How to audit a Pakistani bank valuation model.
Start with a dated balance sheet, reconcile average earning assets and funding, rebuild income and provisions, apply the current tax law, and compare EPS, book value and cash distributions without hiding assumptions inside one target price.
- Tie opening balances, movements and closing balances to the annual or interim statements before forecasting anything
- Use average assets and liabilities for margins; closing balances paired with full-period income can distort the result
- Separate recurring spread and fee income from trading gains, reversals, one-off tax effects and corporate actions
- Show EPS, book value per share, ROE and payout sensitivities in indexed units; do not turn a tutorial into an implied stock target
A bank model is unusually sensitive to accounting consistency. Deposits fund only part of the asset base; equity, borrowings, cash, statutory reserves and other assets also matter. Income is earned over a period, so it should normally be compared with average rather than closing balances. A model that skips these reconciliations can produce a plausible-looking but unsupported output.
The completed Bank Alfalah case below reconciles actual published per-share figures and provides a downloadable calculation. The later 100-unit teaching model explains statement mechanics using separate, anonymous assumptions. Keep the two input sets distinct.
Completed case: Bank Alfalah’s per-share reconciliation
Bank Alfalah’s FY2025 results release reports EPS of PKR 17.97 and full-year cash dividends of PKR 10.50 per old share. Its PSX split notice sets 20 April 2026 as the resumption date for two new shares per old share, with face value changing from PKR 10 to PKR 5.
| FY2025 input | Per old share | Equivalent per new share |
|---|---|---|
| Earnings | PKR 17.97 | PKR 8.985 |
| Full-year cash dividend | PKR 10.50 | PKR 5.25 |
| Dividend ÷ EPS | 58.43% | 58.43% |
A holder of 1,000 old shares becomes a holder of 2,000 new shares. The same historical gross dividend is PKR 10,500 on either representation: 1,000 × 10.50 or 2,000 × 5.25. The split changes units, while the payout ratio stays unchanged. Mixing the old EPS with a new-share price would understate the price/earnings multiple by half.
The half-year 2026 release provides a matched comparison: EPS of 6.76 versus restated 4.84 for the prior half-year. Our calculation, (6.76 ÷ 4.84 − 1) × 100, is 39.67%. The half-year dividend of 3.00 divided by 6.76 gives a 44.38% payout ratio. Small differences from reported growth can arise because these displayed EPS inputs are rounded.
Use a consistent share basis and the same reporting period before interpreting growth or a valuation multiple.
This reconciliation is complete for the stated inputs. It does not estimate fair value. The issuer attributes much of the half-year profit increase to capital gains; annualizing that half-year EPS would embed a separate repeatability assumption. The teaching model below shows the additional balance-sheet, income and valuation checks needed before a forecast could be supported.
Download the calculation (CSV) · Dated inputs and sources (JSON)
01Why a bank is valued differently
A bank's financing and asset books generate much of its income, while deposits and borrowings create funding costs or profit-sharing expense. For a conventional bank, the statements report interest or mark-up lines; an Islamic bank reports its own Shariah-compliant financing, investment and depositor-profit structure. Use the issuer's terminology and notes rather than relabeling one structure as the other.
The model starts with average volumes and effective yields or costs by category. A current account may have no contractual depositor profit, while savings, term deposits and borrowings have different repricing and behavioral characteristics. CASA is useful, but it is not a substitute for the full funding table.
The CASA ratio groups current and savings deposits, but the two do not have the same cost. Recalculate current-account share and savings-account share separately from the note to the accounts, and compare both the period average and closing mix. A management target is an assumption until reported balances confirm it.
02Step 1 - Write down your assumptions
A valuation is only as good as the assumptions under it, so the first move is to write them down. Spell them out and anyone reading your model (including you, six months later) can see exactly which lever to pull when reality turns out differently. For a Pakistani bank, a handful of assumptions drive almost the entire result.
| Assumption | What it controls | Primary record |
|---|---|---|
| Rate path and repricing | Asset and liability yields by reset date, not a one-for-one policy-rate move | SBP decisions plus asset/liability notes |
| Volume growth | Average advances, investments, deposits and borrowings | PSX-filed statements and management guidance |
| Funding mix | Current, savings, term and other funding costs | Deposit composition and expense notes |
| Asset quality | Stage migration, infection, coverage and provision expense | Credit-risk and advances notes |
| Tax | Current, deferred, super-tax and other applicable components | Current Finance Act, Fifth Schedule and tax note |
Do not move every balance-sheet yield by the same number when the SBP policy rate changes. Fixed-rate securities, floating advances, savings deposits and term funding reprice on different dates and bases. Build a repricing table and anchor the policy input to a dated SBP Monetary Policy Statement.
