Bank: MCB BANK LIMITED - Analysis of Financial Statements Financial Year 2003 - 2003-2007
MCB is among the oldest banks of Pakistan. It was among those private banks, which were nationalized in 1974 while it was incorporated in 1947.
Nationalization had badly affected its performance including the quality of loan portfolio and services. Eventually it was privatized in 1991 and is currently owned by the Mansha group. Post privatization, MCB's focus has been on aggressive cost reduction. The bank has a deposit base of around Rs 290 billion and total assets of around Rs 400 billion.
MCB has a network of 900 branches across Pakistan of which around 750 are automated. The bank offers various services to its consumers including personal banking, corporate banking, virtual banking, Islamic banking and other services. The banking sector is expanding rapidly and the MCB has been performing well in this era of competition. MCB has won the "Best Bank of Pakistan" award for the 5th time from 2001 to 2006. The overall performance of the banking sector can speak for itself as today banking sector has capitalized 1/3rd of the KSE.
Banking sector's recent performance (9mths'07)
Overall, the banking sector experienced a slowdown in their incomes in the third quarter (on QoQ basis) due to 100% provisioning against NPLs, slowdown in the private sector credit takeoff, cautious lending by the banks and unstable political and law and order situation in the country. During 3Q'07, the total profitability stood at the level of Rs 15.70b as against Rs 22.46b during 2Q'07, depicting a decline of 30.12% (on QoQ basis). The percentage growth in the net interest income was 32.14% in 1Q'07, 13.18% in 2Q'07 and 14.16% in 3Q'07. The average interest rate spread during 3Q'07 was 7.24% declined by 22 basis points from 7.46% in 3Q'06, due to strong stance of SBP over the high interest rate spreads.
However, the 9M cumulative results show an increase in the incomes. With the satisfactory increase of 14.95%, the profitability of the 25 listed banks reached at Rs 68.95b in 9mths'07 as against Rs 59.98b in the same period last year. Even tough a decline in the growth of net interest income was observed, a significant increase in the non-interest income was successful in offsetting it. The non-interest income of the banking sector showing an increase of 36.12% and stood at the level of Rs 56.95b in 9mths'07, which was Rs 41.84b in 9mths'06.
Net credit to the private sector registered a deceleration during July-1st December FY08, increasing by Rs 133.9 billion (5.4 percent) compared to Rs 147.7 billion (7.0 percent) in the corresponding period of FY07. The major reason behind the declining trend is the non-performing loans. The total non-performing loans of the banking system have now over Rs 160b.
Consumer loans had constituted the major portion of 9.5% ie Rs 15.4b in total NPLs. For the industry, growth in consumer loans decelerated to 4.1 percent during Jul-October FY08 compared to a growth of 7.8 percent in July-October FY07. Except auto and mortgage finance, all other categories under consumer finance registered a slowdown, and personal loans even depict a net retirement.
It must also be kept in mind that the credit by the banking sector is also being supplemented by other sources of financing. The private sector is using non-bank finances, like TFCs and Sukuk, thus shifting part of the credit demand away from the banking sources.
Although the banks have adopted a more cautious lending approach following a rise in non-performing loans, particularly in consumer financing, SME and corporate, they have sufficient room to extend credit as evident from lower loan to deposit ratio. It is pertinent to note that effective CRR is falling since August 2007, primarily due to (1) banks have been allowed to deduct the component of the export credit provided by banks under the Export Finance Scheme - EFS (from their own sources) from the sum total of the demand liabilities determined for the purpose of computation of CRR (2) CRR for all deposits and liabilities of one-year and above maturity has been reduced to zero; whereas for other demand and time liabilities, the CRR is 7 percent.
Prior to this, banks were required to hold 3 percent CRR for time liabilities including deposits of 6 months and higher maturity and 7 percent for the other demand and time liabilities. This implies that in new set-up, CRR on banks' time deposits of six months and above but less than one year has been increased from 3 to 7 percent; while CRR on one year and higher maturity time deposits has been reduced to zero from 3 percent earlier. Thus, banks now have more loan-able funds.
