

Gross Profit Ratio 24% NIL 28.00%

Financial Analysis (Merger & Acquisition) Page 10

 S Investment Ban Bank after

ROE RATIO:
Return On Equity Ratio of JS Bank & JS Investment Bank before & after merger is
as follows;

Bank name JS bank J S Investment Bank J S Bank after Merger

Year JS 2005-2006 JS Inv. 2004-2006 JS after merger 2007-2008

Return on Equity
0% 25.20% 0.86%
Ratio

Financial Analysis (Merger & Acquisition) Page 11

 ChartTitle
30%

25%

20%

15%

10%

5%

0%
Return on Equity Ratio
-5%

JS2005-2006 JSInv. 2004-2006 JSafter merger 2007-2008

RETURN ON ASSETS RATIO:

Return On Assets Ratio of JS Bank & JS Investment Bank before & after merger is
as follows;

Bank name JS bank J S Investment Bank J S Bank after Merger

Year JS 2005-2006 JS Inv. 2004-2006 JS after merger 2007-2008

Financial Analysis (Merger & Acquisition) Page 12

 Return on Assets
0% 6.95% 0.25%
Ratio

an S Bank after

ChartTitle
8%
7%
6%
5%
4%
3%
2%
1%
0%
-1% Return on Assets Ratio

JS2005-2006 JSInv. 2004-2006 JSafter merger 2007-2008

Operating Expense Ratio:

Operating Expense Ratio of JS Bank & JS Investment Bank before & after merger is
as follows;

Bank name JS bank J S Investment Bank J S Bank after Merger

Financial Analysis (Merger & Acquisition) Page 13

 Year JS 2005-2006 JS Inv. 2004-2006 JS after merger 2007-2008

Operating Analysis
49% 45.50% 55.40%
Ratio

ChartTitle
60%

50%

40%

30%

20%

10%

0%
OperatingAnalysis Ratio

JS2005-2006 JSInv. 2004-2006 JSafter merger 2007-2008

Conclusion:
Average net profit \ loss of JS bank (Pvt.) Ltd was 20% loss for the period
2005-2006 and for period 2004 - 2006 JS Investment Bank having 45.70%
profit. After merger of JS bank & JS Investment Bank it was 2.91%, which
was good for JS Bank as its NP ratio increases 22.91%. In the same period

Financial Analysis (Merger & Acquisition) Page 14

 GP ratio of JS Bank increased from 24% (avg. 2005 - 2006) to 28% (after
merger).

Return on equity was -0.0139% (avg. 2005 -2006) and for JS Investment
Bank it was 25.20% (avg. 2004 – 2006) and after merger it was 0.86% which
is batter as it improves 0.87%.

Return on assets for JS bank was -0.0033% (avg. 2005 -2006) and for JS
Investment Bank it was 6.95% (avg. 2004 – 2006) and after merger it was
0.25% also improves as it was before merger.

Operating expense ratio trend is increasing, from the Operating expense

ratio we can see that for JS Bank it was 49% (avg. 2005 - 2006) and for JS
Investment it was 45.5% (avg. 2004 - 2006) and 55.40% after merger. It
effects on profit of JS bank, the operating expense ratio after acquisition was
increasing.

After the analyzing the above ratio it is concluded that overall position of JS
Bank improves but operating expense ratio normally increase which is not
fear sign.

Appendix

I personally collected this data with the help of survey from

those areas where our target market. We also search several
web sites to get ideas about laundry business and mostly
research done with the help of google.com which are very handy
to get ideas and knowledge.

Financial Analysis (Merger & Acquisition) Page 15