The core function of a bank is managing risk and the high risk high reward mantra has long dominated the growth strategies of the business world in general. While that may have been true to some degree, taking the road less travelled - low risk equals higher return - has proven beneficial for some.
Banking the gains in the first three quarters, Meezan Bank (MEBL) continued its path towards profitability in its full year results announced on Monday. Shareholders opted for 10 percent bonus shares, instead of a cash dividend, in an effort to capitalise cash for future growth plans.
The foundation for growth in 2010 was the network expansion that the Islamic bank undertook. It opened 53 branches in new cities during the year and successfully implemented deposit mobilisation strategies. Deposits were up 31 percent.
Interestingly, the cost of deposits remained largely the same as the previous year. Conscientious efforts to accumulate low cost deposits paid off as MEBL was able to maintain a healthy 66 percent CASA ratio.
Still, finding high quality financing avenues have remained elusive for the Islamic bank. Financings-to-deposit ratio declined marginally-by 50 bps- to 41.5 percent in the year ending December 31 2010. Since being hit in the downturn of 2008, it has been very conservative in its financing decisions.
Asset quality seems to be on the uptick as non performing financing to total financings declined by 90 bps, improving the coverage ratio to almost 90 percent from just under 70 percent in the year ago period. This remains the core of the conservative approach of the bank.
Following the launch of the Ijara sukuk at the tail end of the year, MEBL has mobilised investments of Rs22 billion, according to Meezans CFO, Shabbir H. Khandwala. That translates to a 136 percent jump in investments for the bank over the previous year.Sources in the company confirmed that lack of short-term liquidity placement options saw the bank continually looking towards foreign markets, pumping up income from dealing in foreign currencies by 83 percent, in turn pumping nearly 55 percent growth in non-financing income.
A 30 percent increase in administrative expenses is hardly unreasonable at a time when the Islamic bank is expanding its reach. Training new human resource and technological enhancements were labelled as investments in the future of the organisation by the bank.
In the ongoing year, MEBL will focus on opening more branches, improving its financing-to-deposit ratio well above 50 percent. It will also continue deposit mobilisation strategies and work with the central bank to introduce shariah-compliant short-term paper in the domestic market.
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Meezan CY10
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P&L (Rs mn) CY10 CY09 chg
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Return earned 12,291 10,102 21.7%
Return expensed (6,606) (4,970) 32.9%
Net Return Income 5,684 5,132 10.8%
Provisioning (1,496) (1,532) -2.3%
Net Reurn income after provisions 4,188 3,600 16.3%
Other income 2,475 1,598 54.9%
Operating revenues 8,159 6,730 21.2%
Other expenses (4,536) (3,458) 31.2%
Profit before taxation 2,127 1,740 22.3%
Profit after taxation 1,650 1,025 60.9%
EPS (Rs) 2.36 1.62
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Source: Company Accounts
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