Bank :-MCB BANK LIMITED - Analysis of Financial Statements Financial Year 2003- Q 2003 2007
MCB is among the oldest banks of Pakistan. It was among those private banks to be nationalised in 1974 after it was incorporated in 1947. Nationalisation had a drastic impact on its performance as it affected the quality of loan portfolio and services.
Eventually it was privatised in 1991 and is currently owned by the Mansha group. Post privatisation, MCB's focus has been on aggressive cost reduction. The bank has a deposit base of around Rs 290 billion and total assets of around Rs 400 billion.
MCB has network of 900 branches across Pakistan of which around 750 are automated. The bank offers various services to its consumers including personal banking, corporate banking, virtual banking, Islamic banking and other services. In this rapid expanding banking sector, MCB has been performing well to compete with its rivals. MCB has won the "Best Bank of Pakistan" award for the 5th time from 2001 to 2006. The overall performance of banking sector can speak for itself as today banking sector has capitalized 1/3rd of the KSE.
Banking sector's recent performance (9mths'07):
Overall the banking sector experienced a slowdown in their incomes in the third quarter (on QoQ basis) due to 100% provisioning against NPLs, slowdown in the private sector credit takeoff, cautious lending by the banks and unstable political and law and order situation in the country. During 3Q'07, the total profitability stood at the level of Rs 15.70b as against Rs 22.46b during 2Q'07, depicting a decline of 30.12% (on QoQ basis).
The percentage growth in the net interest income was 32.14% in 1Q'07, 13.18% in 2Q'07 and 14.16% in 3Q'07. The average interest rate spread during 3Q'07 was 7.24% declined by 22 basis points from 7.46% in 3Q'06, due to strong stance of SBP over the high interest rate spreads.
However, the 9M cumulative results show an increase in the incomes. With the satisfactory increase of 14.95%, the profitability of the 25 listed banks reached at Rs 68.95b in 9mths'07 as against Rs 59.98b in the same period last year. Even though a decline in the growth of net interest income was observed, a significant increase in the non-interest income was successful in offsetting it. The non-interest income of banking sector showing an increase of 36.12% and stood at the level of Rs 56.95b in 9mths'07, which was Rs 41.84b in 9mths'06.
Net credit to the private sector registered a deceleration during July-1st December FY08, increasing by Rs 133.9 billion (5.4 percent) as compared with Rs 147.7 billion (7.0 percent) in the corresponding period of FY07. The major reason behind the declining trend is the non-performing loans. The total non-performing loans of the banking system are now over Rs 160b.
Consumer loans has constituted the major portion of 9.5% ie Rs 15.4b in total NPLs. For the industry, growth in consumer loans decelerated to 4.1 percent during July-October FY08 compared to a growth of 7.8 percent in July-October FY07. Except auto and mortgage finance, all other categories under consumer finance registered a slowdown, and personal loans even depict a net retirement.
It must also be kept in mind that the credit by the banking sector is also being supplemented by other sources of financing. The private sector is using non-bank finances, like TFCs and Sukuk, thus shifting part of the credit demand away from the banking sources.
Although the banks have adopted a more cautious lending approach following a rise in non-performing loans, particularly in consumer financing, SME and corporate, they have sufficient room to extend credit as evident from lower loan to deposit ratio.
It is pertinent to note that effective CRR is falling since August 2007, primarily due to:
(1) Banks have been allowed to deduct the component of the export credit provided by banks under the Export Finance Scheme - EFS (from their own sources) the total sum of the demand liabilities determined for the purpose of computation of CRR.
(2) CRR for all deposits and liabilities of one-year and above maturity has been reduced to zero, whereas for other demand and time liabilities, the CRR is 7 percent.
Prior to this, banks were required to hold 3 percent CRR for time liabilities including deposits of six-month and higher maturity and 7 percent for the other demand and time liabilities. This implies that in new setup, CRR on banks' time deposits of six-month and above but less than one year has been increased from 3 to 7 percent, while CRR on one year and higher maturity time deposits has been reduced to zero from 3 percent earlier. Thus, banks now have more loan-able funds.
