MCB: Provisioning reversal ensures profit growth

The template is there, and big banks seem to be following it this earning season. MCB Bank Limited (MCB) raked in 12 percent year-on-year growth in after tax profits, mainly at the back of massive reversal in provisioning charges. MCB continued with its rich tradition of high payout, doling out another Rs5/share as interim dividend – taking the year-to-date dividend to Rs9.5/share.

The net markup income stayed lower year-on-year despite volumetric growth in average earning asset, as the central bank continued with its accommodative monetary policy stance. Average interest rates have been down by nearly 400 basis points in 1HCY21 versus the same period last year.

The unfunded income continued to provide substantial support to bottomline, as the share of non-markup income to total income went up to nearly a quarter from 16 percent in the same period last year. The 34 percent year-on-year increase was spread among various business arms at the back of increased business activities, diversified revenue streams, and investments towards digital transformation. Dividend income specially saw a substantial increase of 83 percent year-on-year, whereas gain on sale of securities also contributed a net gain of over Rs550 million.

MCB managed to keep administrative expenses in check despite continuous branch network expansion and significant technology investments. The biggest difference was made by reversal in provision charges of Rs2 billion, versus provisioning expense of Rs4 billion during the same period last year. The NPLs went down to Rs51 billion, bringing the infection ratio down to 9.98 percent, adequately provided for at 96 percent.

On the liabilities front, MCB managed to expand the deposit base by 12 percent over December 2020 to Rs1.44 trillion. MCB has been relentlessly pursuing growth in low-cost and non-remunerative deposit base, evident from a high CASA ratio of 92 percent. During the period, non-remunerative deposits grew by 20 percent year-on-year, improving the current account to total deposit ratio from 38 percent as at December 2020, to 41 percent by the end of June 2021.

Investments continue to lead the way in terms of asset composition, growing to Rs1.1 trillion of 7 percent over December 2020. The advances numbers are not known yet, but the bank has put the “growth in advances subdued amidst a dearth of quality lending”. The ADR is likely to have stayed in the early 30s, which is a multiyear low. Within advances, MCB has reported significant traction in consumer lending, particularly on automobile and construction fronts. As the economic activities slowly but surely pick up, one should expect some increase in demand for what the Bank would deem fit to be called “quality lending”. Even without it, the profits will keep coming, as MCB’s financial soundness indicators make an exceptionally good reading.