Askari Commercial Bank's profit in the year ended December 31, 2003, is likely to record a robust growth registering an increase of 52 percent compared to preceding year on back of strong credit off-take, better interest margin and strong balance sheet.
Askari Commercial Bank is likely to announce its financial results for the year ended Dec 31, 2003, on next Wednesday. The bank will release its financial figures at Karachi Stock Exchange.
"We are expecting 2003 earnings of Rs 1.05 billion, or 9.14 rupees a share, an increase of 52 percent, primarily on the back of strong balance sheet expansion and better interest margin," said Asif Ali Quershi, head of research at Global Securities, in a report.
The high deposit growth is mainly a sector-related phenomenon the bank has been able to capitalise on its middle market positioning to expand its loan book.
"Despite sharp fall in portfolio yield, we expect Askari to show 30 basis points expansion in net interest margin (NIM) to 3.5 percent in FY03 helped by steeper cut in deposit returns.
However, we anticipate NIM to shrink in FY04 with lower reinvestment yields unlikely being matched by further deposit rate cuts."
The impact of lower NIM though shall be compensated by balance sheet expansion with a high NPL coverage of over 120 percent providing further cushion against pressure on earnings.
Declining tax rate shall also help earnings to climb. However, a low capital/asset ratio of 5.7 percent shall keep a check on dividend pay-out ratio while possible acquisition of ABL could dilute earnings.
Earnings growth momentum to sustain through 4th quarter: Askari showed 61 percent growth in profits during third quarter of 2003 and we expect this trend to extend through the final quarter.
FY03 has generally been a good year for banks in terms of profitability. However, unlike most other banks that dipped into revaluation reserves to drive earnings growth, Askari's earnings growth is primarily a function of increase in core earnings ie, net interest income which in turn is driven by a combination of asset growth and expansion in net interest margin (NIM).
Middle market positioning helping loan book growth: Banking sector credit grew by 17 percent during FY03 (ending Dec'03) with consumer financing and middle market companies being the key drivers.
Askari has traditionally been well-positioned in the middle market segment and therefore benefited from the sector's credit growth.
The bank's loan book grew by 25 percent to Rs 37.5 billion during Jan-Sep '03 and is likely to have shown strong growth in the final quarter during which private sector credit demand showed robust increase.
Deposit rate cut exceeding decline in portfolio yield: Helped by steeper cuts in deposit rate, Askari has actually seen expansion of NIM in FY03 despite sharp fall in yield on earning assets. We estimated average NIM of 3.5 percent in FY03 versus 3.2 percent in FY02.
Asset growth and lower provisions to offset decline in NIM: Going forward, we expect Askari's NIM to face some squeeze as the impact of lower reinvestment yields enlarges with little room left for further deposit rate reductions as NFA driven monetary growth has already started slowing down.
However, the impact of decline in NIM shall be offset by a combination of full period impact of higher asset base, lower NPL provisions and reduction in tax rate.
Higher asset growth to constrain payouts: Expansion in contingent and fund based financing shall continue to constrain Askari's dividend policy. Askari's capital/asset rate of 5.7% is relatively low while it carried contingent exposures measuring 6 times its capital.
Moreover, Askari is a serious contender for ABL acquisition. All these factors shall keep its payout ratio low.
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