IN another sign of the growing appetite of Shariah-compliant financial institutions, Meezan Bank successfully completed its acquisition of global bank HSBC’s Pakistan operations last week.

The transaction yielded the country’s largest Islamic bank HSBC’s 10 branches, along with about Rs22bn in deposits.

And just a day after that, Meezan Bank Ltd (MEBL) announced that its earnings for the nine months ending September 30 (9MCY14) were up a solid 24pc from the same period last year.

In a detailed statement issued after acquisition, the bank noted the success of ‘Meezan Premium Banking,’ which was launched two years ago. It said the initiative has been “successful in introducing Islamic banking to the high net worth customer segment. The HSBC acquisition will help the bank further strengthen itself in this segment and establish itself as a leader in the priority banking segment”.

The deal marks the second time the Islamic bank has absorbed a foreign bank’s operations in the country

The conventional foreign bank had a reputation of dealing primarily with elite corporate and individual clients. It remains to be seen how many of these would now continue to do business with a bank that offers Shariah-compliant products only.

Speaking to Dawn by phone last week, Meezan Bank CFO Shabbir Hamza Khandwala said, “We are welcoming our new clients and informing them of the Shariah-compliant products that we offer”. He added that the bank has already completed the transfer of data and records from HSBC to its own T24 system, and has offered employment to all the foreign bank’s staffers.

The transaction was not a first for MEBL, as it had successfully taken over the Pakistan operations of French bank Societe Generale in 2002.

Financial performance: For 9MCY14, the bank posted after-tax earnings of around Rs3.58bn, up from Rs2.88bn in 9MCY13. Its earnings-per-share worked out at Rs3.57, against Rs2.87 last year. It did not announce any dividend.

Both the spread and non-spread-based business segments recorded healthy overall growth. Income from Islamic assets jumped 21pc to Rs20.8bn.

However, the bank’s ‘return on deposits and other dues expensed’ rose by a higher 22.7pc to Rs11.2bn, despite the fact that all Shariah-compliant banks are exempt from the SBP’s minimum deposit rate requirement on savings accounts.

When asked about the above-average core expenses, Khandwala said this was expected given the big growth in the deposit base even before the HSBC acquisition. Total deposits had grown 13.8pc to Rs329.9bn during the period.

While the bank is yet to release detailed financial statements for the third quarter, its savings accounts and fixed deposits had formed around 65pc of total deposits by June.

Provisions: Unlike many other banks, MEBL’s provisions against toxic debt have been on a rise this year. The trend continued in the third quarter, as it booked over Rs42m in provisions against non-performing loans in the three months, up significantly from Rs1.8m in the same quarter last year. This took the tally for the nine months to Rs120.3m, against Rs16.6m in 9MCY13.

However, the bank gained a big reprieve by reversing provisions against sour investments to the tune of almost Rs153m over the nine-month period, allowing it to record an overall net reversal of Rs27m by end-September. MEBL’s coverage ratio stood at a high 120pc by end-September, said Khandwala.

In its annual report for 2013, the bank had specified that over half of its NPLs — Rs2.65bn — were concentrated in the textile sector, with another Rs650.5m in automobile and transportation sectors.

Investments: The bank’s investments have been on a declining trajectory so far this year as well. Cut off from the bonanza that the frequent PIB auctions have been for conventional banks, the Islamic bank has long complained about the lack of Shariah-compliant investment opportunities.

Its net investments totalled around Rs109.5bn by end-September, down from Rs112.05bn by June and Rs150.2bn by end-2013 — a 27pc drop in nine months.

However, the bank’s CFO said the investment outlook will improve now that the central bank has announced trading of government Ijara Sukuk through open market operations.

In a circular issued on October 15, the SBP said it would directly buy or sell the Islamic bonds through OMOs in an auction, similar to the one where it trades in Treasury bills with conventional banks. The measure will offer an additional avenue for Islamic banks to manage their surplus liquidity and also lead to a ‘more effective transmission of monetary policy,’ said the central bank.

Meanwhile, the bank compensated the drop in investments by increasing its net lending, which clocked in at Rs138.3bn, up 8.4pc from December. Till last year, about 28.3pc or Rs37.8bn of its gross financing was with the textile sector, followed by Rs18.7bn in power and Rs14.5bn in agriculture.

Non-spread income: The bank recorded a major rise of 39.5pc in non-spread-based income, which totalled Rs3.4bn for 9MCY14. This was mainly a result of big increases in banking fees and commissions (up 34.6pc to Rs1.2bn) and income from forex dealings (up 187pc to Rs1.22bn).

Published in Dawn, Economic & Business, October 27th, 2014