MCB Bank is among the oldest banks of Pakistan. It was among those private banks which were nationalised in 1974 after it was incorporated in 1947. Nationalisation had a drastic impact on its performance as it affected the quality of loan portfolio and services. Eventually, it was privatised in 1991 and is currently owned by the Mansha group. Post-privatisation, MCB's focus has been on aggressive cost reduction.
MCB has a network of over 1000 branches across Pakistan of which around 750 branches are automated. The bank offers various services to its consumers including personal banking, corporate banking, virtual banking, Islamic banking and other services. In this rapid expanding banking sector, MCB has been performing well to compete with its rivals. MCB has won the "Best Bank of Pakistan" award for the 5th time from 2001 to 2006.
Recent results 3Q10
Despite high discount rates and a flood-hit economy, the banking sector has managed to raise profits by 11% by the end of 3Q10, compared to the same period last year. The big five local banks - MCB, NBP, UBL, ABL, and HBL - contributed 96% to the sector's profit and performed better than the other banks registering a 14% growth in profits. The improved profitability is attributed to the growth in net interest income earned, which shows a growth of 10% for the big five banks. Combined with a 34% decline in provision against advances, the position of the banking sector is seen to have improved considerably under the given circumstances.
Net mark-up income stood at Rs 26.98 billion, a marginal rise of 1.3% over 3Q10. A sharp decline in provisioning, from Rs 5 billion to Rs 2 billion, resulted in the net mark-up income after provisions to stand at Rs 24.9 billion, an increase of 15.5% over 3Q09. Non-mark-up income on the other hand rose considerably, up by 17% to stand at Rs 4.6 billion (3Q09: Rs 3.9 billion). This rise was primarily due to an increase in fee, commission, and brokerage. Non-mark-up expenses rose in a similar fashion, thus dampening the effect of increased income. Administrative expenses, which form the major chunk of non-mark-up expenses rose by 28%, due to rising costs of business. Profit after tax for the period stood at Rs 12.5 billion, a rise of 6% over 3Q10 (3Q09: Rs 11.8 billion), with an EPS of Rs 16.44 per share.
Deposits for the period stood at Rs 422 billion, a rise of 16.6% over 3Q09 (3Q09: Rs 362 billion). The greatest proportional change was seen within Fixed Deposits, which rose by 40%, followed by Current Accounts and Savings Deposits which rose by 17% and 11% respectively. Borrowings rose by 10%, boosting the rise in Total Liabilities to 16%.
On the Assets side, earning assets, which comprise 82% of Total Assets, rose by almost 16% to stand at Rs 446 billion (3Q09: Rs 386 billion). Lendings to financial institutions doubled, now standing at Rs 9 billion while investments rose by 45%. Advances declined by 4% as a result of which there was a transformation in the structure of the company's earning assets. The share of advances dropped from 62% to 51%, while investments now contribute 47% rather than 37%. The share of lendings to financial institutions remained the similar despite the increase in its amount. Compared to the industry, MCB has a greater proportion of investments in its portfolio and a smaller share of advances. Total assets of the bank rose by 15% over the period.
NPLs of MCB rose by 9.3%, which is lower than the industry average of 12%. The company's NPLs now stand at Rs 23.9 billion, while advances stand at Rs 229 billion. The NPL to advance ratio thus stands at 10.5%, as compared to 9.2% at the end of 3Q09. This deterioration in asset quality is a poor sign especially since the company has been unable to curb NPLs despite reduced lending. As a result of the decline in advances, the advance to deposit ratio dropped significantly, from 66% at the end of 3Q09 to 54% at the end of 3Q10. This value is considerably lower than the industry average of 63%.
According to the latest monetary policy decision, as of September 30th, SBP has announced further tightening of the monetary policy, setting the policy rate at 13.5%. Lending rates will as a result go up, further dampening private sector investment and thus reducing advances for banks. While banks are currently profiting as a result of the wide interest spread, this is a negative sign for the economy as a whole and will eventually cause trouble for the banking sector as well.
Banking sector overview
The banking system, as a whole, remains healthy despite the country going through a period of economic difficulty. The banking sector absorbed the build-up of non-performing loans in the system while maintaining profitability and robust balance sheets. Much of the credit for this must go to the SBP for the policies it has pursued over the last decade to ensure that banks are adequately capitalized and adhere to prudent risk management.
