National Bank of Pakistan (NBP) keeps defying the odds. The largest public sector bank posted its 1QCY16 financial results yesterday, showing an impressive 23 percent year-on-year growth in after-tax profits. Recall that the ongoing banking result season has seen most banks posting depressed earnings, owing to a variety of reasons, but NBP seems to have stood out.
The performance becomes more exemplary, considering the bank carries all the ills of being owned by government. The NPL drag that it carries on its books is mostly because of the governments ability to make timely interest payments and guarantees. Recall that NBP carries a number of schemes initiated by the government, and faces the brunt in form of NPLs.
NBP's average earning assets decreased during the quarter, couple that with low interest rates, and a slowdown in mark-up income is a just outcome. But the bank seems to have managed the situation well, managing to reduce the mark-up expenses considerably during the period. Reduced cost of deposits was a crucial factor.
That said NBP saw sizeable deposit erosion in 1QCY16 over December end CY15 - as the deposits went worryingly went down by 11 percent, against industry odds. What is disturbing is the fact that the deposit decline has not aimed at an improved CASA, as one would have thought. In fact the current deposits - both remunerative and non-remunerative have gone down over December 2015.
Advances dipped in absolute terms by 4 percent over December 2015, whereas investments inched up a bit. The ADR improved to 43.6 percent from 40 percent as at December end 2015. But the reading could be misleading, as decline in deposits has resulted in a much reduced denominator for the ratio calculation.
NBP managed to reduce its provision expense massively, thanks to aggressive provisioning in the yesteryears and continuous efforts to clean the book. The dip in non-interest income does not come as a surprise and has been a feature of this seasons results so far - as the contribution from gain on sale of securities has come back to normalcy.
NBP also seems to be doing well on the cost front - managing to keep a tight lid on administrative expenses. Despite unfavourable market conditions, a 23 percent year-on-year increase in profits is surely a commendable feat. That said, NBP would have to up the game on the deposit front - especially improving the deposit mix.
A sizeable profit for state-owned institutions in Pakistan is 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 high-ish 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 NBPs 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.
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