Banks are now introducing new products for general public in the market to attract fresh deposits and increase in the weighted average deposit rates of the banking system, which is now 4.14% at the end of Oct'07 up by 16 basis points from Jun'07.
Growth in investment by banks during the first nine months of 2007 was about 9 times of the increase in the advances in this period. It recorded an increase of Rs 476.1bn, nearly 80% of assets increase during January-September 2007. As a result, the assets mix of the banks showed a slight shift from the previous trend.
BANK'S 9MTHS'07 PERFORMANCE":
MCB Bank Limited declared PAT of Rs 11.24b (EPS: Rs 17.90) in 9mths'07 as compared to Rs 8.64b (EPS: Rs 13.76) in 9mths'06, reflecting a significant growth of 30.14%. Unlike the industry trend, one witnessed a growth in the net-interest income of the bank ie 15.6% during the period under review and amounted to Rs 17.93b as compared to Rs 15.51b in 9mths'06. However, considering the size and operations of the bank, this is not a significant growth.
Furthermore, the bank realized the capital gain on the sale of securities, which caused the non-interest income of the bank to grow by 29.6% to Rs 4.74b as against Rs 3.66b in 9mths'06, thus supporting the overall profitability.
The asset base of the bank grew by 11.8% to Rs 382.59b in 9mths'07 (Rs 342.10b in Dec'06). The major increase has been witnessed in the investment portfolio, which enhanced by Rs 60b to Rs 123.31b in 9mths'07 from Rs 63.48b in Dec'06. Net advances on the other hand decreased to Rs 190.52b (Rs 198.23b in Dec'06) due to overall slowdown in industry advances. As a result, the ADR of the bank depressed to 66.1% from 77.0% in Dec'06. The bank has also announced third interim cash dividend of Rs 2.50 per share, that makes the total dividend payout of Rs 7.50 per share in 9mths'07 as compared to Rs 6.00 per share in 9mths'06.
FINANCIAL PERFORMANCE (FY'03-Q3'07)Overall, MCB's profitability was on a rising trend after 2004. The bank's profitability was low in 2004 as can be seen from the dip in the ratios. However, in 2005 the PAT shot up by 267% rising to Rs 8.92bn. The growth momentum continued and by the end of 2006, the PAT crossed the 12 billion mark ending the year at Rs 12.14bn. The rapid growth in profits over the last couple of years can be attributed to a 45% increase in markup/return earnings and a decline of 1.34% in operating expenses in 2006.
The main cause of such high profitability of MCB along with other banks is due to high spreads of the banking system. It is worth mentioning that MCB enjoys one of the widest spreads and highest margins in the industry, backed by its low deposit rates.
The interest rate spread on outstanding loans and deposits had been hovering around 7.3 to 7.5 percent during Q3'07. However, the spread on gross disbursements and fresh deposits remained lower, in the range of 5.1 to 6.5 percent. The squeezed spread in the later case mainly owed to shift in deposit structure with growing share of fixed deposits and relatively increasing pressure on interest rates on all deposit categories.
The deposits of MCB have shown an increase of 11.9% in the year 2006 rising to Rs 257 million (Rs 288 million in Q3'07). The outer deposit circle (2006) and inner circle (Q3'07) shows that the deposits largely comprise of savings deposits (54%) and current deposits (32-33%). Long-term deposits form 67% of the entire customer deposits indicating the bank's strength to meet liquidity needs. There has been a shift in the deposits structure of the banking system where the banks are attracting longer-term deposits by offering higher returns, mainly due to CRR being zero-rated for time deposits.
Deposits by financial institutions have risen but they still only form 2% of the entire deposits. ROD has increased from 3.14% to 4.7% from 2003 to 2006 as the profitability of the bank has improved significantly from effective utilization of the money deposited.
