MCB should advance more advances

Higher provisioning for bad debts, soaring operating expenses and lower non-core earnings offset the gains in MCB Banks core income in 2009.
Had it not been a lower reversal in pension funds by Rs1.4 billion during 2009, MCBs operating expense would have been restricted to a mere 8 percent - which speaks volumes of its cost management - and its bottom line would have been greener.
The provisioning against possible bad loans, which almost doubled in the last quarter, is due to the shift in NPLs towards the loss category and some subjective provisioning on prudence. This is largely an industry-wide phenomenon. The numbers also suggest that MCB has not booked, to the likes of other giants, the benefit of Forced Sales Value.
Around Rs400 million of capital gain made from the equity market in the last quarter helped the bank to partially restore its non-conventional income in the revenue mix. But, despite a 45 percent quarter-on-quarter increase in non mark-up income, MCBs non-conventional income portion slipped by 327 bps to 14 percent in 2009.
Mind you, MCB is traditionally known for its corporate portfolio with less attention to consumer and non-core banking activities. The peers, especially UBL, with much more presence in consumer segment and other activities are likely to outperform MCB in the downward cycle of interest rates.
Nonetheless, a relatively clean and strong presence in industries located in Punjab partially withered Mansha and his team from the plague of toxic assets - as a result, the banks infection ratio increased by 192 bps to 8.6 percent.
Still there is no free lunch. Prudence has a cost. MCB while closely watching its deposits mix did not opt much for expensive fixed deposits, and kept 83 percent of deposits in current/saving accounts. But, by doing so, it missed the bus, as its deposits growth of 11 percent remains below the industry average of 14 percent.
More importantly, by refraining from too much exposure in the circular debt TFC, the bank has not only created a rift with the finance ministry and the central bank, but has also taken a hit on its ADR. With a decline of Rs3 billion (1%) in advances, the banks advance-to-deposits ratio fell by 924 bps to 73 percent by December.
It is pertinent to note that MCB, unlike others (HBL and Faysal), has not classified any of its power related exposure in unquoted TFCs as investments. This could be because the lender refrained from participating in the second TFC issued by the Power Holding Company.
MCBs attempt to purchase RBS was a step in the right direction. It appears that although Mian Manshas sharp eyes are still looking for some other lucrative acquisition, the management does not seem to be in a hurry.
However, the bank still has to work aggressively on core banking business - exploring high yielding advances both in retail and consumer banking and refocusing on innovative products to attain momentum in its other income account seem to be the right steps in the right direction.
MCBs ROE declined by 415 bps to 27.4 percent in last year. And, if the lenders management doesn shift gears soon, the bank will keep on losing its strength of maintaining high return on equity.

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MCB BANK - P&L

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Rs (mn)                                 2009      2008   Growth

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Mark-up  earned                       51,616    40,044      29%

Mark-up  expensed                    (15,841)  (11,561)     37%

Net mark-up Income                    35,775    28,483      26%

Provisioning                          (7,465)   (4,042)     85%

Net mark-up income after provisions   28,310    24,441      16%

Non-markup  income                     5,643     5,791      -3%

Operating revenues                    41,417    34,275      21%

Non-markup  expenses                 (10,797)   (8,365)     29%

Profit before taxation                23,155    21,868       6%

Profit after taxation                 15,495    15,375       1%

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EPS                                    22.42     22.25

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Source: Company Announcement

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