National Bank of Pakistan has had a struggling year so far. The state owned commercial lender just reported a 39 percent drop in half year net earnings, thanks to soaring cost of funds and higher administrative expenses. Although, its markup revenues on assets grew sharply by 33 percent - in line with its peers - the bank could not put the reigns on its cost of desists which doubled during the period.
Share of time deposits to total deposits at the bank increased by 520 basis points to 25 percent in Jan08-Mar09 period, while paying a high cost on its saving deposits, which equalled nearly one-third of the total. As a result, net markup income remained unchanged in the six months ending June.
The bank saw provisioning against bad loans and investments rise just 11 percent, compared with more than 150 percent increase booked by its peers. On the face of it, it might seem like something to cheer about, but it turns out that NBPs loan infection ratio is already the highest in the industry segment - standing at 9.5 percent in June 2008 compared with an average 5.9 percent suffered by HBL, UBL and MCB.
Mounting toxic assets are an industry wide phenomenon, but the quality of assets is worse for NBP and was at alarming levels even before the effect of the recession had started hitting others. However, the bank has done a remarkable job in increasing its advance-to-deposits ratio from 63 percent to 71 percent in the last five quarters (Jan08-Mar09) while keeping a check on typically corresponding growth in bad loans.
The banks NPL to gross loans increased by just 110 bps from 9.2 percent to 10.3 percent in fifteen months of difficult times. But the past has its ramifications as the banks capacity to heal its wounds is restricted by its inability to convert deposits into advances at the time of heightened economic activities in previous years. Now, despite decent efforts since the start of 2008, a snapshot of banks ADR and NPLs is much worse than that of its peers.
Similarly, the bank is not effective in implementing cost cutting solutions owing to the usual public organisation inefficiencies. NBPs operating and other expenses increased by 22 percent, much higher than its peers HBL and UBL which saw non-markup expenses jump 15 percent and 8 percent respectively.
The brunt of economic slowdown is also more visible in NBPs non-core business as its fee commission and other income dwindled by 8 percent year-on-year. However, the segment might see profits in the third quarter owing to likely dividends from the banks investment in NIT. The bank is currently trading at a price-to-book multiple of 0.56 on its last published book value; and by adjusting for all of its unprovided bad advances, it is trading at a P/B multiple 0.64x.
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National Bank (P & L statement)
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RS (MN) 2Q-09 2Q-08 GROWTH 1H-09 1H-08 GROWTH
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Mark-up earned 18,472 14,461 28% 37,268 28,017 33%
Mark-up expensed (8,959) (4,572) 96% (18,289) (9,081) 101%
Net mark-up Income 9,513 9,890 -4% 18,979 18,936 0%
Provisioning (3,875) (3,510) 10% (5,577) (5,034) 11%
Net mark-up income
after provisions 5,638 6,380 -12% 13,402 13,902 4%
Non-markup income 3,308 3,454 -4% 6,967 7,562 -8%
Operating revenues 12,821 13,344 -4% 25,946 26,497 -2%
Non-markup expenses (5,560) (4,161) 34% (10,681) (8,790)
Protit before taxation 3,387 5,673 -40% 9,689 12,674
Profit after taxation 2,067 3,323 -38% 1,109 1,819
EPS 1.92 3.00 0.94 1.97
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Source: Company Results