MCB - healthy dividends despite profit dip

Banking profits are on a decline and expectedly so. MCB Bank announced its CY16 financial results, posting a 14 percent year-on-year drop in unconsolidated after tax profits. That said, there was reason to rejoice for shareholders, as MCB doled out another Rs4/share as final cash dividend, taking the full year payout to a healthy Rs16/share.

The decline in mark-up income does not come as a surprise, despite healthy growth in balance sheet. The interest rate cycle has been under pressure, limiting spreads on earning assets. The asset mix continues to be heavily titled in favour of investments, as the IDR stood at 71 percent as at December end 2016. But that pales in comparison to the 81 percent IDR for the same period last year. Investments declined by 2 percent from CY15, standing at Rs 556 billion at the end of CY16.

Advances, on the other hand, have finally started to pick up, registering a sizeable 14 percent growth over CY15. The ADR improved slightly to 44.5 percent, from 43.6 percent last year. On the liability side, the deposit base continued to grow steadily, having recorded a double digit 12 percent growth over last year. MCB has of late put greater emphasis on improving the deposit mix and the resultant improvement in CASA ratio is a testament to its efforts. In times of thin earning spreads and limited upside in non mark-up income, reducing the cost of deposit is just the right call.

The non-core income contribution remained vital, though with a largely flat growth. Recall that banks had made merry, cashing on PIBs and treasury bills last year, booking heavy gains on sale of securities. That seems to have returned to normalcy; yet non mark-up income remains a vital cog, as topline shows no sign of fast paced growth anytime soon. MCBs cost efficiency has been nothing short of exemplary, as the non mark-up expenses were kept in check, improving the cost-to-income ratio.

MCB has one of the cleaner loan books going around, and adequately provided for. With advances gradually picking up, MCB seems well poised to cash in any opportunity that may come its way. Topline will have to do more of the talking going forward, as noncore income may not continue to contribute as significantly. A slight uptick in interest rates may also bode well for the industry going forward, the chances of which theoretically appear brighter.