Allied Bank in CY17

Allied Bank Limited (ABL) saw its bottom line tank year-on-year in CY17. That was not a surprise. Recall that earning spreads have been squeezed as the interest rates remained low throughout the year. ABL had a largely uneventful 2017, as it moved cautiously towards balance sheet consolidation. The most significant impact was made by a sizeable drop in non funded income. But ABL still managed to declare Rs1.75/share as final dividend, taking the full year tally toRs7/share – much in line with analysts’ expectations.

Interest rates have been on the lower side for quite a while, and it was always going to be a matter of time before big banks start feeling the pinch. The contribution from non mark-up income had kept many of them going even with thin spreads, but the capital gains had to come down some day and down they came in 2017 for the likes of ABL.

The drop on account of gain on sale of securities alone contributed an impact of Rs2 billion in 2017. Other avenues such as dividend and fee, commission income remained flattish. This almost undid a massive reversal ABL booked on account of provisions against NPLs. Mind you, there is only this much ABL and company can do to further reduce the cost of deposits, already sitting at very high CASA. Further drop in gross spreads was an unexpected outcome.

ABL still managed to keep a tight lid on administrative expenses, which grew modestly. This is despite the bank’s ever growing retail network and digital footprints across the country. ABL’s balance sheet expansion was rather checked in 2017. The deposit base expanded by near 10 percent over December 2016, slightly under industry average. But this may well be strategic as ABL’s focus of late has been on adding the right mix of deposit, which is also evident in its high CASA and quality of deposits.

ABL’s asset growth was well spread between advances and investments. Advances portfolio jumped by 13 percent over December 2016 taking the ADR from 40 percent to 42 percent. The industry average advances growth during this period hovers around 18 percent, suggesting ABL may have some catching up to do on this front. Meanwhile, investments continue to lead the way, inching up 18 percent over December 2016, as treasury bills were back as the favoured parking lot.

ABL’s loan book is very clean and is adequately provided for. The deposit mix is one to be envious, which also means there is limited upside on this front. The bank will surely have to revert to lending more aggressively and smartly, as banking on non-funded income may not do the trick this time around.