Top line drives Silk’s bottom line

Silk Bank essentially focuses on what the banks are supposed to do, i.e. private sector lending. An Advances-to-Deposit Ratio (ADR) of 77 percent and Investment-to-Deposit Ratio (IDR) of 24 percent as of March 2014 bears testament to the inclination Silk has towards core banking. However, in 1Q CY14, the bank momentarily changed its stance and focused on investments which grew by 18 percent over December 2013 while advances inched up by just 0.1 percent over the similar period.
Perhaps, Silk is succumbing to the industry-wide of parking its funds for long-term government securities which yielded lucrative yields of over 12 percent on all tenors.
The top line yielded a tremendous year-on-year growth of 22 percent in 1Q CY14. While deposits also grew in the first quarter by a modest 5 percent over December 2013, enhanced focus on low-cost deposits is what that boosted the Net Interest Margin (NIM) by around 2 times and resulted into a spread ratio of 40 percent in 1Q CY14 vis-à-vis 23 percent in the similar period of last year.
Silk’s NPLs fell by 9 percent year on year in CY13 but the bank booked huge provisions in CY13 and in 1Q CY14 too owing to inadequate loan provisioning in the previous year.
Non-mark-up income performed really well in 1Q CY14 will growth mainly triggered by gain on sale of securities. Non-mark-up expenses also impressed whereby they bet the inflation and grew by just 3 percent year on year in 1Q CY14. The bottom line turned to profits vis-à-vis a loss of Rs219 million in 1Q CY13.
Low provisioning in the yesteryears will trigger the bank to book higher provisioning expense and, in effect, will keep diluting the bottom line growth despite any improvement in the asset quality. How well the bank plays with other variables to offset the negative impact of swelling provisioning charges will be the real challenge for the bank.

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Silk Bank Limited (Unconsolidated P&L)

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Rs (mn)                              1QCY14    1QCY13      chg

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Markup Earned                         2,230     1,822      22%

Markup Expensed                       1,347     1,400      -4%

Net Markup Income                       882       422     109%

Provisioning/(Reversal)                 216        49     340%

Net Markup Income after provisions      666       373    78.6%

Non Mark-up/Interest Income             450       314      43%

Operating Revenues                    1,116       687      62%

Non Mark-up/Interest Expenses         1,074     1,042       3%

Profit Before Taxation                   42     (355)

Taxation                               (25)       135

Profit After Taxation                    67     (219)

(Loss)/earnings per share              0.03    (0.08)

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