Allied Bank Limited

Brief Introduction:

Allied Bank started its operations in Lahore in 1942 under the name of Australasia Bank. It became Allied Bank of Pakistan in 1974. In August 2004, because of capital reconstruction, the bank's ownership was transferred to a consortium comprising Ibrahim Group; hence, it was renamed as Allied Bank Limited in 2005.

As of now, with its existence of over 70 years, the bank has built itself a foundation with a strong equity, assets and deposit base and is the fifth largest commercial bank of Pakistan.

It offers universal banking services, while placing major emphasis on retail banking. The Bank has a large network of over 1000 online branches and ATMs in Pakistan and offers various technology-based products and services to its diverse clientele.

Financial Performance CY15

Allied Bank Limited has gone from strength to strength - focusing mainly on balance sheet growth. It was very recent when the bank was recognised as the "Strongest Bank by Balance Sheet - 2015." The top line growth stayed moderate as interest rates remained on the lower side, coupled with limited asset growth. Banks of late have been shying away from high yielding riskier assets. The focus has shifted towards the safer havens of government securities - hence the limited top line growth.

Lower interest rates did not mean lower net interest income as ABL played smartly to rationalise cost of deposits. The deposit base has been increasing steadily, without being spectacular. But the real deal is the right kind of deposits being added to the liability book. ABL's CASA has been steadily improving over the years, having crossed 74 percent as at December end 2015. The gross spread ratio was recorded at a five-year high in CY15, despite challenging interest rate environment - a testament to ABL's drive towards rationalising deposit mix.

On the asset front, the growth is very much there, but the pattern has changed dramatically over the past five years. It was in CY12 last when advances outnumbered investments on ABL's books. The ADR has gone down from as high as 66 percent in CY11 to 46 percent in CY15. Call it lazy banking, reluctance or whatever else - ABL's shareholders are surely not complaining.

Yields on government securities have declined in the recent past, but ABL along with most its peers still seems to be playing safe than sorry. The decline in advances growth and ADR has been well compensated by marked improvement in

all other indicators, almost simultaneously. The gross spread ratio improved from 37 percent in CY12 to 50 percent in CY15. The NPL ratio has also declined to 6.3 percent - not that it has been a big problem for ABL in the recent past. ABL's loan book is one of the cleanest in the industry and the bad loans are adequately provided for.

ABL's treasury arm has also proved to be a massive boost to bottom line in times of thin spreads. Other than the usual gain on sale of securities, ABL has also done well on cross-selling front - increasing revenues from fee, commission etc. All this while, the administrative costs have been optimised, evident from the improved cost to income ratio.

Outlook

Interest rates seem to have bottomed out after the recent 25 bps cut by the central bank. In theory, banks should be going all out on an aggressive lending spree. But interest rates are not the only factor determining banks' lending decisions. ABL, being a large bank appears well-positioned to take advantage in case genuine demand arises in the market.

Banks have also put down the slowdown in advances growth to a lack of genuine credit demand. That said, energy situation seems to be improving gradually. CPEC is also round the corner - and while it may not directly involve local banks, the likes of ABL will still have a role to play financing projects one way or another.

Strictly in terms of profitability, CY16 may be a toughest year for ABL - given record low spreads. That said, ABL has the might and muscle to weather the tough phase. Advances may not go through the roof in the immediate future, and non-core income may also remain on the lower side - but with macroeconomic indicators showing strength - it will not be long before the asset portfolio starts moving towards advances.