Banks are now introducing new products for general public in the market to attract fresh deposits and increase in the weighted average deposit rates of the banking system, which is now 4.14% at the end of Oct'07 up by 16 basis points from Jun'07.
Growth in investment by banks during the first nine months of 2007 was about 9 times of the increase in the advances in this period. It recorded an increase of Rs 476.1bn, nearly 80% of assets increase during January-September 2007. As a result, the assets mix of the banks showed a slight shift from the previous trend.
Financial performance (FY'03-Q3'07) - a snapshot!
MCB Bank Limited (MCB) posted after tax of Rs 15.26b with the earnings per share of Rs 24.30 in FY07 as compared to profit after tax of Rs 12.14b with earnings per share of Rs 19.33 in FY06, depicting a significant growth of 26.0% during the year. Net interest income increased by 13% to be Rs 23.9b from Rs 21.2b in FY06. The gross interest income grew by 23%, while the interest expense grew by 74%, depicting an increase in the cost of raising funds. The non-markup income increased by 20% to be 6 billion. The major contribution came from a 148% increase from the capital gain on sale of securities.
The asset base increased by 20% from 342 billion to 420 billion in the year 2007 as compared to the year 2006. Deposits showed a steady increase of 13% to bring the figure to Rs 292 billion as compared to Rs 257.4 billion in FY06. Advances increased by 10% to be Rs 218b, while the investments increased by 78% to be Rs 113 billion.
RATIO ANALYSIS (FY03-FY07): As seen from the ratios above, the ROA and ROD has shown a slight incline in 2007, while the ROE has declined slightly in 2007. The ROA and ROD show a slight increase because of the comparable increases in assets with the PAT. The deposit rate growth has been slower, thus being depicted in an increased ROD. Return on equity is lower due to an increase in equity by 35% in 2007 compared to 2006.
Overall MCB's profitability was on a rising trend after 2004. The bank's profitability was low in 2004 as can be seen from the dip in the ratios. However, in 2005 the PAT shot up by 267% rising to Rs 8.92bn. The growth momentum continued and by the end of 2006, the PAT crossed the 12 billion mark ending the year at Rs 12.14bn. The rapid growth in profits over the last couple of years can be attributed to a 45% increase in markup/return earnings and a decline of 1.34% in operating expenses in 2006.
The main cause of such high profitability of MCB along with other banks is due to high spreads of the banking system. It is worth mentioning that MCB enjoys one of the widest spreads and highest margins in the industry, backed by its low deposit rates.
The deposits of MCB have shown an increase of 13% in the year 2007 rising to Rs 292 billion. The outer deposit circle (2007) and inner circle (2006) shows that the deposits largely comprise of savings deposits (54%) and current deposits (32-34%). Long-term deposits form 67% of the entire customer deposits indicating the bank's strength to meet its liquidity needs. Surprisingly, the share of term deposits in the year 2007 has declined from 13% to 11%. On the other hand borrowing from the financial institutions has increased by 65%, along with deposits from the financial institutions. This shows that MCB has increasingly used the money market for both investments and borrowings. Share of financial institutions in deposits has increased to 3.3% as compared to 1.2% in 2006.
The assets of the bank have been expanding rising from Rs 298.1bn (2005) to Rs 342.8bn (2006). Mainly a growth in lending to financial institutions and balances with other banks is responsible for the expanding asset base of the bank. Because of the highly productive earning assets of the bank, the ROA has increased to 3.5% in 2006 (2005: 3.0%). Compared to the ROA of the banking sector of 2% this is very healthy and indicates the strength that MCB possesses is generating strong returns.
The bank's equity has been rising. It registered an increase of 72.1% in 2006 and an increase of 35% in 2007 because of increase in bank reserves. The bank's equity was 55.1bn in 2007. Since 2003, the bank has raised Rs 2.9 billion through the issue of new shares.
Advances have seen a growth of 112.8% since 2003. At the end of 2006, the advances for the bank were Rs 206.8 billion increasing from Rs 188.2 billion in 2005. The bank's advances mainly are comprised of short to medium-term loans, which ensure a smooth liquidity position to be maintained by the bank. However, the advances grew only by 10% in FY07 as compared to FY06. Earning asset to assets ratio has remained more or less stable, while the ADR has decline quite understandably on back of slower increase in advances as compared to deposits. Increased investments are in line with the industry trend of investment in the low risk, good returns MRTBs.
