The banking results season has kicked off right on cue. MCB Bank reported a 10 percent year-on-year dip in pretax profits for 1QCY25, while staying true to its reputation as a dividend-friendly stock, announcing a Rs9/share first interim payout. Yet, it’s the balance sheet that grabs attention—just two quarters apart, but seemingly from two different banking eras, as the industry has decisively returned to its old habit: ditching private credit for government securities.
After the ADR sprint of 4QCY24, where banks scrambled to dodge penal taxation, 1QCY25 brought a quick relapse. MCB’s ADR tumbled from 54 percent to the 30s, comfortably settling back into familiar territory. It’s not that the asset mix was ever skewed in favour of advances—but the speed of investment build-up was striking. From the sharpest quarter-on-quarter rise in ADR last quarter to one of the steepest declines this time—the ephemeral nature of credit growth has rarely been more evident.
MCB’s investment portfolio surged by Rs650 billion (56 percent) over the previous quarter, pushing the IDR to a record 87 percent. Advances, on the other hand, shrank by Rs282 billion or 27 percent, taking the outstanding book to Rs760 billion—levels last seen at the close of 2022. Unsurprisingly, the ADR collapsed to 36 percent.
The retreat in advances is not MCB-specific—it’s an industry-wide phenomenon. Total advances for the banking sector dipped 15 percent over December 2024 to settle at Rs15 trillion. Interestingly, NBFIs, which account for just 8 percent of the banking sector’s loan book, contributed to a third of the Rs2.4 trillion quarterly decline, thanks to the temporary lending surge in the ADR-fuelled dash last quarter.
On the liabilities side, MCB made up for the Rs140 billion deposit outflow seen in 4QCY24, recovering to the same level as end-3QCY24. Deposits grew by 9 percent over December 2024, outpacing the industry’s 4 percent growth during the period.
The significant shift in the interest rate outlook played a role in the drop in markup income. On the non-markup front, a modest uptick was seen, with fee, dividend, commission, and FX income contributing the bulk. However, administrative expenses rose sharply, outpacing headline inflation and pressuring the cost-to-income ratio, which fell over 8 percentage points year-on-year.
With inflation cooling and the external account holding steady, interest rate cut expectations have returned to the chatter. Yet, industrial output remains sluggish, and the farm economy is sending mixed signals, leaving little hope for a significant revival in private sector credit appetite in the near term.
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