Non-core in­come props up MCB's earn­ings

The Pak Banker - - 4EDITORIAL - Ali Raza Me­hdi

AS­TRONG per­for­mance by the non-core busi­ness seg­ment some­what com­pen­sated for MCB Bank's bloated tax ex­penses for the first half of the year. The blow­ing up of the tax bill was ex­pected fol­low­ing the im­po­si­tion of the 4pc su­per tax and changes in the tax­a­tion struc­ture for banks post-FY16 bud­get, and this ate up into the bank's af­ter-tax earn­ings for the sec­ond quar­ter.

MCB posted an un­con­sol­i­dated profit-af­ter-tax of Rs13.54bn for the six months end­ing June 30 (1HCY15), up 15.5pc from earn­ings of Rs11.73bn in the same pe­riod last year. This trans­lated into earn­ings-per-share of Rs12.17, against last year's Rs10.54. It an­nounced a div­i­dend of Rs4 per share, tak­ing its to­tal pay­out to Rs8 per share so far this year.

'The bank is op­ti­mistic about in­creas­ing its credit off­take to­wards per­sonal and mort­gage fi­nanc­ing [seg­ments]' On a con­sol­i­dated ba­sis, the bank and its sub­sidiaries posted a net in­come of around Rs13.52, up 14.2pc from 1HCY14. Yet, MCB's sec­ond quar­ter earn­ings were down 9.4pc yearover-year to Rs5.6bn, as the bank booked the one-time tax ex­penses dur­ing the pe­riod. Non-in­ter­est in­come: Ever since the latest mon­e­tary eas­ing cy­cle set in last Novem­ber, sec­tor watch­ers have been ex­pect­ing banks to rely more on cap­i­tal gains from their eq­uity and Pak­istan In­vest­ment Bond (PIB) trad­ing oper­a­tions to shore up their bot­tom lines. And MCB seems to have done ex­actly that this year.

The bank booked Rs2.92bn as net cap­i­tal gains dur­ing 1HCY15, a sig­nif­i­cant in­crease from Rs628.5m it had earned from this seg­ment last year. Of this, a ma­jor chunk of Rs1.8bn was re­alised from the sale of listed shares, while Rs1.12bn were earned by selling PIBs. Other com­po­nents of the non­core seg­ment also per­formed well. The bank earned Rs4.35bn from fees and com­mis­sions dur­ing the six-month pe­riod, an im­prove­ment of 28pc over 1HCY14. Mean­while, in­come from div­i­dends jumped 37pc to Rs615m, while other in­come surged to Rs1.08bn from Rs226m last year.

Sha­jar Cap­i­tal an­a­lyst Hamza Ka­mal said "Rs700m in com­pen­sa­tion for tax re­funds was the prime fac­tor in the [rise in] other in­come".

All of this led to an over­all growth of 73pc in the bank's non-in­ter­est in­come, which clocked in at Rs9.44bn for the pe­riod. "The [fee-based] in­come alone con­trib­uted 54pc to non-in­ter­est in­come. This was pri­mar­ily a re­sult of in­creased re­mit­tances dur­ing the sec­ond quar­ter, to­gether with growth in the ban­cas­sur­ance busi­ness. Other com­po­nents of the non-in­ter­est in­come grew by 93pc on a cu­mu­la­tive ba­sis," re­marked Elixir Se­cu­ri­ties an­a­lyst Ujala Ad­nan.

In­vest­ments: While the bank doesn't pro­vide a break­down of its in­vest­ments by as­set class ev­ery quar­ter, ac­cord­ing to its an­nual re­port for CY14, it had al­most Rs12bn worth of listed shares on its in­vest­ment books, up from Rs7.7bn in CY13. Its to­tal PIB hold­ings stood at around Rs329bn at endDe­cem­ber, al­most three-times the prior year's level.

Nonethe­less, its net in­vest­ments jumped 22.8pc to RsRs627.5bn dur­ing the half-yearly pe­riod. Yet, in a slight de­par­ture from in­dus­try trend, most of these ad­di­tions for MCB are said to have been in Trea­sury bills.

Quot­ing the bank's post-re­sult con- fer­ence call with an­a­lysts, Ujala said "the man­age­ment dis­closed its tilt to­wards in­creas­ing its T-bill port­fo­lio rather than PIBs dur­ing the cur­rent year. A large pro­por­tion of these T-bills have a ma­tu­rity of six months".

Be­sides, the bank's "as­set de­ploy­ment re­mains skewed to­wards in­vest­ments as its in­vest­ment-to-de­posit ra­tio stands at an all-time high of 82pc," said JS Global Se­cu­ri­ties an­a­lyst Am­reen Soorani.

Ad­vances: Mean­while, as many other banks have largely re­strained their lend­ing and mer­rily gone about chas­ing PIBs, MCB seems to be giv­ing due at­ten­tion to its ad­vances port­fo­lio.

The bank's net ad­vances grew by around 4pc to Rs315.3bn dur­ing Jan­uary-June. And for the July 2014June 2015 pe­riod, its net ad­vances were up a healthy 11pc, while over­all bank loans to the pri­vate sec­tor dur­ing the same time had gone up by a lower 7.3pc, ac­cord­ing to cen­tral bank data.

"The man­age­ment is tar­get­ing a 910pc growth in ad­vances," said Ujala.

Nonethe­less, Soorani pointed out that the bank's ad­vances-to-de­posit ra­tio dropped 293 ba­sis points to 41pc, as its de­posits grew faster than its loans.

This mix of in­vest­ments and ad­vances led the bank to post an in­ter­est in­come of Rs41.5bn for 1HCY15, up 10.4pc from Rs37.6bn in 1HCY14. Mean­while, a re­duc­tion in non-per­form­ing as­sets al­lowed the bank to re­verse pro­vi­sions to the tune of Rs755.5m.

De­posits: The bank's over­all de­posit base grew a de­cent 11.3pc to Rs765.8bn in 1HCY15. The high­est growth came in cur­rent ac­counts, which went up 24.2pc to Rs282bn, while sav­ings ac­counts in­creased 3.8pc to Rs397.2bn. Si­mul­ta­ne­ously, its high­cost fixed de­posits dropped 13.3pc to Rs53.8bn.

As a re­sult, the bank's ra­tio of cur­rent and sav­ings ac­count (Casa) de­posits to to­tal de­posits rose to 93pc, among the high­est in the in­dus­try. This - along with the drop in in­ter­est rates which have pulled down de­posit costs across the in­dus­try - helped MCB con­tain its core ex­penses to Rs16.6bn by end-June. And these costs ac­tu­ally went down to around Rs8bn in the sec­ond quar­ter, from Rs8.2bn in the same pe­riod last year.

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