Bank Alfalah's biggest problem is its declining deposit base. Although the lender has a high concentration in the lucrative consumer segment loans and decent penetration in the non-core segment, a low advance-to-deposit ratio and higher proportion of fixed deposits (39% of the total) limited its return on equity to a mere 10 percent for the first half year ending June.
The bank lost 86 basis points in deposits market share to stand at 7.1 percent in the first quarter CY09, owing to a 9 percent decrease in its deposits base. Although, its ADR increased by 134 bps to 67 percent in the first quarter, its loan base also shrank by 7 percent. This restricted the bank's net mark up income growth to just one percent.
Although, BAFL's relatively clean book speaks volumes for its niche in the consumer segment; to the likes of the industry, the three times increase in provisioning pushed its net-of-provisioned core income 20 percent lower year-on-year. However, the good thing is that while the bank has covered 66 percent of its bad loans, its 'total bad loans to gross loans' ratio stands at 5.5 percent versus the industry average of 11.6 percent.
Meanwhile, lack of economic activity in the country plagued BAFL's strength to earn fee commission, dividend and other income which edged only 2 percent up, year on year. Cost cutting is the order of the industry; correspondingly the bank managed to trim its growth in administrative expense to ten percent in first half 2009, but better administration could not rescue its bottom line, given the damage done by line managers, with net profits down 39 percent in the first half CY09.
The bank's stock is currently trading at just 0.44 times its book value; however, excluding all unprovided bad loans, this ratio increases to 0.51. Such a steep discount on price to book is hard to justify even after accounting for the lender's low return on equity.
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Bank Alfalah P & L Account
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Rs (mn) 2Q-09 2Q-08 Growth 1H-09 1H-09 Growth
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Mark-up earned 8,637 6,979 24% 17,912 13,762 30%
Mark-up expensed (6,101) (4,365) 40% (12,646) (8,536) 43%
Net mark-up Income 2,536 2,614 -3% 5,266 5,226 1%
Provisioning (924) (375) 146% (1,502) (513) 193%
Net mark-up income at 1,612 2,239 -28% 3,764 4,713 -20%
Non-markup income 1,626 1,559 4% 2,744 2,702 2%
Operating revenues 4,161 4,173 0% 8,010 7,928 1%
Non-markup expenses (2,499) (2,503) 0% (5,104) (4,627) 10%
Profit before taxation 739 1,295 -43% 1,404 2,788 -50%
Profit after taxation 661 821 -20% 1,109 1,819 -39%
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EPS 0.49 0.89 0.94 1.97
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