Uneasy times for Bank Alfalah

For Bank Alfalah the writing is now on the wall. After depleting in the first nine months, BAFLs deposits picked up in the last quarter, as did overall economic activities, resulting in a 7.7 percent increase in the deposit base to Rs324 billion in the year ending December 2009.
Still, the lenders advances-to-deposits ratio, which has already been low amongst its peers, deteriorated further by 518 basis points to a mere 61 percent, barring no power sector TFC classified as investment.
BAFL could have classified its strategy as being prudent in 2008, for its then lower ADR was justified by a relatively low gross infection ratio of 4.5 percent.
However, with mounting toxic assets in 2009, a falling ADR should have made the banks board of directors question its managements efficiency.
The bank basically took two back to back hits during the year. First, it barely managed to increase its net mark-up income growth, as growth in mark-up expenses outpaced interest earned, and second, its high provisioning against bad loans pushed the net core income lower by 1 percent.
Though, BAFLs provisioning rose 15 percent during 2009, in essence it doubled year-on-year. This is because in 2008, the provisioning was extraordinarily high due to full charge of impairment amounting Rs1.4 billion on equity securities, which in turn gives a high base to this years provisioned amount.
Interestingly, provisions booked in the last quarter were about 80 percent of the amount expensed out in the preceding nine months. This dented the banks profitability as it suffered from a net loss of Rs665 billion in the fourth quarter.
The management attributes this sharp rise to subjective provisioning recommended by external auditors. But that, knowing that this element of caution is largely absent from the books of its peers, puts further doubts on BAFLs relatively clean portfolio.
Although, BAFLs operating revenue mix is tilted towards non-core segment owing to its strong presence in consumer segment, lately the bank could not do much to enhance it, thanks to the economic slowdown. The bank registered a nominal growth of 7 percent in fee commission and other income.
The only thing working for Alfalah was administrative efficiency as the bank managed to control its expense during tough times with admin and other expenses increasing by just 10 percent. Nonetheless, it was not enough to support its bottom line, which fell 31 percent to Rs897 million during 2009.
Despite such dismal performance, however, investors pushed its stock price higher by 4.72 percent on Monday.
While that was primarily because BAFL paid Rs0.8 per share as dividend, it is also because the bank is currently trading at a really low price-to-book multiple, which doesn justify even after accounting for the lenders low return on equity.

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Bank Alfalah - Profit and Loss accounts

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Rs (mn)                       2009        2008    Growth

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Mark-up  earned             35,561      30,967       15%

Mark-up  expensed          (24,654)    (20,494)      20%

Net mark-up Income          10,907      10,472        4%

Provisioning                (4,072)     (3,543)      15%

Net mark-up income

 after provisions            6,835       6,929       -1%

Non-markup  income           5,182       4,823        7%

Operating revenues          16,089      15,295        5%

Non-markup  expenses       (11,002)     (9,957)      10%

Profit before taxation       1,016       1,795      -43%

Profit after taxation          897       1,301      -31%

EPS (Rs)                      0.71        1.41

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Source: Company Accounts