The assets of the bank have been expanding rising from Rs 298.1bn (2005) to Rs 342.8bn (2006). Mainly a growth in lending to financial institutions and balances with other banks is responsible for the expanding asset base of the bank. Because of the highly productive earning assets of the bank, the ROA has increased to 3.5% in 2006 (2005: 3.0%). Compared to the ROA of the banking sector of 2% this is very healthy and indicates the strength that MCB possesses is generating strong returns.
The bank's equity has been rising. It registered an increase of 72.1% in 2006 because of increase in bank reserves. The bank's equity was 40.8bn in 2006. The reserves grew by a startling 172.4% to 24 billion in 2006. Since 2003, the bank has raised Rs 2.9 billion through the issue of new shares. The ROE of MCB has dipped in the year 2006 to 29.7 (2005: 37.6%) largely because of greater profits retention and fresh capital injections. However, in comparison to the banking sector average ROE of 24.2% MCB is still better off.
ROA, ROE and ROD of 3Q'07 is though lower than FY06 ratios, yet it follows the exact trend of the previous years. Advances have seen a growth of 112.8% since 2003. At the end of 2006, the advances of the bank were Rs 206.8 billion increasing from Rs 188.2 billion in 2005. The bank's advances mainly are comprised of short-term loans, which ensure a smooth liquidity position to be maintained by the bank. Net advances in Q3'07, however decreased to Rs 190.52b (Rs 198.23b in Dec'06) due to overall slowdown in industry advances. As a result the ADR of the bank depressed to 66.1% from 77.0% in Dec'06.
The major increase has been witnessed in the investment portfolio of the bank, which enhanced by Rs 60b to Rs 123.31b in 9mths'07 from Rs 63.48b in Dec'06. This is line with overall banking industry where the assets mix has shifted more towards investments than advances.
On evaluating the performance of MCB's earning assets we see that yield (yield as calculated by markup or interest income/earning assets) has shown on overall rising trend. Moreover, 'Cost of Funding Earning Assets' has also shown an increasing trend. A slight increase in 'cost of assets' coupled with returning higher profits is a good sign for any business and signifies its potential to produce/earn in future.
Post privatization, MCB's focus has been on expense reduction and sought for aggressive cost efficiency. It is also evident by a rising interest margin of MCB since markup/return/interest expensed has fallen more rapidly than the markup/return/interest income. Yields for FY06 and 3QFY07 are similar indicating that the returns would continue to increase. But average deposit rates are also expected to increase which might impact MCB's high margins by eroding its low cost funding sources. Future expansion through low cost funding sources would be difficult resulting in declining spreads.
The serious concern for the bank is the increasing number of its non performing loans, which resulted in the high provisioning against it. During the Q3'07 the bank's total provisioning increased phenomenally by 285.6% to Rs 1.57b against Rs 0.40b in the corresponding period last year. MCB in particular and the industry in general has been able to contain credit risk despite aggressive growth in advances to consumer and private sectors (forming around 95% of NPLs). This is also shown by the downward trend in NPLs as a percentage of advances. However, MCB should take immediate steps to further overcome this problem as SBP is going to implement full provisioning against non-performing loans from 31st December 2007.
We can see that the bank has made an extraordinary effort to reduce its dependence on debt, as a source of finance. Debt management figures reveal that the bank has 96% of its assets financed by debt in 2003. However it had reached a very high level and there is always a potential to fall back from heights, same has been the case with MCB as it had to reduce its dependence on heavy debts. Furthermore, debt to equity ratio suggests a tremendous recovery by MCB to improve its credit rating up to AA+ in long term & A1+ in short term. Moreover, the growth in profits and higher capital injections as well as the imposition of the enhanced Minimum Capital Requirement (MCR) has directed to equity based source of financing in 2006. Declining deposit times capital is indicative of the declining deposit base of the MCB.