On evaluating the performance of MCB's earning assets we see that yield (Yield as calculated by markup or interest income/earning assets) has shown on overall rising trend. Moreover, 'Cost of Funding Earning Assets' has also shown an increasing trend. A slight increase in 'cost of assets' coupled with returning higher profits is a good sign for any business and signifies its potential to produce/earn in future. The yield on earning assets has increased by 133 basis points in FY07 as compared to 88 basis points increase in the cost of funding earning assets. The increase in markup income has been contributed by increase in interest from customers and a higher increase in income from the securities held for sale.
The serious concern for the bank is the increasing number of its non-performing loans, which resulted in the high provisioning against it. During 2007 the bank's total provisioning increased by 25%, while NPLs also rose by the same percentage as compared to 2006. MCB in particular and the industry in general has been able to contain credit risk despite aggressive growth in advances to consumer and private sectors (forming around 95% of NPLs). The provisioning against NPLs is nearly 100%, which shows a proactive approach by the bank. Withdrawal of FSV will not have a major impact on the bottom line in FY08.
The solvency situation for the industry as a whole has shown marked improvement in recent years caused by increasing profitability and fresh inflows of capital. In MCB's case, here was a decline in the solvency position in 2004 as a result of high growth in deposits. This situation, however, has improved in 2006 because of substantial increase in equity mainly attributed to the increase in MCR by the SBP. As a result both ratios E/A and E/D showed a rising trend. However, the earning assets as a percentage of deposits remained flat in Q3'07 mainly due to slower growth in deposits in the quarter.
The price of MCB's share has fluctuated between Rs 247 to Rs 328 in the year 2007 (till September). The average price of MCB shared hovered around the Rs 43 mark in 2003 but the phenomenal success of the bank over the years has led investors to invest heavily in MCB's shares and as a result, the yearly average for 2006 was Rs 324. This has caused the share of MCB to operate at a high P/E multiple of 13.9 even though the bank recorded a high EPS of 23.4 in 2006. MCB has also issued GDR due to which it has to maintain strict policies of Accountability and Accountancy, which also plays a key role in investor's confidence.
The equity of the bank has been rising as discussed above. The increase in equity is for meeting the capital requirements under the Basel II accord and for growth purposes. Primarily in 2006, it shot up by 72%. This has resulted in the book value of MCB to climb to Rs 74.8 (2005: Rs 55.6). Nevertheless, it has been matched by share price increase and in the year 2006 price was 4.3x the BV.
On comparison with KSE 100 index we see that it has not outperformed the index yet almost rose to the index level by the end of FY07. MV to BV has shown an increasing trend, which also indicates the success of MCB in gaining investor's confidence steadily. We can see that MV-BV has increased from 1.21 (FY03) to 4.34 (FY06).
MCB's price performance
The bank has had a very open dividend policy. In 2005, it gave a 42.5% cash dividend worth Rs 1.71 billion. Similarly, a dividend of Rs 3.96 billion was paid in 2006 (32.6%). However, DPS of the bank has inclined sharply. MCB has generally attracted investors due to its strong fundamentals, which has caused its share price to incline sharply. The bank has retained greater profits in 2006, which promises future growth prospects. This has resulted in low dividend coverage in 2006, as high profits have not been passed onto the investors. The total dividend for the year 2007 has been Rs 12.5.
FUTURE OUTLOOK: SBP stressed upon further tightening the monetary policy in its recent MPS (2HFY08) by raising the discount rate by 50bps to 10.5%. Increase in CRR by 100 bps strives to reduce liquidity in the market. MCB shall not be highly affected by this measure, as most of its deposits are term deposits. Rather it shall benefit from the zero rating of CRR on the >1 year deposits by having more to lend as is evident from its high earning asset ratio.
The recent drive by the regulator to reduce the banking sector spreads shall result in a decline in the profitability of the sector. The banking sector spreads have declined, but only marginally. The stricter provisioning requirements and withdrawal of FSV implemented by the SBP will 1) reduce the profits and 2) make the banks cautious in their lending, as is evidenced by the deceleration of credit as mentioned above. If the government continues to finance its deficit though the commercial banking sector, it will crowd out the private sector. Endeavors taken in this direction by the SBP may yield results if complemented by policies elsewhere.
