Sizeable profits for state-owned institutions in Pakistan are not an oft-occurring phenomenon. National Bank of Pakistan (NBP) is one of the very few such institutions that has shown decent profits year-after-year unlike the PIAs and Railways of this age. One may point towards the state-owned E&P companies that make sizeable profits too, but then the competition in case of banking sector is with the sophisticated private sector. Carrying all the ills of being state-owned, the ability to repeatedly deliver strong profits is surely commendable.
Pakistan's largest public sector bank reported a massive 51 percent year-on-year increase in pre-tax profits for CY15 despite thin spreads and low interest rate scenario.
Even flat top line growth has resulted in decent profit growth for banks in CY15. But it was always going to be tricky in the case of NBP, by virtue of being a state owned bank - as its asset mix has historically been tilted towards advances - and quite toxic ones too. NBP, to match the performance of similar sized peers, had to alter its asset strategy - and that is exactly what it did and it instantly yielded the desired results.
It has been quite some while since banks, most notably the big ones, almost gave up on lending and investments became the favoured parking spot. NBP, more by design than by choice, was the lone bank among peers carrying a highest ADR. But that has changed at long last, as the CY15 year end numbers clearly show how the NBP aggressively added government securities to its investment portfolio - reversing the ADR and IDR from a year ago.
NBP continued its exemplary deposit growth - but that could be seen coming as it has often surpassed the average sector deposit growth. The big deal was a massive change in the asset mix as the ADR went down to 40 percent as at CY15 end - from 51 percent a year ago. Investments grew at a mammoth 47 percent during the year, as treasury bills kept coming and almost entire incremental deposit was parked with government securities. The IDR, consequently, jumped to 58 percent.
Advances, on the other hand, dropped in absolute terms by 8 percent from year ago. Provisioning charges have long been a drag on NBP's income statement and the situation does not seem to have improved significantly - as the infection ratio continues to be north of 20 percent. And this is where the government has to share responsibility. When it compels NBP to facilitate its schemes, it should also be supportive in terms of making timely interest payments and timely guarantees. Had that been the case, the profits could have been much higher than the already impressive number.
NBP's treasury arm lent able support to the bottom-line as there were sizeable gains made on sale of securities and dividend income. Commendably, NBP was able to put a lid on its administrative costs, a feat
of sorts for a state-owned institution - resulting in much improved cost to income ratio. A jaw dropping increase in pre-tax profits was a just outcome.
Interest rates are expected to stay on the lower side and the spreads have shrunk further in CY16 thus far. Profit making will continue to be an arduous task for banks, but there is little juice left in government securities and merely investing in government papers this time around may not yield such good returns. NBP faces an uphill task in terms of NPLs. Further improving the deposit mix and limiting non-core costs could be the way forward for NBP in the near term.
Comments
Comments are closed.