The following example essay on “Banks New Investment Strategy” answers the question how to come up with something innovative to live up to the mission of JS Bank?
It was a fine sunny morning of April when Basir Shamsie took off for his office. While driving his way to the office, he could not stop thinking about the impending board meeting he was headed for. The board meeting which will decide the future of the company he works in. To his surprise, the new CEO who replaced the former CEO Khalid Imran was none other than him.
Basir Shamsie, who was serving as the SEVP & Group Head Treasury, Investment Banking & Financial Institutions at JS Bank for the past 12 years, was now actually appointed as the CEO of JS Bank.
While sitting in his plush office after assuming control, Shamsie was critically thinking over what direction to pursue for a foreseeable future of the Bank. He knew everyone had high expectations from him due to his vast experience and brilliant mind.
He had to come up with something that would help JS Bank become a better and bigger bank, a strategy that would enable the Bank to grow and achieve its vision of being recognized as the premier and best performing investment company in Pakistan. They say, With great power comes great responsibility and so was the case with Shamsie.
There was a need to come up with something innovative to live up to the mission of JS Bank. Hence, Shamsie was concerned about how to go about it. He proposed the idea of shifting the investment focus from T-bills and PIBs to investments in corporate and mortgage financing. It was a shift from a very less risky investment (government bons) to a high risky investment (mortgage and corporate financing), thus it was very important to make the decision wisely.
JS Bank is a subsidiary of JS Group, one of the most reputable diversified investment company operating in Pakistan. Apart from excelling in areas of asset management, securities brokerage, investment banking, commercial banking, insurance and trade finance, the group happens to own 5 more vertical businesses such as JS Industrial, JS Property, JS Infocom, JS Transportation, and JS Resources. JS Group also commenced Islamic Banking and financial services under the Brand of Bank Islami in 2006.
JS Bank came into existence on December 30, 2006 as a result of the merger between Jahangir Siddiqui Investment Bank Limited and the commercial banking operations of American Express Bank Limited Pakistan. After operating for seven years in 2013, JS Bank managed to tap most of the metropolitan cities of Pakistan with a network size of over 180 branches in around 100 cities nationwide.
Like all other banks, JS Bank also parks most of its funds in the most secure government bonds such as T-Bills and Pakistan Investment Bonds (PIBs) to avoid putting funds in highly risky toxic loans. Since, government securities are least risky and default rate is very low, Banks prefer to invest their money in these low risky bonds and securities.
According to a banking survey of 2016, JS Bank is regarded as a small bank due to its total assets being less than Rs.150 billion. JS Bank has a ranking of 15 determined by the level of its total assets. This is shown in Exhibit 1 as follows:
Pakistans Banking industry consists of commercial banks, foreign banks, Islamic banks, development finance banks (DFIs), and micro finance banks. Banking sector comprises a total of approximately 31 banks, out of which 22 are local private banks, five are owned by public-sector and the rest four are foreign banks. There are few major players in the market that have a dominating stake in banking assets of Pakistan. These few big banks collectively have more than 57% of deposits and 53% of advances across Pakistan. These major banks are:
There are various sizes of banks operating in Pakistan comprising of large banks, medium size banks, small banks, and Islamic banks. All these banks are regulated by the State Bank of Pakistan which controls the activities of all banking system in Pakistan.
Prior to focusing more towards Mortgage & Corporate financing, JS Banks major share of profit earnings would come from investing investors money in Governments securities such as T-bills and PIBs. One of their flagship mutual fund scheme was JS Capital Protective Fund.
To better understand Capital Protective Fund, most of these schemes deploy a conventional capital protection strategy of investing a significant portion of their assets (80%-85%) in bank deposits/government securities, for capital protection at maturity, while the remaining assets (15%-20%) are invested in high yielding assets such as equities for capital growth. This asset allocation between equities and fixed income instruments remains fixed throughout the life of the scheme.
Investing in PIBs and T-bills comes under Deposits while Mortgage and Corporate Financing come under Advances (Asset side). In 2016, Advances to Deposit Ratio (ADR) was 41.48%. After the appointment of Basir Shamsie as the new CEO there was a boost in Advances investment, ADR increased to 63.48% by the last quarter of 2017.
JS Bank Ltd made a strategic decision to diversify their source of profit earning by investing more towards corporate & mortgage financing facility. This decision was made by Basir Shamsie, who was appointed as the new CEO of JSBL in early 2018.
According to Basir Shamsie, the reason for focusing more towards Corporate & Mortgage financing is the fact that the commercial banks were previously earning huge profits from the discount rates of State Bank of Pakistan (SBP). However, in the recent year the rates have been going up which had a chain reaction on interest rates thereby increasing them too and making it difficult for borrowers to borrow.
The bank was able to tap increased demand for corporate loans and big enterprise loans in previous years. However, it started giving more consideration to consumer loans, lending to small and medium enterprises (SMEs), medium-sized enterprises (MEs), and other areas of lending such as agriculture since last year.
Following the new strategy, JS Bank has opted for corporate financing by showing interest in Prime Minister Youth Business Loan Scheme (PMYBL). Under this scheme, JS Bank has made agreements with Corporate entities like Nestle and Careem to allow people to get advances with ease. For instance, JSBL will provide loans to Careem drivers so that the drivers can have a car of their own. Similarly, it will also provide loans to farmers associated with Nestle to purchase livestock, buy equipment and upgrade farms.
Targeting Agriculture sector of Pakistan, JSBL launched JS Zarkhez Agri Finance Scheme through which they provide lease to farmers and produce transporters so that they can buy tractors, pick-ups, mini trucks etc. The bank, in its half-year financial statement said it exceeded its SBP-assigned agriculture credit target with a clean portfolio, paving the way for sustainable expansion in the coming year. In the last fiscal year, the bank lent Rs10 billion to farmers.
JS Bank created a boost in its mortgage financing facility by launching JS Ghar Apna, home loans given to public so that they can buy, build and renovate their homes. The rate at which these loans are given is KIBOR + 4.25% which is claimed to be lowest floating mark-up rate.
The Banks higher management justifies their emphasis on house loans facility because they are expecting higher growth in mortgages in the coming years, driven by computerized land records in the two provinces, and due to rising real estate prices. In addition to this, The State Bank of Pakistan (SBP) revealed in July it will introduce a subsidized financing facility for low-cost housing by providing liquidity to the financial institutions at subsidized rate.
The current CEO of JS Bank is aware of the fact that going towards Mortgage & Corporate Financing to maintain profit margins can be risky as the mortgage houses, advances or loans, auto financing and agriculture lending are risky products, but according to him, this is the only way for the private banks to earn profits. Many banks are still unwilling to consider giving loans to MEs and SMEs which has given JS Bank a head start that could create a reliable name among the people from agriculture sector, small businessmen and general public.
Mr.Shamsie states that since the ratio of Non-performing loans was nominal (less than 2%), the bank decided to come forward and revise its strategy. JS bank is amongst the top five banks when it comes to a variety of customer focused offerings including SME, home and auto loans.
The CEO, Mr.Shamsie, seems very optimistic about the new strategy. He believes that this will help JS Bank achieve its mission of growing at a sustainable rate. Although the risk associated to these investments tends to be high, but with greater risk comes greater profits, which Shamsie is focusing to work on. As a bank that focuses on growth, it is very important to earn high profits to support that growth that JS bank is looking forward to achieving.
However, the rising interest rates will burden the people even more when paying back the loan so there is a good chance that people might not borrow from JS bank in the future. This might compel the bank to switch to T-bills and PIB financing again which might hinder their current growth unless they introduce a better strategy to counter the issue of rising interest rates.