Recent quarters were not great for core banking earnings. Low interest rates have depressed returns on assets, while there is not much room to further growth for the already fattened CASA ratios. UBL and HBL were big enough to have flattish profits growth. But the net profits of MCB and ABL fell by 4 percent and 24 percent in the 1QCY17 results announced yesterday. The rising star is Bank Alfalah who’s bottom-line grew by 15 percent, as the bank was able to control its cost of funds.
In case of MCB, the mark-up earnings fell by 2 percent due to low interest rates and around 30 percent fall in PIBs portfolio. These were booked at the time when rates were high and are replaced by low yielding T-bills. Had MCB not worked on growing high returns advances, the fall in mark-up income would have been higher.
During 2016, banks advances grew by 14 percent and probably the trend continued in the 1QCY17 as during Jan-Mar-17, the mark-up income increased by 12 percent suggesting that bank’s lending in high spread consumer and SME segment have shown some growth. Lately, MCB has introduced a product touching both segments in form of SME credit card, a first of such kind in Pakistan.
The bank is finding difficulty in keeping its cost of funds down as by Dec 1, bank’s CASA was already at 94 percent, leaving no or little room for further growth. Bank’s deposits grew by 12 percent in FY16; ADR stood at 47 percent, which although low is higher amongst peers. MCB Bank’s infection ratio was 5.9 percent by Dec 2016 with 91 percent coverage ratio on the gross advances toll of Rs368 billion (net advances: Rs348 bn).
The MCB’s net interest income fell by 14 percent in 1QCY17, which is beautified by unexpected reversal in provisioning to the tune of Rs878 million. The other earning kick the bank has is the high jump in non-markup income that grew by 69 percent in the recent quarter. The prime reason for high non-core earnings is capital gain of Rs2 billion, which was merely Rs162 million in the similar period last year.
Nonetheless, despite combined reversal in provisioning and capital gain that have post tax earnings impact of Rs1.7 per share, the net profits fell by 4 percent to Rs5.9 billion (EPS: Rs5.3). The bank issued interim dividend of Rs4 per share. The bank has to work on controlling administrative expenses and has to lend more aggressively to show growth in the bottom-line as not much can be done to curtail cost of funds further with the deposit base of Rs781 billion in Dec-16.
In case of ABL, 2016 was a sluggish year as earning assets did not grow in tandem to deposits growth; the bank geared up a bit in the 1QCY17 as net advance grew by 6 percent to reach Rs350 billion (infection ratio: 5.9%). But it was not enough to bring growth in mark-up income, which fell by 8 percent during Jan-Mar-17 from the levels in the corresponding period last year.
However, ABL covered the fall by thinning the mark-up cost, which is down by 10 percent in the quarter on the deposit base of Rs810 billion. This coupled with some reversal in provisioning made net mark-up income increase by 2 percent. Bank’s non mark-up income fell down substantially by 43 percent due to low capital gains and dividend income this quarter. ABL did a good job in containing administrative growth to 6 percent. But there is no fun is saving cost if the assets are not growing enough.
The ABL’s ADR stood at 43 percent. The need is to grow it, and ABL should focus more on consumer, trade and SME segments. It has to be smart enough to provide solutions for array of costumer classes from cash flow to wealth management products as easy money making on government papers days are gone.
ABL net income fell by a quarter to Rs3.6 billion (EPS: Rs3.2), and it issued interim cash dividend of Rs1.75 per share.
Unlike the two top five category banks that have presence of around five decades or so, Alfalah is relatively younger in its twentieth year, and is not only growing faster but also swiftly adopting to technological advancement. It has the highest advance to deposits ratio (59%) amongst top six banks while the infection ratio is contained to 4.8 percent. The bank has worked hard to make balance sheet stronger as its NPLs fell from 9 percent (2011) to 4.8 percent (2016). It should now look further to expand its already existing consumer and SME lending portfolios.
The bank has posted net earnings of Rs2.9 billion in 1QCY17, showing a growth of 15 percent YoY. Its mark-up income declined by 7 percent, which is primarily due to fall in yield to investment - from 9.9 percent (2015) to 8.2 percent (2016). The worrisome part is that yield on advances fell even more from 9.1 percent to 7.3 percent. Yes, interest rates fell; but for a bank whose growth is dominated by non-corporate high spread lending, the returns on advances should be driving profitability.
The mark-up expense of the Bank Al-Falah is down by good 16 percent, and it is due to the available room, unlike MCB, to enhance CASA base by 880 bps to 83.3 percent by Dec-2016. Like its peers, reversal in provisioning contributed to the bottom-line. But the bank’s non-mark-up income growth is reduced to 12 percent, which is covered by restricted 3 percent growth in administrative expenses.
Times are good ahead for banks as interest rates have probably bottomed out, and NPLs’ swift fall is visible by high reversal in provisioning. The fiscal deficit might not be too high, and government is relying on SBP for fiscal financing; banks ought to look for private sector lending; and to make higher spreads, consumers and SMEs should be the focus of top banks.
Comments
Comments are closed.