Last week, Fauji Fertiliser Bin Qasim provided details about its plans to diversify into the halal meat, dairy and power generation sectors.

The ambitious plans by the company can be said to have been made partly plausible by the recent stream of income from its parent company’s banking subsidiary, Askari Bank Ltd (AKBL).

In a span of less than a year, AKBL has gone from being a loss-making entity saddled with toxic assets, to a financial institution that has started contributing to its parent company’s diversification pursuits.

A consortium of three companies — Fauji Foundation, Fauji Fertiliser Company (FFCL) and Fauji Fertiliser Bin Qasim (FFBL) — cumulatively holds a 71.91pc stake in the bank. The bank, in turn, directly owns an asset management company and also has majority shareholding in a brokerage firm.

The mid-sized bank, with Rs409.5bn in assets by September, was acquired by the Fauji consortium from the Army Welfare Trust in June 2013. For the remainder of 2013, the bank’s management embarked on a drive to clean up the balance sheet by realising billions of rupees worth of sour loans and investments as non-performing, and then booking adequate provisions against them.

Once the exercise was complete by early 2014, the bank was able to join the rest of the industry in the profit-making spree. By September, its coverage ratio had improved to a respectable 90pc.

“During [2013], aggregate non-performing assets increased by 23.65pc, with non-performing loans (NPLs) rising by 24.89pc and non-performing investments by 7.24pc. The increase in NPLs was mainly due to recognition of certain accounts, a sizeable portion of which was previously assigned for close monitoring,” the bank’s directors wrote in their annual report for 2013.

The bank’s two biggest shareholders have received over Rs750m so far this year in dividends

By December 2013, the highest share of NPLs — or over Rs12.5bn — was in the textile sector, followed by the energy sector with Rs3.3bn and ‘individuals’ with Rs3.2bn.

The clean-up act yielded nearly instant results. AKBL surprised sector watchers by declaring a cash dividend of Re1 per share in the second quarter this year.

FFCL has received Rs544m from the bank so far this year in the form of dividends, while FFBL has received Rs272m.

The stream of cash is likely to come in handy as FFBL pursues a costly diversification strategy. It anticipates the meat project to cost around Rs6.4bn, and hopes to get the financing in place by mid-2015. Meanwhile, the power plant is expected to cost $265m.

“So far, we haven’t been formally reached regarding the funding aspect about the FFBL projects, at least to my knowledge. But, obviously, we expect Askari Bank to be a part of the funding mix,” a senior AKBL executive told Dawn on the condition of anonymity.

CY14 performance: The bank, following the industry-wide trend, parked an increasing amount of funds into high-yield government debt, which resulted in a major 21pc improvement in core earnings to almost Rs25bn during the nine months ending September 30 (9MCY14). “Rising stock prices also didn’t hurt,” added the bank executive. Its overall investments went up around 4pc to reach Rs172.3bn.

Meanwhile, it adopted a cautious lending stance, as its net advances rose by a meagre 2.3pc to Rs167.3bn. Nonetheless, it was in line with the 2.4pc growth in the overall industry’s net advances during the same nine-month period.

AKBL posted an after-tax profit of Rs3.11bn in 9MCY14, against an after-tax loss of Rs3.95bn in 9MCY13. Its earnings-per-share worked out at Rs2.47, against loss-per-share of Rs3.13 last year. It did not declare any dividend for the third quarter.

With yields on government papers falling after the central bank cut the policy rate, AKBL seems well-placed to compensate the expected drop in interest margins with rising income from the non-core side of the business. Till September, this income had reached Rs3.78bn, up a solid 36.2pc from 9MCY13.

Profiling the bank in September for Elixir Securities, analyst Ujala Adnan noted that AKBL had launched its branchless banking service, Timepey, in collaboration with a cellular service provider in 2012. The service was partly responsible for the higher non-core income. However, Adnan added that a bigger factor was the ‘volumetric growth in export income’.

Deposits: The bank had over Rs350.3bn in deposits by end-September, an increase of 4.5pc from last December. The bulk of deposits — Rs192.4bn — were in savings accounts, with another Rs86.5bn in non-remunerative current accounts.

“We have addressed the NPL issue, our internal reorganisation is almost done, and profits are coming. Thus, the situation is markedly different from 2013. We are now going to focus on branch expansion, as there is major competition with other banks for cheap deposits,” said the AKBL executive.

By the end of September, the bank’s branch network comprised 286 outlets, including 42 Islamic banking branches and a foreign branch in Bahrain. It had added five branches in 9MCY14.

However, the Elixir analyst noted that “the bank has the highest employees-per-branch. Operational inefficiency such as high cost/income ratio can be brought down by deploying staff from existing branches to new branches, rather than hiring additional staff”.

Published in Dawn, Economic & Business, December 15th , 2014