Lower ex­penses shore up ABL's earn­ings

The Pak Banker - - 4EDITORIAL - Ali Raza Me­hdi

AHEALTHY growth in core in­come and lower de­posit ex­penses pro­vided some much-needed re­lief to Al­lied Bank Ltd's bot­tom line for the half year end­ing June 30. How­ever, the twin im­pact of the re­cent changes in the tax­a­tion struc­ture and the low in­ter­est rate sce­nario led to an ex­pected drop in sec­ond quar­ter earn­ings.

Still, the higher in­ter­est in­come and lower core ex­penses al­lowed the bank's un­con­sol­i­dated af­ter-tax profit for the six-month pe­riod (1HCY15) to rise 3.4pc to Rs7.36bn. Its earn­ingsper-share trans­lated into Rs6.42, up from last year's Rs6.2. The bank an­nounced a div­i­dend of Rs1.75 per share for the pe­riod.

As the bank booked the one-time 4pc su­per tax in­tro­duced in the FY16 bud­get, its over­all tax bill for 1HCY15 shot up to Rs6.2bn from Rs3.7bn last year. Yet, as it booked the one-time 4pc su­per tax in­tro­duced in the FY16 bud­get, its over­all tax bill for 1HCY15 shot up to Rs6.2bn from Rs3.7bn in 1HCY14. Since the tax amount (Rs1.46bn) was booked in the sec­ond quar­ter, the bank's profit-af­ter-tax for the three months end­ing June dropped 18.5pc over the pre­vi­ous quar­ter to Rs3.15bn. "The steep drop in sec­ond quar­ter earn­ings is ex­plained by the one-off su­per tax of Rs1bn im­posed and ad­di­tional tax pro­vi­sion­ing of Rs0.5bn on ac­count of changes in the tax rate for cap­i­tal gains and div­i­dend in­come. The ad­di­tional taxes ac­count for a Rs1.28 per share im­pact in 2Q only," wrote Kasb Se­cu­ri­ties an­a­lyst Mo­ham­mad Fawad Khan in a re­search note last week. In­vest­ments: The bank's net in­vest­ments went up around 10pc to Rs455.3bn dur­ing the pe­riod, form­ing a 49.6pc share in the to­tal as­set base of Rs917.9bn.

Like its peers, ABL re­lied on its huge hold­ings of Pak­istan In­vest­ment Bonds (PIBs) for the bulk of its in­ter­est in­come. And it con­tin­ued to ac­tively bid for fresh PIBs is­sued dur­ing 1HCY15, as its to­tal PIB port­fo­lio ex­panded by a siz­able 20.8pc and reached Rs319bn by end-June.

"ABL [like a few oth­ers] has main­tained a rather con­ser­va­tive ap­proach when it comes to its as­set mix. While sched­uled banks' to­tal PIB hold­ings rose by around 12pc dur­ing Jan­uaryJune, ABL's rose by 20pc, sug­gest­ing that it was fairly ac­tive dur­ing the bond auc­tions," said one sec­tor watcher. A fur­ther anal­y­sis of the bank's fi­nan­cial state­ments shows that it is con­tin­u­ously adding PIBs into its avail­able for sale (AFS) port­fo­lio; the bonds in this cat­e­gory grew from Rs72.4bn at end-2014 to Rs110.5bn by March 31 and then to Rs132.6bn by June 30.

The amount of PIBs in the held-toma­tu­rity port­fo­lio (HTM) re­mained largely un­changed at around Rs185bn, while those in the held-for-trad­ing (HFT) cat­e­gory grew from Rs2.5bn to Rs12.5bn. Given the drop in in­ter­est rates and the cor­re­spond­ing rise in bond prices dur­ing the pe­riod, the higher PIBs in the HFT port­fo­lio likely con­trib­uted to the Rs8.17m in un­re­alised gains on the bank's profit and loss ac­count for 1HCY15.

The bank earn­ings from the HTM port­fo­lio al­most dou­bled to Rs11.35bn dur­ing the pe­riod. Con­versely, its in­come from ad­vances dipped to Rs13.9bn, in line with the lower preva­lent lend­ing rates as well as the drop in its loan book.

ABL's over­all in­ter­est in­come clocked in at Rs36.4bn for 1HCY15, up 14.5pc from last year.

"The bank has said it will be ven­tur­ing to­wards more SME and pri­vate sec­tor lend­ing, while con­tin­u­ing to rely on PIBs for its core in­come," com­mented Taurus Se­cu­ri­ties an­a­lyst Us­man Riaz. While the bank's di­rec­tors have yet to re­lease their re­port for the six-month pe­riod, its then-CEO Tariq Mah­mood had writ­ten in the first quar­ter re­port that "strate­gic pri­or­i­ties to­wards steady growth in per­for­mance would be driven by op­ti­mum util­i­sa­tion of mul­ti­ple de­liv­ery chan­nels [and] con­tin­u­ously im­prov­ing the qual­ity of as­sets. The bank re­mains com­mit­ted to­wards di­ver­si­fy­ing rev­enue streams through fo­cus­ing on grad­ual growth in Is­lamic bank­ing, branch­less bank­ing and fee-based in­come op­por­tu­ni­ties".

De­posits: On the other hand, a ma­jor rea­son be­hind the bank's flat­tish in­ter­est ex­penses ap­pears to be its ef­forts to shore up cur­rent ac­counts. Dur­ing 1HCY15, non-re­mu­ner­a­tive cur­rent ac­count de­posits recorded the high­est growth of 16.7pc and reached Rs238.6bn. Sav­ings de­posits went up by a much lower 5pc to Rs178.7bn, which high-cost fixed de­posits dropped 3.2pc to over Rs177bn dur­ing the pe­riod. As a re­sult, the bank's ra­tio of cur­rent and sav­ings ac­counts (Casa) to to­tal de­posits in­creased from 73pc to 75pc, said Riaz.

This com­po­si­tion, cou­pled with the cy­cle of mon­e­tary eas­ing that has led to a drop in the min­i­mum de­posit rate on sav­ings ac­counts, helped the bank re­duce its de­posit ex­penses to Rs13.7bn from Rs14.8bn last year.

This, in turn, helped its net in­ter­est in­come rise a solid 35.2pc to around Rs17.4bn for 1HCY15.

The bank's de­posit mo­bil­i­sa­tion ef­forts have also been aided by its ag­gres­sive ex­pan­sion strat­egy, which has seen it add around 110 branches in around two-and-a-half years. Its cur­rent net­work com­prises 998 out­lets.

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