The solvency situation for the industry as a whole, showed remarkable improvement in recent years, caused by increasing profitability and fresh inflows of capital. In MCB's case, here was a decline in the solvency position in 2004 as a result of high growth in deposits. This situation, however, has improved in 2006 because of substantial increase in equity mainly attributed to the increase in MCR by the SBP. As a result both ratios E/A and E/D showed a rising trend. However, the earning assets as a percentage of deposits remained flat in Q3'07 mainly due to slower growth in deposits in the quarter.
The price of MCB's share has fluctuated between Rs 247 to Rs 328 in the year 2007 (till September). The average price of MCB share hovered around Rs 43 mark in 2003 but the phenomenal success of the bank over the years has led investors to invest heavily in MCB's shares and as a result, the yearly average for 2006 was Rs 324. This has caused the share of MCB to operate at a high P/E multiple of 13.9 even though the bank recorded a high EPS of 23.4 in 2006. MCB has also issued GDR due to which it has to maintain strict policies of accountability and accountancy, which also play a key role in investor's confidence.
The equity of the bank has been rising as discussed above. The increase in equity is for meeting the capital requirements under the Basel II accord and for growth purposes. Primarily in 2006, it shot up by 72%. This has resulted in the book value of MCB to climb to Rs 74.8 (2005: Rs 55.6). Nevertheless, it has been matched by share price increase and in the year 2006 price was 4.3x the BV.
On comparison with KSE-100 index we see that it has not outperformed the index yet almost rose to the index level by the end of FY07. MV to BV has shown an increasing trend, which also indicates the success of MCB in gaining investor's confidence steadily. We can see that MV-BV has increased from 1.21(FY03) to 4.34 (FY06).
MCB'S PRICE PERFORMANCE:
The bank has had a very open dividend policy. In 2005, it gave a 42.5% cash dividend worth Rs 1.71 billion. Similarly, a dividend of Rs 3.96 billion was paid in 2006 (32.6%). However, DPS of the bank has inclined sharply. MCB has generally attracted investors due to its strong fundamentals, which has caused its share price to incline sharply. These cause a low dividend yield. The bank has retained greater profits in 2006, which promises future growth prospects. This has resulted in low dividend coverage in 2006, as high profits have not been passed onto the investors.
The bank has also announced the third interim cash dividend of Rs 2.50 per share, that makes the total dividend payout of Rs 7.50 per share in 9mths'07 as compared to Rs 6.00 per share in 9mths'06.
FUTURE OUTLOOK: SBP stressed upon further tightening the monetary policy in its recent MPS (2HFY'08) by raising the discount rate by 50bps to 10.5%. Increase in CRR by 100 bps strives to reduce liquidity in the market. MCB shall not be highly affected by this measure, as most of its deposits are term deposits. Rather it shall benefit from the zero rating of CRR on the >1 year deposits by having more to lend as is evident from its high earning asset ratio.
The recent drive by the regulator to reduce the banking sector spreads shall result in a decline in the profitability of the sector. The banking sector spreads have declined, but only marginally. The stricter provisioning requirements and withdrawal of FSV implemented by the SBP will 1) reduce the profits and 2) make the banks cautious in their lending, as is evidenced by the deceleration of credit as mentioned above. If the government continues to finance its deficit though the commercial banking sector, it will crowd out the private sector. Endeavours taken in this direction by the SBP may yield results if complemented by policies elsewhere.
After current tightening, average deposit rates are also expected to increase, which might impact MCB's high margins by eroding its low cost funding sources. Future expansion through low cost funding sources would be difficult resulting in declining spreads.
Recently, SBP has raised the upper limit of retail exposure to Rs 75 million in case of consumer loans and small business loans. Moreover, the exposure limit should not be more than 2% of total (gross) retail portfolio of the bank. MCB's low market share in consumer banking has been one of its weak areas. It should try to overcome this weakness and tap on this opportunity.