The investments, especially the government papers, which declined in both absolute rupee terms as well as a proportion of total assets during the first FY08, registered a slight increase during the last quarter. Actually, the heightened credit risk on account of deterioration in macroeconomic fundamentals and already constrained liquidity profile induced the banks to shift their preference towards risk-free Market Treasury Bills (MTBs).
The banking system is marked with a high concentration as a fewer number of banks hold a major share of the system's total assets and deposits. This concentration has been following an overall declining trend as the medium sized banks gradually gained market share. However, due to unusual liquidity stress that affected mainly the small and medium sized banks, the market share of five large banks increased.
The deposits in the industry are generally showing an upward trend, though the growth is slow. The industry has been witnessing a gradual shift in deposits from savings to term deposits for quite some time. This trend emerged largely in response to SBP's policy incentives to encourage the mobilization of longer terms deposit so as to reduce the maturity mismatches. Consequently, fixed deposits gained a significant share of savings deposits since 2004. Other factors like general rise in interest rates and innovative deposits scheme have also augmented depositors preference for terms deposits.
The worsening business and economic environment somewhat increased the credit risk, which compelled the banks to adopt cautious lending strategy, particularly in consumer sector where the advances have been decreasing since the start of CY08. Some new loans have been issued of which a significant portion of these were disbursed to public sector enterprises (PSEs). Thus advances have shown a declining trend.
This rise in NPLs observed across all the banking groups except specialized banks, where NPLs have actually decreased. NPLs have been on the rise mainly due to poor economic performance of the economy and the FSV benefit therefore resulting in worsening of asset quality ratios.
Interestingly, in the wake of economic slowdown, banks seem to facilitate the businesses through rescheduling/restructuring of loans; the textile sector being the major beneficiary. Latest banking industry numbers show an effort to keep balance sheets clear of NPLs by recognizing and providing for NPLs on criteria that are more stringent. This approach might look costly in the meantime but in the long run it'll definitely benefit banks by providing a cushion to withstand losses.
The bank's profit after tax grew by 1.6% to Rs 15.536 billion as compared to last year. In a careful analysis, we see that bank has been able to withstand economic lows while still maintaining its profitability. The net interest income grew by 16% to Rs 28.483 billion as compared to FY07 of Rs 24.463 billion. The interest earned in this year was 29% higher than previous years, but it was matched by more than proportionate increase in interest expense by 37%. The main reason for the higher costs of funds is due to increase in the minimum rates of 5% return on deposits. Previously banks have saved a lot due to no protection of consumers on the returns. Furthermore, the returns on NSS (National Savings Scheme) have also increased as part of tight monetary policy. These higher rates on NSS gave strong competition to deposits and also huge drains from the system. Also, this growth in net interest income is less than the industry average of 19.7%, thus the bank should take steps in this regard.
The Non interest income fell by 1.1%, though the industry average grew by 21%. Major decreases were seen in dividend income, Gain on Sale of securities and Income from Foreign Currencies. In large part of the last quarter, the stock markets were closed due to shortage of liquidity and lack of investor confidence. These resulted in losses in values of securities and eventually the trade gains vanished due to collapse of stock markets. To match this revenue, the non-mark-up expenses were up by 30.4%. So all in all, the non-mark-up activities wore away profits. Wages, part of non-mark-up expense was higher due to inflation in this year for the common reasons of fuel, power and food price hikes.
Return on assets ratio stood at 3%, which is not in line with what industry has to offer. Industry average ROA was close to 2.10% implying that the bank is more profitable and is giving return above the industry. The ROE of the bank was 22% this year as compared to 17.4% of the industry average. This implies that the asset and equity utilisation was high for MCB and is positive sign for the shareholders. ROD (return on deposits) is 4% for the bank whereas the industry average is 6.2%, thus the bank should try and increase its deposit base.
Investment grew by 73.6% this year to Rs 167.134 billion as compared to last year. Advances and lending slipped by 3.5% and 26.8% respectively.
MCB's growth in NPLs has been 27%. The industry average was 27.87%, thus it is in line with the industry. This was not the case previously, and the bank has taken measure to curb the NPLs growth. Due to rising NPLs, banks have been cautious in lending and therefore advances growth has been negative this year as compared to previous years. Another considerable fact over here is that industry wide many banks have helped the troubled borrowers by rescheduling the loans in order to avoid non-performing loans so this can also be reflection of this practice.
