MCB delivers solid results

Low spreads, multiyear low interest rates, super tax, more tax on dividend income and all of that aside - MCB still managed to report a slight increase in its after tax profits year-on-year for CY15. The pre-tax profits soared by a sizeable 15 percent, despite very nominal top-line growth. The impetus came from efficient liability profiling and an ever reliable hand from other income.

That, a little over two-third of mark-up income came from income on investments - mainly government securities - signifies how PIBs and treasury bills still continue to be the favoured parking lot for most banks. MCB's deposit growth was rather muted throughout the year, growing by only 3 percent in CY15 - another reason why the government has kept injecting trillions through OMOs - and banks are happily obliging cashing in on the opportunity.

The asset mix too remained similar to CY14, with the ADR at 44.6 percent for the year as advances grew by a mere 4 percent over December end 2014. Investments on the other hand, grew at a better pace by 9 percent, taking the IDR to almost 80 percent as at December 31, 2015. The net mark-up income still managed to grow sizably as MCB's liability managers continue focusing on improving the deposit mix as the CASA improved further.

The non mark-up income once again provided a good cushion, especially on the back of gain on sale of securities, more than half of which came from gain on PIBs - which was virtually non -existent in CY14. MCB has done a commendable job on the cost front, with its cost to income ratio improving every quarter as the administrative costs were kept in check.

The interest rates may well have bottomed out, but are expected to stay on the lower side in the near term.

Thin spreads are likely to continue for much of CY16 as well. Common sense suggests banks should be pouncing on the opportunity to re-profile the asset mix, especially with all the talks of CPEC and improvement in macroeconomic conditions. But, the government's appetite for borrowing is not going away either - and banks have not needed a second invitation to mint the easy money.

While the yields on government papers have receded, so has the risk of NPLs. One should expect at least a slight surge in advances in CY16 and the notion for lack of genuine demand may not stand true anymore. From the profitability front, thin spreads mean banks will have to start lending more than they have of late - but MCB need not fret yet, as it has government papers in good numbers maturing in CY16.