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MCB Financials
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ASSETS FY '03 FY '04 FY '05 FY '06 3Q '07
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Cash and Balances
with treasury banks 24,053,669 23,833,253 23,665,549 32,465,976 34,405,452
Balances with other banks 1,302,682 5,708,323 1,466,045 6,577,017 4,210,982
Lending to Financial
Institutions 10,130,450 10,965,297 9,998,828 21,081,800 2,913,274
Investments 128,276,812 67,194,971 69,481,487 63,486,316 123,318,412
ADVANCES 97,200,179 137,317,773 180,322,753 198,239,155 190,524,312
Other Assets 6,477,004 6,154,370 5,471,697.00 11,031,450 16,005,203.00
FIXED ASSETTS 4,882,823 7,999,821 8,182,454 9,054,156 11,215,878
Taxation recoverable 0 0 0 0 -
DEFERRED TAX ASSET 0 0 191,967 172,373 -
TOTAL ASSETS 272,323,619 259,173,808 298,780,780 342,108,243 382,593,513
LIABILITIES
Bills Payable 8,396,320 7,566,684 8,536,674 7,089,679 9,109,923
Borrowings from Financial
Institutions 32,627,951 7,590,864 27,377,502 23,943,476 23,569,661
Deposits and Other Accounts 211,511,393 221,069,158 229,341,890 257,461,838 287,921,856
sub-ordinated loans 1,599,360 1,598,720 1,598,080 1,597,440 479,232
Liabilities against assets 0 0 -
subject to financial lease
Other Liabilities 6,372,596 6,525,999 8,192,338 11,171,496 12,978,236
Deffered liabilities 707,306 269,499 0 0 405,414
TOTAL LIABILITIES 261,214,926 244,620,924 275,046,484 301,263,929 334,464,322
NET ASSETS 11,108,693 14,552,884 23,734,296 40,844,314 48,129,191
REPRESENTED BY:
Share Capital 3,065,273 3,371,800 4,265,327 5,463,276 6,282,768
Reserves 4,379,255 5,661,553 9,054,940 24,662,426 30,555,925
Unappropriated Profit(Ret. Earnings) 281,636 165,208 4,990,260 5,530,973 6,081,280
7,726,164 9,198,561 18,310,527 35,656,675 42,919,973
Surpus on Revaluation of Assets 3,382,529 5,354,323 5,423,769 5,187,639 5,209,218
11,108,693 14,552,884 23,734,296 40,844,314 48,129,191
4.10% 5.60% 7.90% 11.90% 12.60%
Dividend Paid 818,306 1,545,483 3,122,510 - -
INCOME STATEMENT 2003 2004 2005 2006 3Q '07
Mark-up / Return/ Interest earned 10,369,994 9,083,863 17,756,232 25,778,061 23,689,445
Mark-up / Return/ Interest expensed 2,932,693 2,057,640 2,781,468 4,525,359 5,750,881
Net Mark-up / Interest Income 7,437,301 7,026,223 14,974,764 21,252,702 17,938,564
Provision against consumer loans 862 1,200 0
Provision against non-performing 705,787 442,595 1,242,153 1,014,540 1,441,713
loans and advances - net
Provision / (reversal) for diminution -150,000 -172,876 -98,982 121,197 130,913
in value of investments - net
Bad debts written of directly 224,432 8,771 1,184 47,000 199
781,081 279,690 1,144,355 1,182,737 1,572,825
Net markup/ return / interest 6,656,220 6,746,533 13,830,409 20,069,965 16,365,739
income after provisions
NON MARK-UP / INTEREST INCOME
Fee, commission and
brokerage income 1,992,356 2,448,950 2,311,235 1,973,581
Dividend Income/Gain on
Sale of Investments 378,908 480,344 811,801 577,493
