Provisioning takes the toll on Summit

Summit Bank Limited (Summit) had a decent outing in CY16, when it comes to balance sheet growth. Unfortunately, for the bank, the balance sheet growth failed to arrest the decline in profits, as high provision expenses on NPLs and massive surge in administrative expenses took the toll on Summits profits.

That the topline remained flattish came as no surprise, as low yields on earning assets was a recurring theme in CY16, in a declining interest rate scenario. Summit could have still done well to minimize the cost of deposits, but the gross spreads were on a decline, taking the NII down. Recall that Summit has of late worked really hard to reduce the cost of deposits and improve the CASA mix. But from the look of things, there is still much more to do in terms of current account build up and limiting high cost deposits. The deposit based grew by an admirable 19 percent over December 2015.

On the asset side, both investments and advances showed near identical growth in high double digits. But a higher proportion of government securities in the asset mix meant lower earning yields on assets. The ADR stood at near 56 percent, slightly above similar sized peers. With advances comes risk, and Summits loan book appears troublesome, as the bank itself acknowledges some legacy on pre-merger loans.

The infection ratio had risen to over 19 percent by the end of 9MCY16. Keeping up with prudence, Summit decided to adequately provide for the same, which shows in inflated provision charges for the period, which took down the post provisioning income. Making matters worse, that came at a time when non-core income was already sliding, as the contribution from gain on sale of securities came back to earth for the entire industry.

It was always going to be tough to make a comeback from such a position, and a higher than usual increase in administrative expenses did not help the matter either. Some costs were charged to expenses and not capitalized to conform to the new regulatory requirements by the State Bank of Pakistan.

Summits balance sheet has grown alright. It needs to put a greater focus on cost of deposits and NPLs. A more robust control on non-core expenses would also help, if the bank is to make a journey towards profitability again and soon.