A STRONG performance by the non-core business segment somewhat compensated for MCB Bank’s bloated tax expenses for the first half of the year.

The blowing up of the tax bill was expected following the imposition of the 4pc super tax and changes in the taxation structure for banks post-FY16 budget, and this ate up into the bank’s after-tax earnings for the second quarter.

MCB posted an unconsolidated profit-after-tax of Rs13.54bn for the six months ending June 30 (1HCY15), up 15.5pc from earnings of Rs11.73bn in the same period last year. This translated into earnings-per-share of Rs12.17, against last year’s Rs10.54. It announced a dividend of Rs4 per share, taking its total payout to Rs8 per share so far this year.

‘The bank is optimistic about increasing its credit offtake towards personal and mortgage financing [segments]’

On a consolidated basis, the bank and its subsidiaries posted a net income of around Rs13.52, up 14.2pc from 1HCY14.

Yet, MCB’s second quarter earnings were down 9.4pc year-over-year to Rs5.6bn, as the bank booked the one-time tax expenses during the period.

Non-interest income: Ever since the latest monetary easing cycle set in last November, sector watchers have been expecting banks to rely more on capital gains from their equity and Pakistan Investment Bond (PIB) trading operations to shore up their bottom lines. And MCB seems to have done exactly that this year.

The bank booked Rs2.92bn as net capital gains during 1HCY15, a significant increase from Rs628.5m it had earned from this segment last year. Of this, a major chunk of Rs1.8bn was realised from the sale of listed shares, while Rs1.12bn were earned by selling PIBs.

Other components of the non-core segment also performed well. The bank earned Rs4.35bn from fees and commissions during the six-month period, an improvement of 28pc over 1HCY14. Meanwhile, income from dividends jumped 37pc to Rs615m, while other income surged to Rs1.08bn from Rs226m last year.

Shajar Capital analyst Hamza Kamal said “Rs700m in compensation for tax refunds was the prime factor in the [rise in] other income”.

All of this led to an overall growth of 73pc in the bank’s non-interest income, which clocked in at Rs9.44bn for the period.

“The [fee-based] income alone contributed 54pc to non-interest income. This was primarily a result of increased remittances during the second quarter, together with growth in the bancassurance business. Other components of the non-interest income grew by 93pc on a cumulative basis,” remarked Elixir Securities analyst Ujala Adnan.

Investments: While the bank doesn’t provide a breakdown of its investments by asset class every quarter, according to its annual report for CY14, it had almost Rs12bn worth of listed shares on its investment books, up from Rs7.7bn in CY13. Its total PIB holdings stood at around Rs329bn at end-December, almost three-times the prior year’s level.

Nonetheless, its net investments jumped 22.8pc to RsRs627.5bn during the half-yearly period. Yet, in a slight departure from industry trend, most of these additions for MCB are said to have been in Treasury bills.

Quoting the bank’s post-result conference call with analysts, Ujala said “the management disclosed its tilt towards increasing its T-bill portfolio rather than PIBs during the current year. A large proportion of these T-bills have a maturity of six months”.

Besides, the bank’s “asset deployment remains skewed towards investments as its investment-to-deposit ratio stands at an all-time high of 82pc,” said JS Global Securities analyst Amreen Soorani.

Advances: Meanwhile, as many other banks have largely restrained their lending and merrily gone about chasing PIBs, MCB seems to be giving due attention to its advances portfolio.

The bank’s net advances grew by around 4pc to Rs315.3bn during January-June. And for the July 2014-June 2015 period, its net advances were up a healthy 11pc, while overall bank loans to the private sector during the same time had gone up by a lower 7.3pc, according to central bank data.

“The management is targeting a 9-10pc growth in advances,” said Ujala.

Nonetheless, Soorani pointed out that the bank’s advances-to-deposit ratio dropped 293 basis points to 41pc, as its deposits grew faster than its loans.

This mix of investments and advances led the bank to post an interest income of Rs41.5bn for 1HCY15, up 10.4pc from Rs37.6bn in 1HCY14. Meanwhile, a reduction in non-performing assets allowed the bank to reverse provisions to the tune of Rs755.5m.

Deposits: The bank’s overall deposit base grew a decent 11.3pc to Rs765.8bn in 1HCY15. The highest growth came in current accounts, which went up 24.2pc to Rs282bn, while savings accounts increased 3.8pc to Rs397.2bn. Simultaneously, its high-cost fixed deposits dropped 13.3pc to Rs53.8bn.

As a result, the bank’s ratio of current and savings account (Casa) deposits to total deposits rose to 93pc, among the highest in the industry. This — along with the drop in interest rates which have pulled down deposit costs across the industry — helped MCB contain its core expenses to Rs16.6bn by end-June. And these costs actually went down to around Rs8bn in the second quarter, from Rs8.2bn in the same period last year.

Future outlook: In its conference call with analysts, the management shared its views on the general financing environment given the low interest rate scenario.

“The bank is optimistic about increasing its credit offtake towards personal and mortgage financing [segments]. On the other hand, the management suggests that low interest rates have failed to stir up project financing. The bank is focusing on the fertiliser and chemical sectors for its corporate book,” said Ujala.

Meanwhile, Soorani pointed out that the bank’s net interest margins, which dropped 39 basis points in the second quarter, are likely to shrink further going forward as the PIBs that will mature next year are being currently replaced by lower-yielding bonds.

Published in Dawn, Economic & Business, August 17th, 2015

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