BANK OF PUNJAB IS BACK IN THE GAME

reduce and deposits to rise even beyond the government’s contribution. Over the past three years the bank’s deposits went up by cumulatively Rs 114 billion. In the past six months alone, the deposit side of BOP has grown from Rs 347 billion to Rs 429 billion, which is almost 15 per cent growth within half a year. This is big news because the banking sector particularly considers deposits to be the main theme for performance.

In the past two weeks BOP’s stock made news once again as it rallied 33 per cent, as explained by the Sherman securities report. This growth of BOP stock and its performance is surprising considering the past record of heavy Non-Performing Loans (NPL) and the reduction in deposits that the bank had to suffer. The financial crunch that hit Pakistan in 2000’s seemed to have hit BOP the hardest as they had as much as 20 per cent NPLs.A quick reflection of BOP’s bad conditions can be shown by the fact that it was on the verge of liquidity crisis in 2008, and its NPLs had hit the mark of over Rs 80 billion. Some investors are still skeptical of the bank’s liquidity performance despite its good performance over all.

Now when the bank has shown tremendous improvement in its deposits and has also been pulled out of the NPL burden to a great deal by the Government of Punjab, it is still not completely done with the recession that it had to face.The Punjab government injected a heavy equity into the bank’s statements, nearly ten billion rupees over the past couple of years and has promised more in near future. Furthermore the social schemes introduced by the Government of Punjab such as auto financing scheme and Rozgaar scheme are also being financed through BOP which is providing the bank with more money as well as more customers.

The effect of this intervention by the Government of Punjab has multiple dimensions. On the one side, the equity injection means a direct dilution of earnings for the share holders and an inevitable fall in earnings per share (EPS).On the other hand it means an increase in the bank’s deposits and brings them close to and even above the minimum capital requirement by the State Bank of Pakistan (SBP). This extra finance also allows the bank to lend more and therefore earn more interest and perhaps even increase their net interest margin (NIM).

Pakistan Today talked to an acclaimed financial analyst Ameet Doulat at the Next Capital Brokers who shed more light on the matter. He believes that this recovery is not short term and there is reason to believe that the performance of BOP as well as its stock will continue to improve further, at least in the next couple of years.He said that BOP had been showing improvement since its management was changed in 2011, but since such changes take time, the effect is becoming prominent now. The new retail head of BOP is ex-Barclays which mean that the management is now in expert hands who can steer the bank in positive direction.

Considering the current trends in the BOP performance and the huge government injection behind it, the question arises that what would make BOP stay away from falling into another trap of NPLs with all the increased capacity to lend. About this Ameet said, “BOP was among the banks that went overboard with lending back in 2000s when the lending trend was booming and everyone was messing their books.” He added, “However now the conditions are different. Now that the BOP management has changed and they are doing their homework before lending money so it is safe to assume that they won’t be hit again by massive NPL amounts.”

Another irony that can be seen in the stock performance these days is that despite the EPS going down, the stock price is rising. About this the analyst said, “Banking sector generally plays safe and invests in government securities. However, nowadays those securities are not offering a very high rate and the KIBOR isn’t very high either, so advances have become the game changer for banks now.”

Even though earnings per share have been diluted, but the fact that Government of Punjab is the biggest shareholder provides protection against default. Ameet said that the BOP stock is expected to go further up in value and reach around Rs 15 per share near December. (Currently the market share price is approximately Rs 13.4 in the stock market). He added that the EPS can also reach upto Rs 3 per share near the end of the fiscal year. The price to book ratio of the stock is also above one which signals further strength of the stock. Therefore it is safe to assume that the investor trend will continue as it is in the market.These things combined paint a hopeful picture for the future of a bank which had been in a crunch for almost a decade.

The following graphs show how the stock performed in terms of its closing values over the past month and the graph below indicates the volume of shares traded. Both of these signal that the bank’s stock is getting attention by investors and with the investor confidence rising in its performance, it is not only gaining the market price but also becoming a stock that the traders will want to keep in their portfolios as a longer-term investment.