After current tightening, average deposit rates are also expected to increase, which might impact MCB's high margins by eroding its low cost funding sources. Future expansion through low cost funding sources would be difficult resulting in declining spreads.
Recently, SBP has raised the upper limit of retail exposure to Rs 75mn in case of consumer loans and small business loans. Moreover, the exposure limit should not be more than 2% of total (gross) retail portfolio of the bank. MCB's low market share in consumer banking has been one of its weak areas. It should try to overcome this weakness and tap on this opportunity.
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ASSETS FY '04 FY '05 FY '06 FY'07
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Cash and Balances with treasury banks 23,833,253 23,665,549 32,465,976 39,683,883
Balances with other banks 5,708,323 1,466,045 6,577,017 3,807,519
Lending to Financial Institutions 10,965,297 9,998,828 21,081,800 1,051,372
Investments 67,194,971 69,481,487 63,486,316 113,089,261
ADVANCES 137,317,773 180,322,753 198,239,155 218,960,598
Other Assets 6,154,370 5,471,697.00 11,031,450 17,868,761.00
FIXED ASSETTS 7,999,821 8,182,454 9,054,156 16,024,123
DEFERRED TAX ASSET 0 191,967 172,373
TOTAL ASSETS 259,173,808 298,780,780 342,108,243 410,485,517
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LIABILITIES
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Bills Payable 7,566,684 8,536,674 7,089,679 10,479,058
Borrowings from Financial Institutions 7,590,864 27,377,502 23,943,476 39,406,831
Deposits and Other Acounts 221,069,158 229,341,890 257,461,838 292,098,066
Other Liabilities 6,525,999 8,192,338 11,171,496 11,722,493
Deffered liabilities 269,499 0 0 1,180,162
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TOTAL LIABILITIES 244,620,924 275,046,484 301,263,929 355,365,842
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NET ASSETS 14,552,884 23,734,296 40,844,314 55,119,675
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REPRESENTED BY:
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Share Capital 3,371,800 4,265,327 5,463,276 6,282,768
Reserves 5,661,553 9,054,940 24,662,426 34,000,638
Unappropriated Profit(Ret. Earnings) 165,208 4,990,260 5,530,973 5,130,750
9,198,561 18,310,527 35,656,675 45,414,156
Surpus on Revaluation of Assets 5,354,323 5,423,769 5,187,639 9,705,519
14,552,884 23,734,296 40,844,314 55,119,675
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INCOME STATEMENT 2004 2005 2006 2007
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Mark-up / Return/ Interest earned 9,083,863 17,756,232 25,778,061 31,786,595
Mark-up / Return/ Interest expensed 2,057,640 2,781,468 4,525,359 7,865,533
Net Mark-up / Interest
Income before provision 7,026,223 14,974,764 21,252,702 23,921,062
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NON MARK-UP / INTEREST INCOME
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Fee, commission and brokerage income 1,992,356 2,448,950 2,311,235 2,634,610
Dividend Income/ Gain on Sale of Investment 378,908 480,344 811,801 632,300
Income from dealing in foreign currencies 492,738 531,455 692,010 693,408
Gain on Sale of securites 804,419.00 866,112.00 605,865.00 1,500,865.00
Other Income 576,007 1,425,174 570,505 563,213.00
Total non mark-up / return / interest income 4,232,988 5,753,669 4,991,416 6,011,291
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NON - MARKUP INTEREST EXPENSES
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Administrative expenses 7,244,200.00 6,459,490.00 6,482,592.00 5,022,416.00
Other Provisions / write offs/ (reversals) 149,593 -72,740 11,411 -3,743
Other Charges 41,864 178,841.00 66,708.00 540,594.00
Total Non markup Interest expenses 7,435,657 6,565,591 6,560,711 5,559,267
Extraordinary Items 513,852
PROFIT BEFORE TAXATION 4,057,716 13,018,487 18,500,670 21,308,035
PROFIT AFTER TAXATION 2,431,532 8,922,415 12,142,398 15,265,562
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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