Deposits for the bank increased by 11.3% to Rs 367.60 billion in FY09 as compared to the industry's growth of 10.03%. Borrowings from other institutions almost doubled to Rs 446.62 billion as compared to last year. This can be reflected from the increased investments by the bank this year. The composition of the deposits has changed since FY07. In the last year banks have put an effort to bring in new innovative long-term deposits schemes in order to avert any liquidity related risks. This was also in instructed by the SBP in order to avoid mismatch of maturities of different funds borrowed by the bank. But still it has to be borne in mind that most of the funds are provided by current and checking accounts which are further utilized by the banks.
On evaluating, the performance of MCB's earning assets we see that yield (mark-up or net interest income as a percentage of earning assets) has shown on overall rising trend. The net interest income has increased too and the productivity of earning assets is on the rise as a result increasing this ratio overall. Moreover, 'cost of funding earning assets' has also posted an increasing trend due to which the cost to income ratio has risen in recent years. Yet it is lower than the industry average of 5.45%. This ratio is showing a constant upward slope because in last few months the SBP has made it mandatory for every bank to pay a minimum deposit of 5%, this has added more to costs of funds. A slight increase in 'cost of assets' coupled with returning higher profits is a good sign for any business and signifies its potential to produce/earn in future.
Post-privatisation, MCB's focus has been on expense reduction and sought for aggressive cost efficiency. It is also evident by a rising interest margin of MCB since mark-up/return/interest expensed has fallen more rapidly than the mark-up/return/interest income. Since FY07, this variable has seen an upward trend. However, average deposit rates are also expected to increase which might impact MCB's high margins by eroding its low cost funding sources. Future expansion through low cost funding sources would be difficult resulting in declining spreads.
The ADR of the bank stood at 74% compared to industry average of 71.5%. Over the years we see a change in the composition of advances. Long term advances are taking up more of the total share. One reason is the efforts made by banks to mobilize long term funds to match the maturities of different funds. Another apparent reason from current trend is that due to higher NPLs the banks are helping the borrowers by rescheduling the advances to longer terms which might turnaround the debt servicing ability in the longer-term. In FY09, the bank decreased its advances as compared to FY08 which can be seen in the reduced long-term advances as compared to short-term advances.
The ratio of earning assets to assets in FY09 averaged to about 82.52% showing an increase of 1.3% to that of last year. The advance to deposit ratio decreased due to the growth in deposits and decline in advances, thus increasing the liquidity of the bank.
The solvency situation for the industry as a whole has shown marked improvement in recent years, caused by increasing profitability and fresh inflows of capital. The bank is also increasing its equity mainly attributed to compliance with the MCR under the Basel II accord and for growth purposes. The Capital Adequacy Ratio shows a positive trend and increased to 19.07% as compared to 16.28% of last year against SBP's minimum requirement of 8% of the risk-weighted exposure.
We can see that the bank has made an extra ordinary effort to reduce its dependence on debt, as a source of finance. The assets base and equity has been increasing as compared to debt. However, 87% of the assets are financed through debt which is still a high figure. Furthermore, debt to equity ratio suggests a tremendous recovery by MCB to improve its credit rating up to AA+ in short-term and A1+ in long-term. Moreover, growth in profits and higher capital injections as well as the imposition of the enhanced Minimum Capital Requirement (MCR) has directed to equity-based source of financing in later years.
The cash dividend per share was Rs 11 compared to Rs 11.5 of last year. The Dividend Yield (DPS as a ratio of price) decreased to a higher increase in market price of the scrip. The dividend coverage ratio was almost the same as last year, as the EPS and DPS this year were more or less equal.
The P/E ratio of the company increased 73% to 9.8 as compared to 5.66 of FY08. This was due to the high share price of the scrip during the year of Rs 219.68 compared to Rs 125.81 of last year. The same reason applied to the higher Market-Book value ratio which increased to 2.49 compared to 1.66 in FY08.
MCB is following a multi-pronged plan, whose key features are as follows:
-It aims to be the leader in transactional convenience. To get top market share, the bank will continue to invest alternate channel payment capabilities and services as well as getting a larger share of transaction driven businesses like remittances, cash management, payroll and trade.
-Continuation of investment in branches to make them more sales and service oriented. Through introduction of new sales and service model, strengthened transaction processing and leading financial products menu, the bank aspires to achieve this ambition.
-In addition to the core focus on mass, mid market and corporate segments, the bank will continue down the path of further segmenting our customer needs and developing focused customer propositions, particularly in Privilege, Islamic & SME.
-Finally, controls and efficiency is central to the bank's existence. It will build stronger controls, develop a unit cost culture and generally be on top of the game.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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