National Bank of Pakistan

Brief introduction:

With an asset base of over Rs 1.7 trillion, National Bank of Pakistan (NBP) is the second largest commercial and largest public sector bank in Pakistan. It has a diversified business portfolio and is a lead player in the debt/equity market, corporate investment banking, retail and consumer banking, agricultural financing, treasury services etc. Besides, the bank is making great strides in promoting and developing the country's small and medium enterprises.

NBP is at the forefront of international banking in Pakistan which is proven by the fact that NBP has its branches in all the major financial capitals of the world.

NBP has developed a wide range of consumer products, to cater the different segments of society. Some schemes have been specifically designed for the low to middle income segments of population. These include NBP Karobar, NBP Advance Salary, NBP Saiban, NBP Kisan Dost, NBP Cash n Gold etc.

It has implemented special credit schemes like small finance for agriculture, business and industries, Qarz-e-Hasna loans to students, self-employment scheme for unemployed persons, public transport scheme etc. The Bank has also expanded its range of products and services to include Shariah Compliant Islamic Banking products. The bank also provides services as trustee to National Investment Trust (NIT), Long-Term Credit Fund (LTCF) and Endowment Fund for student loans scheme.

PERFORMANCE CY15

Profits and state-owned institutions do not have a merry history in Pakistan - it is very rare that a state-owned institution keeps generating sizeable profits year after year. And the country's largest public sector bank, NBP is one such exception that performs against the odds, in the age where the likes of PIA and PSM bleed heavy losses.

Only the state-owned E& P companies can claim to match NBP in terms of profit generation, but then the banking industry has stiff competition with a very advanced, sophisticated private sector, which makes NBP's performance more special. Carrying the baggage and ills of being owned by the government, NBP's financial performance has stood out of late.

The country's second largest bank reported a mammoth 51 percent year-on-year increase in pre-tax profits for CY15. The exemplary performance was driven by tight cost control, improved performance on the non-core income front and improvement in deposit mix. Mind you, the decline in interest rates during the period posed a stiff challenge to spreads.

For the first time in recallable memory, NBP's asset portfolio shifted in favour of investments and that seems to have yielded the desired results, instantly. The top line still remained flat, but to match the peers, NBP had to alter its asset mix, as the other similar sized banks have minted good money, keeping the ADRs low. The bank's ADR slid to 48 percent as at December end 2015 from 59 percent a year ago.

Simultaneously, the IDR grew to 57.7 percent from 45.5 percent in CY14. In terms of absolute numbers, investments grew by a massive 47 percent during the year, while net advances went down by 8 percent. It has been quite some while since banks, most notably the big ones, almost gave up on lending and investments became the favoured parking spot. NBP, more by design than by choice, was the lone bank among peers carrying a highest ADR. But that has changed at long last, as the CY15 year end numbers clearly show how the NBP aggressively added government securities to its investment portfolio - reversing the ADR and IDR from a year ago.

The bank marched on its exemplary deposit growth drive, surpassing the sector's average deposit growth, having posted a 16 percent deposit growth during the year. And needless to say, banks have been trying to add the right kind of deposit rather than just looking for deposit growth. NBP's gradually improving CASA ratio is testament to its drive to reduce cost of deposits, especially when spreads are squeezed and return requirements on average deposits are more stringent.

Provisioning charges have long been a drag on NBP's income statement and the situation does not seem to have improved significantly - as the infection ratio continues to be north of 20 percent. Government should be more supportive when it comes to making timely interest payments and timely guarantees, especially when it compels the NBP to facilitate the state-run schemes.

The contribution from non-mark-up income was another shining note on the income statement. When yields on most assets are low, most banks want the non-core income to support the bottom line, and NBP did just that. The contribution of non-core income as a percentage of total mark-up income has gradually grown from 20 percent in CY11 to north of 30 percent now.

Moreover, NBP was also able to control its administrative costs, resulting in much improved cost to income ratio to 47.6 percent, from 54.7 percent, a year ago. Despite higher effective taxation rate, the bank was able to report a more-than-decent 28 percent year-on-year increase in after-tax profits.

Future outlook

The interest rates have remained on the lower side and spreads have not shown any signs of going up either. That said, the interest rates may well have bottomed out and now is the time for banks to find suitable avenues to lend. Now that, NBP is a shy lender, but yields on government securities do not offer much anymore as the bulk of juice has already been extracted via gain on sale of securities.

NBP will not need a second invitation to be part of the lending drive that could be triggered by CPEC. All this while, NBP would do well to keep a vigilant eye on the NPLs. The year 2016 might be a tough one for profits, but the bank's fundamentals are strong enough to keep it afloat.