Falling ADRs, costly operations clip banking gains

With the announcement of full-year results by Askari Bank and Faysal Bank, the difference between conventional and aggressive banking has become even more obvious.
Askari bank -- being the seventh largest lender with a market share of 4.6 percent - managed to beat the industry with the help of 14 percent growth in deposits during Jan-Sep period.
However, the bank could not outshine others in the tough battle of commercial lending as with a 2 percent decline in advances, AKBLs advance-to-deposit slipped by 12 percentage points to 71 percent in the first nine months of 2009. To add to the agony, its gross infection ratio rose by 231 bps to 10.7 percent in a span of nine months.
AKBLs one-off higher provisioning in the preceding year, despite the fall in non-core income, helped the bank boost its earnings by a massive 187 percent.
Had it not been a high provisioning last year, the banks performance would not have been much different than its peers as AKBL profits were down by 86 percent in the previous year (2008). The bank also issued 20 percent bonus shares to marginally meet the minimum capital of Rs6 billion required by the central bank.
On the other hand, the high risk-taking aggressive player - Faysal Bank - despite being eleventh in size, managed to maintain an above average ADR.
FABLs ADR eased by just 5 percentage points to 87 percent in 2009, though, this is assuming, the Rs9 billion of unquoted power sector TFCs as advances (and not as investments, as required to be classified by SBP), in order to compare apples with apples. To the likes of industry, the infection ratio for the bank, increased by 197 bps to 9.9 percent by December 2009.
The banks liability team, which was losing its market share in first nine months, geared up in the last quarter to beat the industry by huge margins - exhibiting 20 percent growth in 2009. FABL enhanced its market share by 12 bps to 2.9 percent.
Although, the banks deposit mix tilted towards demand liabilities by posting 40 percent increase in current/savings account, higher inter-bank borrowings for its capital market operations soared its mark up expense by 47 percent - surpassing the growth in interest earned during the period.
Faysal Bank, renowned for its expensive human resource justified by its higher concentration in non-conventional banking, is eyeing to purchase RBSs Pakistan operations to enhance its consumer banking and commercial trading businesses.
The deal may or may not materialize, but the fact that FABLs new president was previously heading RBSs operations (then ABN-AMRO), prior to assuming his current position, provides sufficient hint in this regard.
FABLs higher involvement in equity market operations, despite subdued performance in investment banking, helped the bank increase its share of non-core income in operating revenue by 4 percentage points to 36 percent. This better-than-industry average came despite the lower dividend income from NIT holdings.
Higher operating cost and soaring cost of funds, however, eroded the impact of growth in equity operation and advances as the banks profits before tax declined by 28 percent in 2009.

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                                              FAYSAL BANK                    ASKARI BANK

Rs (mn)                                2009     2008  Growth     2009       2008  Growth

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Mark-up  earned                      16,958   13,404   27%      22,662    18,393     23%

Mark-up  expensed                   (11,968)  (8,455)  42%     (13,629)  (10,651)    28%

Net mark-up Income                    4,990    4,949    1%       9,033     7,742     17%

Provisioning                         (2,192)  (2,048)   7%      (2,915)   (4,073)   -28%

Net mark-up income after provisions   2,798    2,902   -4%       6,118     3,670     67%

Non-markup  income                    2,813    2,311   22%       2,555     2,707     -6%

Operating revenues                    7,803    7,260    7%      11,587    10,449     11%

Non-markup  expenses                 (4,311)  (3,416)  26%     (7,030)    (5,915)    19%

Profit before taxation                1,301    1,796  -28%       1,643       462    256%

Profit after taxation                 1,200    1,115    8%       1,108       386    187%

EPS (Rs)                               1.97     1.83              2.18      0.78

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Source: Company Accounts