Income from dealing in
foreign currencies 492,738 531,455 692,010 552,657
Gain on Sale of securites 0 804,419.00 866,112.00 605,865.00 1,273,968.00
Unrealized Gain/(loss) on
revaluation of invstments classified
as held for trading 0 -11,440.00 1,634.00 0 -121
Other Income 576,007 1,425,174 570,505 366,114.00
Total non mark-up/return/
interest income 0 4,232,988 5,753,669 4,991,416 4,743,692
6,656,220 10,979,521 19,584,078 25,061,381 21,109,431
NPL 10,999,337 8,837,712 8,395,989 8,570,813 9,546,284
NON - MARKUP INTEREST EXPENSES
Administrative expenses 7,244,200.00 6,459,490.00 6,482,592.00 4,558,484.00
Other Provisions/write
offs/(reversals) 149,593 -72,740 11,411 -9,452
Other Charges 41,864 178,841.00 66,708.00 179,435.00
Total Non markup
Interest expenses 0 7,435,657 6,565,591 6,560,711 4,728,467
Extraordinary Items 0 513,852
PROFIT BEFORE TAXATION 6,656,220 4,057,716 13,018,487 18,500,670 16,380,964
Taxation - Current - for the year 1,555,764 4,611,359.00 5,701,443.00 4,958,076.00
for prior years 0 -149,763.00 593,497.00 -459,952.00
Deferred 70,420 -365,524.00 63,332.00 635,460.00
0 1,626,184 4,096,072 6,358,272 5,133,584
PROFIT AFTER TAXATION 6,656,220 2,431,532 8,922,415 12,142,398 11,247,380
Basic Earnings per Share 6.61 5.99 17.43 23.4 17.9
Diluted Earnings per Share 6.61 5.99 17.43 23.4 17.9
Average price per share 43.85 55.18 113 324.6 328.05
Provisions 6,810,917 6,692,398 7,816,924 8,608,344 9,546,284
LIQUIDITY
Earnings Assets to Assets 86.52% 84.87% 85.18% 84.67% 82.73%
Yield on earning assets 4.40% 4.31% 5.65% 8.02% 8.25%
Advance to deposits 45.96% 54.21% 70.52% 77.76% 71.28%
Cost of Funding earning assets 1.24% 0.91% 1.17% 1.67% 1.92%
Interest Margin 28.28% 22.65% 15.66% 17.56% 24.28%
SOLVENCY
Equity to Assets 4.08% 4.83% 6.86% 10.08% 12.28%
Equity to Deposits 5.25% 5.93% 8.50% 13.27% 16.31%
Earning Assets to Deposits 111.39% 97.47% 113.28% 109.84% 110.01%
DIVIDEND PAYOUT
Dividend Coverage 2.1 2.4 4.3 3.2 4.2
DPS 3.2 2.5 4 7.2 4.3
Dividend Yield 0.073 0.045 0.036 0.022 0.013
Dividend 983,457 843,000 1,715,000 3,960,000 2,702,776
EARNING
Return on Assets 2.40% 0.90% 3.00% 3.50% 2.90%
Return on Equity 59.90% 16.70% 37.60% 29.70% 23.40%
Return on Deposits 3.10% 1.10% 3.90% 4.70% 3.90%
Asset Quality
Non-Performing loans to Advances 11.32% 6.44% 4.66% 4.32% 5.01%
Provisions to
Non-Performing Loans 0.6 0.8 0.9 1 1
MARKET VALUE RATIO
BV 36.24 43.161 55.645 74.762 76.605
Price-Earnings ratio 6.63 9.21 6.48 13.87 18.33
Market-Book value ratio 1.21 1.278 2.031 4.342 4.282
shares outstanding
during the year 306,527.30 337,180.03 426,532.70 546,327.60 628,276.80
DEBT MANAGEMENT
Debt to Equity 23.5 19.7 13.6 8.1 7.4
Debt to Asset 96% 95% 93% 89% 88%
Deposits time Capital 19.04 17.23 11.98 6.85 7.05
Capital(avg of asset
and liabilities 11,108,693.0 012,830,788.5 19,143,590.0 37,569,267.0 40,844,314.0
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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