03Step 2 - Build the balance sheet
Project each material balance-sheet line rather than treating deposits as equal to advances plus investments. On the asset side, separate advances or financings, investments, cash and balances, placements, fixed assets and other assets. On the funding side, separate deposits, borrowings, other liabilities and equity. The projected statement must satisfy assets = liabilities + equity.
The advances-to-deposit ratio (ADR) is useful for comparing loan deployment, but it does not measure every earning asset and it does not prove credit quality. Pakistan has changed bank-tax provisions involving ADR in past Finance Acts. Do not carry an old threshold into a 2026 model: calculate current tax from the Finance Act 2026, the amended Ordinance and the issuer's tax note.
04Step 3 - Build the P&L: the earnings engine
Rebuild the income statement from average balances where possible, then reconcile the result to the reported presentation. Keep net spread income, fee income, foreign-exchange or trading results, provisions, operating costs, associates, tax and non-controlling interests on separate lines.
A few lines in that ladder are where bank models get their nuance:
- Funding cost: reconcile expense by deposit and borrowing class; apply the current SBP minimum-deposit-return rule only to balances within its scope.
- Repricing: map floating and fixed-rate assets and liabilities by reset bucket. A policy-rate change does not reach every line in the same quarter.
- Credit cost: reconcile stage balances, infection, coverage, write-offs and charge or reversal. A single low provision year should not silently become a permanent forecast.
- Operating cost: separate ordinary cost growth from branch openings, technology programs, pension effects and one-time charges.
- Tax: bridge accounting profit to current and deferred tax using the current law. Historical effective rates do not establish the next period's statutory treatment.
05Step 4 - Build valuation cross-checks
A modeled output is not a target until the multiple, required return, terminal assumptions and comparison set are justified. Use several lenses and explain why each is or is not comparable.
| Method | How it works | When it fits |
|---|---|---|
| Dividend yield | Compare sustainable cash distributions with price | Requires payout normalization and retained-capital analysis |
| Price-to-earnings (P/E) | Compare price with normalized trailing or consistently modeled forward EPS | Requires a like-for-like period, tax basis and peer set |
| Price-to-book (P/B) | Compare price with attributable common book value per share | Interpret with sustainable ROE, capital adequacy and asset quality |
The payout ratio shows how much attributable profit became cash distribution, but retained earnings are valuable only if they support capital, absorb risk or earn an adequate return. P/B should be read beside ROE and capital ratios; P/E should be read beside the earnings cycle and tax basis. No single multiple resolves those questions.
For a sensitivity table, normalize EPS to 1.00 index unit. Applying 7x, 8x and 9x then produces 7, 8 and 9 valuation units. The table reveals the mechanical impact of a multiple choice without implying a rupee price for an issuer.
To build a peer table, use the same price date, reporting period, diluted-share basis and treatment of one-off items for every bank. Record ROE, P/B, P/E, capital adequacy, asset quality, coverage, deposit mix and liquidity. Median multiples are descriptions of a dated sample, not automatically appropriate inputs for the subject bank.
Trailing and forward are different datasets. Label the earnings period, price date and estimate source. Do not compare a trailing peer multiple with a forward subject EPS without explaining the mismatch.
06Step 5 - Reconcile outcomes and sensitivities
Keep model value, market price and realized return separate. A return calculation needs the actual entry and exit dates, distributions, corporate actions, tax and transaction costs. A modeled dividend or terminal multiple is an assumption, not a realized cash flow.
Run at least these sensitivities without ranking them in advance:
- Asset and liability repricing: change reset timing and effective yields separately, not only the policy-rate headline.
- Volume and mix: flex advances, investments, current accounts, savings, term deposits and borrowings while keeping the balance sheet balanced.
- Credit cost: test stage migration, coverage and recovery assumptions rather than one provision percentage alone.
- Tax and capital: update current law, deferred-tax effects, minimum capital and risk-weighted assets.
- Multiple and payout: vary valuation multiples and distributions independently of operating earnings.
Then perform a back-check: run the model using only information available at the start of an older period and compare its predicted income, balance sheet and ratios with the later reported results. Record where the model failed. That error log is more informative than a polished single scenario.
A defensible bank model has a dated source beside each input, a balanced projected statement, average-balance yield checks, an attributable-profit and share-count reconciliation, current-law tax treatment, and a sensitivity table. The indexed example on this page intentionally cannot be converted into a company target.