Chairman's Statement

img
Mohammed W. Al-Harby

On behalf of the Board of Directors, I would like to present the 35th audited financial statements of Saudi Pak Industrial and Agricultural Investment Company Limited as well as consolidated accounts together with Auditors Report to Members and the Directors Report for the year ended December 31, 2016. The assets and liabilities of Saudi Pak Leasing Company Ltd (SPLC) were not consolidated as a subsidiary till January 26, 2016 andshare of profit of SPLC as an associated company, for the period January 27, 2016 to December 31, 2016 was also not accounted for in the Holding Companys consolidated financial statements for the year ended December 31, 2016 for which specific exemption has been obtained from the Securities Exchange Commission of Pakistan (SECP).

During the period under review, Pakistans economy continued to maintain its growth momentum for the 3rd year in a row with GDP growing at 4.71 percent in FY2016 which is the highest in eight years. Despite global economic slowdown economic growth in Pakistan accelerated on the cumulative impact of the governments macroeconomic and structural reform program, sharply lower oil prices, improved security and planned infrastructure investment tied to China Pakistan Economic Corridor (CPEC). Further stable PKR parity also helped in keeping the CPI inflation under control. The average CPI inflation fell from 8.62 percent in FY 2014 to 4.53 percent in FY 2015 and further declined to 2.9 percent during FY 2016. SBP decreased the policy rate to a historically low level of 5.75 percent which is the lowest rate in last 44 years reflecting significantly improved macroeconomic conditions towards the end of FY 2016.
The improved economic growth prospects have led rating agencies to improve their outlook for Pakistan. Standard & Poor upgraded the Country credit rating from B negative to B with stable outlook. Similarly Moodys upgraded the rating from Caa2 to B3 with stable outlook.
KSE-100 crossed a record high of 47,807 points. Demand for credit is gradually strengthening at the back of low interest rate environment. However, business environment remains competitive with pressure on loan pricing and margins as large commercial banks divert their resources towards project finance business given substantially reduced returns on Govt. Treasury Bills.

Company maintained its strategy as per the approved business plan. Focus remained on core project finance business which witnessed an impressive growth of 23.7% despite increased competition from commercial banks. Capital Market positions were reconfigured with high dividend yielding equities in view of low interest rate environment. Given higher inflation expectations going forward and no further reduction in discount rate expected, Company offloaded a substantial portion of its investments in Govt. Securities and capitalized on trading opportunities in Capital markets to book handsome capital gains. Overall this strategy proved to be very successful enabling the company to far exceed its budgeted profit targets.

Despite a massive 425 bps reduction in discount rate Net Interest Margin nominally reduced by 2%. The drop in Gross Revenue was largelly cushioned by efficient management of resources and 23.7% increase in project finance business. Income from capital market operations was recorded at Rs. 243.89 million (Capital Gain: Rs. 119.26 million; Dividend Income: Rs. 124.63 million) as compared to Rs. 213.19 million booked last year. Similarly Company booked capital gains of Rs. 317.14 million from available gains in Govt. securities as against Rs. 234.35 million booked last year. Overall as a result of above the company posted a pre-tax profit of Rs. 962.85 million as all business segments out performed. This result was achieved despite prudent fresh new provisioning of Rs. 430.75 million made against NPLs and unquoted stocks brought forward from the past which is an extremely commendable achievement. The shareholders equity increased by 5.8% to Rs. 9,920.58 million as at December 31, 2016.

Turnaround in Companys overall risk profile including operating results and financial flexibility was reconfirmed by our Credit Rating Agency JCR-VIS who maintained Companys Long Term entity rating to AA+ and short term to A1+ with stable outlook.

Future prospects for Pakistan economy remain bright. Renowned international rating agency Fitch expects growth to strengthen to 5.3% in FY 17, lifted by a recovery in agricultural output following poor weather conditions in the previous season and an influx of investment linked to the China & Pakistan Economic Corridor (CPEC). Pakistan has important strategic endowments and development potential. The country is located at the crossroads of South Asia, Central Asia, China and the Middle East and is thus at the fulcrum of a regional market with a vast population, large and diverse resources, and untapped potential for trade. Asian Development Bank is of the view that a major impetus to growth in the FY 2017 and beyond will be the implementation of $ 46 billion program of infrastructure spending on roads, railways, pipelines, and electric power in the economic corridor project linking Pakistan with the People Republic of China.

Company plans to remain focused on the core business activities and capitalize on available business opportunities while developing new revenue generating sources including private equity and fee income. Concerted efforts on recoveries, strengthening risk management framework, process improvements, resolving issues relating to its strategic investments will continue. The board firmly supports management to pursue its plans. In the end I would like to express on my behalf and on behalf of the Board our sincere gratitude to the joint venture partners, the Kingdom of Saudi Arabia and the Islamic Republic of Pakistan for their unwavering support and State Bank of Pakistan as well as Securities Exchange Commission of Pakistan for their professional guidance. I am also thankful to the Board Members for their valuable contributions. Further, I congratulate and express my deep pride in the Saudi Paks team for this excellent performance.

Mohammed W. Al-Harby
Chairman

Select Language: