Bank: MCB BANK LIMITED - Analysis of Financial Statements Financial Year 2009 - 1Q Financial Year 2011
The past three years have been nothing short of a bumpy ride for the financial sector of Pakistan; with the mismatch in demand and supply stirring inflationary trends in the market reinforced by grave fiscal indiscipline there was little in the way of controlling price rises by means of a contractionary monetary policy that could be done by the deficit pressed government.
The price pressures from continued injection of high powered money into the economy via state borrowings from the Central Bank could not be offset by the increase in policy rate initiated by the State Bank consequently leading to even higher pressures on the purchasing power of consumers in the economy.
The private sector credit off take has critically suffered at the hands of such chaotic public sector behavior. For the banking sector whether or not the decline in private sector participation stands as a positive or negative, stands out as a double edged dilemma. Where on one hand the combined effect of such circumstances and poor extraneous variables like flood and power shortages were reflected in the rising ratio of NPLs to deposits in the banking sector, on the other we saw that the asset allocation of the major financial depository institutions tilted heavily in favour of government securities, thereby enhancing the risk profile of the banking institutions.
RECENT RESULTS (1Q11)
MCB posted good results in 1Q11 with PAT increasing by 21% as compared to last year. The growth was fuelled by 25% increase in NII and a 43% increase in the non-interest income. MCB's asset yield increased to 13.0% (average 6-month KIBOR 13.6%) from 12.3% in December 10 while cost of funds remained fairly stable at 4.2% from 4.1% resulting in NIM expansion to 8.9% from 8.2%.
Despite a 7% growth in deposits, MCB managed to increase CASA to 82% from 80% in December 10, due to 8% and 9% increase in the current and savings account respectively. The advances remained fairly stable due to a cautious policy being followed in times of uncertainty. ADR, therefore, witnessed a decline to 60%, showing the heaviness on the investments side. EPS was recorded at Rs 6.61 as compared to Rs 5.45 in the same period last year.
INDUSTRY COMPARISON As the graph shows the competitive standing of MCB was marginally hurt during the year ended 31 December 2010. With the share of total deposits down to a modest 8.42% from 8.5% in the previous year, the bank was also unable to retain its advances share of over 8% as this figure slipped to 7.85% in 2010.
Given the influx of new investments in the Pakistani banking sector, the overall share of MCB's total assets in the industry contracted as well. However, we cannot deny the fact that in terms of market performance the shares of MCB remained strong and succeeded in attracting more attention from the investors than other banks in the industry.
Upon a closer examination of the industry based discrepancies we find that the MCB's rate of growth for net interest income, advances and Profit after tax have all lagged far behind the industry norms. Surprisingly, deposit growth is one avenue where the bank has far exceeded the normal position of the firms in the industry indicating that the consumer confidence in the bank was strengthened during the tenor.
Also that the asset structure of the bank stands more skewed than the average base in the market, considering how 81% of the deposits of MCB come from short-term deposits while the industry average is a considerably lower 69%. Also that despite the comparatively lower rate of growth in post tax profits, MCB has succeeded in providing a higher return on equity and return on deposits to its shareholders and customers respectively than the other banks in the market.
This is aptly reflected in the favorable P/E multiple of 10.3 as compared to 7.5 on average in the industry. Moreover the net markup to deposit ratio for MCB also far exceeds that of the industry, indicating that it has successfully maintained its asset excellence even in times of financial despair like 2009-10.
FINANCIAL REVIEW: The graph above shows the comparative asset liability maturities of MCB for the year ended 31 December 2010. Generally the share of private sector loans increased by 3% this year which was seen to be a marked improvement over the 11% decrease that had taken place in 2009; however we cannot ignore the fact that 91% of the investments are still in the risk free government securities. The loans extended to public sector over the period grew by a meagre 1% as opposed to the pronounced growth of 32% that had taken place earlier.
As far as the maturity mismatch concerns are considered the decrease in CASA to deposit ratio from 83% to 81% cannot disguise the fact that the concentration of the firm's assets are in securities that range from under three months to at most a year whereas the bulk of the liabilities stem from longer term funding sources.
It has been asserted that the bank places great confidence in its asset and equity bases, considering them to be sources of competitive advantage in the oligopolistic banking sector of Pakistan. Although considering the uncertainty in the Pakistani market this may seem like a prudent policy, there is considerable question over the fact that the industry average on non interest earning short term deposits is far lower than that of MCB.
As far as the quality of the firm's asset base is concerned, the impact of the widespread devastation caused by the floods in the agricultural loans and SME sector was also felt by MCB though marginally. The NPLs to advances ratio grew to 8.95% from 8.62% but at the same time the coverage ratio swelled from 67% to 77%. This indicated the prudence of the provision policy of the company and exhibited the cause of the consumer confidence in the risk management policies of the bank.
PROFITABILITY: The economic scenario discussed earlier served to increase the cost of credit in the economy. However the balanced portfolio maintained by MCB helped to increase interest income by 3% over 2009. Holistically the gross spread of MCB fell from an astounding figure of 69.32% in 2009 to a little over 67% in 2010. The adverse movement was perhaps more evident in comparison to the average net interest income growth of the banking industry that stood at 8.2% while MCB struggled far behind with a 3% rate of growth.
However, we cannot ignore the fact that the continued influx of investments indiscriminately comprising of T-bills helped the bank to register a 6% increase in interest income. The average return on these investments hovered around an astonishing figure of 46% but despite such a performance the 14% increase in markup expensed outweighed the income generated, consequently pulling the gross spread down.
As the graph shows, both the returns on assets and the returns on equity for 2010 stood at comparatively lower figures than those for 2009. The net interest income and non interest income grew by 3% and 11% respectively in the period, indicating the diversification that the company sought during the tenor however, the marked 22% increase in the operating expenses figure served to offset the positive impact of such changes.
The implementation of stringent cost cutting and effective budgeting and planning policies helped to pacify the growth rate of expenses which otherwise would have been sufficient to counteract any positivities in the income growth. Overall the profit before taxes and PAT figures rose by 13% and 9% respectively but compared to the asset and equity increases these were not sufficient to sustain the previous rates of return on assets and equity.
LIQUIDITY AND SOLVENCY: The liquidity position of MCB over the year seems to have fared very mixed results over the year. With the proportion of earning assets in the total asset base being steady it was perplexing to find that the yield on these assets had declined by one percentage point over the tenor.
Moreover, the company lent out a comparatively smaller proportion of its deposits as advances, indicating that it wished to improve its cash position preemptively to counterbalance any with drawls demands from its customers due to the financial hardships faced by the households today.
Also that the cost of funding the assets stood constant at the low 3.6% primarily because of the concentration of CASA in the deposit structure of the bank. As far as the solvency position is concerned, the bank's equity to asset ratio increased and coupled with the 3% point increase in equity to deposit ratio these served to strengthen investor confidence in the financial stature of MCB. Also that the ratio of earning assets to interest bearing liabilities further improved from 1.57 times in 2009 to 1.62 in 2010.
As far as the gearing position is concerned the high debt to equity ratio of 720% in 2009 fell down to 706% in 2010 despite the fact that total liabilities swelled during the period. On the other hand the proportion of total assets funded by debt stayed constant at 86% over the period.
INVESTOR RATIOS: MCB lived up to the expectations of its investors, with an average dividend dispersal of Rs 11.5 in 2010. The dividend payout as a proportion of profit was marginally higher this year as opposed to 2009 as was the absolute rate of dividend per share (11.5 compared to 11 in 2009). Also that the dividend yield stayed somewhat constant over the tenor while the EPS increased to Rs 22.2 from Rs 20.38 in 2009. Despite the average rise in price per share over the year, the P/E multiple contracted to 10.3 from 10.78 over the tenor as did the market to book value ratio from 2.73 to 2.51. Hence it seems that the general investor despair over the economic and financial conditions of Pakistan came to negatively affect the investment position of a company that phenomenally grew in terms of its market capitalization over the same fiscal year.
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LIQUIDITY FY 2010 FY 2009
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Earnings Assets to Assets 87.15% 87.23%
Yield on earning assets 11% 12%
Net Advance to deposits 59.01% 68.89%
Cost of Funding earning assets 3.6% 3.6%
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SOLVENCY 2010 2009
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Equity to Assets 12.195% 11.990%
Equity to Deposits 27.18% 24.12%
Earning Assets toInterest Bearing liabilities 1.62 times 1.57 times
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DIVIDEND PAYOUT 2010 2009
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DPS RS 11.5 Rs 11
Dividend Yield 5.03% 5.01%
Dividend payout 56.32% 53.52%
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EARNING FY 2010 FY 2009
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Return on Assets 3.13 3.25
Return on Equity 25.91 27.35
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Asset Quality FY 2010 FY 2009
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Non-Performing loans to Advances 8.95% 8.62%
Provisions to Non-Performing Loans 15% 32%
CASA to deposit 81% 83%
Coverage ratio (specific provision / NPLs) 77% 67%
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MARKET VALUE RATIO FY 2010 FY 2009
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BV 104.19 91.74
Price-Earnings ratio 10.3 10.78
Market-Book value ratio 2.51 2.73
Average price per share 203.42 159.5
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DEBT MANAGEMENT FY 2010 FY 2009
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Debt to Equity times 7.06 7.20
Debt to Asset 86% 86%
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INDUSTRY SHARE 2010 2009
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Deposits 8.42% 8.50%
Advances 7.85% 8.24%
Total assets 8.37% 8.52%
Market capitalisation 24.10% 22.35%
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].