NBP: Solid profits

National Bank of Pakistan (NBP) continued its impressive performance and defied the odds once again. In times of thin spreads, low interest rates, and slow deposit growth, the state-owned bank managed to report a massive 25 percent year-on-year increase in after-tax profits. Recall that most banks have had a middling earning season, owing to a variety of reasons, making NBP stand out in 1HCY16.

The most telling contribution to the bottom line came from massive decline in provision charges for NPLs. Recall that bad loans had long been a drag on NBP's balance sheet, often eroding profits. But, aggressive provision in yesteryears and focus on recoveries resulted in a substantial decrease in provision charges. That said, the infection ratio still remain on the higher side at 17.8 percent, mostly coming from increase in sub-standard category.

The performance gets more commendable considering NBP expectedly reported a flat top line growth. Recall that spreads on earning assets have squeezed to new lows, and banks had to look for other avenues to keep the revenue churning.

That, the NBP's investment portfolio, mostly comprising of risk-free sovereign papers, is now touching an unprecedented trillion rupee mark - is testament to the new normal in the banking sphere. Recall that NBP was never known as a reluctant lender, but even its ADR hovers in the mid 40s, whereas, the IDR is almost touching 70 percent, up from 58 percent in December 2015.

NBP's deposit base eroded during the period, down 2 percent from December 2015, against industry odds. This, however, is much improved from 1QCY16 numbers, but NBP would do well to further improve its CASA mix from the current 77 percent. In times of thinning spreads and lower non-core income, banks with highest CASA stand to benefit more.

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 government's 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.

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. The future looks promising, especially, knowing that NBP has historically not been a shy lender. But, with the NPLs on its books, treading with care could do the trick for NBP.