MCB: non-markup revenues need renewed focus

It pays to be clean and MCB Bank has been doing just that. Its clean corporate portfolio has weathered it yet again from bad loans otherwise swarming the banking industry. Higher liquidity, however, in the absence of safe and lucrative advances kept its first half earnings growth contained to just 1 percent.
Arguably with one of the best corporate lending portfolios among the five local giants coupled with low penetration in the consumer segment, MCBs non-performing loans (NPLs) have remained significantly low. The banks NPL to gross advance ratio stood at 4.9 percent at the end of March 2009 compared with industrys average of 7.6 percent. It would be interesting to watch the banks NPL ratio in June 2009 which seesawed from 4.7 percent (June 08) to 3.9 percent (December 08) then back to 4.9 percent (March 09).
The seasonal impact of commodity financing is more visible on MCBs books than on any other bank as evident by its oscillating advance-deposit ratio (ADR), which swung from 68 percent (June 08) to 83 percent (December 08) to 76 percent (March 09). The banks management should be pondering on this mixed trend, especially its declining ADR in the first quarter 2009 in contrast to rising NPL ratio.
Moreover, the banks inability to generate adequate non mark-up income requires serious policy work at the time of de-leveraging. Although, slowdown in trade activities is partly to be blamed for declining fee and commission income; but essentially it is the banks own lack of focus as well.
The share of MCBs non-mark up income (Rs 2.8 billion in 1HYCY09) to gross operating revenues declined by 525 basis points to just 13 percent in 1HCY09- far lower than 30 percent (Rs 6.7 billion) seen in UBLs first half books. MCB has to have clear policy framework to penetrate more in trade activities and consumer banking as sizeable portion of consumer segment earnings stems from fee and other charges.
The banks intention to acquire RBS Pakistans operations looks well placed, as it would help capture high rewarding consumer portfolio, which RBS had inherited from ABN Amro. Nonetheless, Prime Banks infectious branch network could cannibalise the benefits of consumer segment synergies. But more on that later.

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MCB PROFIT AND LOSS ACCOUNTS

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Rs (mn)                              2Q-09   2Q-08   Growth   1H-09    1H-08  Growth

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Mark-up earned                      12,847   8,748      47%  25,850   16,936     53%

Mark-up expensed                    (3,857) (2,347)     64%  (7,765)  (4,339)    79%

Net mark-up Income                   8,990   6,401      40%  18,084   12,597     44%

Provisioning                        (2,151)   (837)    157%  (3,896)  (1,452)   168%

Net mark-up income after provisions  6,840   5,564      23%  14,189   11,145     27%

Non-markup income                    1,070     939      14%   2,758    2,855     -3%

Operating revenues                  10,060   7,340      37%  20,842   15,452     35%

Non-markup expenses                 (2,459) (1,632)     51%  (5,258)  (3,371)    56%

Profit before taxation               5,451   4,870      12%  11,689   10,629     10%

Profit after taxation                3,622   3,565       2%   7,756    7,677      1%

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EPS                                   5.24    5.16            11.22    11.11

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