AS the broader banking industry has only recently started recovering from the loan losses ‘that arose following the global economic meltdown in 2008,’ the state-run National Bank of Pakistan has yet to turn the corner on this front.

As its non-performing loans (NPLs) continue to pile up, the bank has blamed government-guaranteed loans to public sector enterprises that have gone bad.

The bank’s toxic advances grew by almost Rs10bn in the first quarter of calendar year 2015 (1QCY15) to Rs130.7bn. This compares with the overall Rs15bn increase in the entire industry’s bad loans in the period — resulting in NBP having an unenviable 21pc share in industry-wide NPLs.

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“Non-performing GoP-guaranteed loans remain a big drag on our pro¬fitability and have impacted our interest income considerably,” noted the bank’s president, Syed Ahmed Iqbal Ashraf, in his quarterly report to shareholders.

In a recent research note, IGI Securities projected that at least some of the higher NPLs originated from a big joint venture steel mill, which has been facing gas pricing issues since last year.

The higher bad debts forced the bank to book a massive Rs3.05bn in provisions against NPLs in the quarter. Its total provisions for the period reached Rs3.3bn, against Rs975m in 1QCY14.

Nonetheless, the bank also appears to have redoubled its recovery efforts and also booked sizable forced sale value (FSV) benefits against toxic investments and advances. It was able to keep its provisions against NPLs down by a sizable Rs3.5bn because it availed these FSV benefits. Still, its infection ratio worsened from 16.6pc at end-2014 to 18.8pc by end-March, according to Elixir Securities.

In addition to its role in financing government-guaranteed loans to often bleeding public sector enterprises, the NBP is also big in some riskier consumer loan segments, like salary and gold loans. It is also spearheading the launch of the prime minister’s youth loan programme.

Non-performing GoP-guaranteed loans remain a big drag on our profitability and have impacted our interest income considerably — NBP President Syed Ahmed Iqbal Ashraf

According to its annual report for CY14, the largest share of the bank’s gross advances (18.4pc or Rs134bn) were concentrated among ‘individuals’. This was followed by around Rs114bn (16pc) in energy and Rs75bn (10.6pc) in textiles.

And in the NPL portfolio, textiles had the largest share at Rs27.7bn, followed by ‘metal products’ with Rs16.2bn and ‘general traders’ with Rs12.8bn.

Apart from troubles on the asset quality front, it emerged last year that the bank’s Bangladesh operations had lost a staggering sum of around Rs18bn, and that dozens of its employees (both Pakistani and Bangladeshi nationals), including senior executives, were allegedly involved in the scam. In February, the case was referred to the National Accountability Bureau by the National Assembly’s Standing Committee on Finance.

First quarter performance: The bank’s after-tax earnings for 1QCY15 improved by a marginal 4.2pc to Rs3.28bn, from Rs3.14bn in 1QCY14. Its earnings-per-share worked out at Rs1.54, up from Rs1.48 last year.

The bank managed to earn sizable interest income of Rs29.3bn in the first quarter, up nearly 16pc from the same quarter last year, as it continued to benefit from its hefty Pakistan Investment Bond (PIB) holdings.

However, owing to the bank’s sizable fixed (Rs290bn) and savings accounts (Rs352.8bn) deposits and relatively lesser non-remunerative current accounts (Rs252.4bn), its interest expenses remained high, going up by 13pc year-over-year to Rs18.8bn.

As a result, its net interest income rose by 21.5pc to Rs10.5bn during the period.

Capital gains on PIBs: While the bank’s income from the non-interest segment went up a sizable 39.6pc YoY in the first quarter, most of this was due to an abnormal growth in capital gains.

Perhaps to augment its profitability, the NBP chose to realise capital gains (made possible by the fall in government bond yields) by selling some of its PIBs. As a result, it booked capital gains of Rs3.5bn, against just Rs742.5m in 1QCY14.

However, this would probably come at a cost. “This [will be] detrimental to the profitability of the bank in the long run as it will have to invest the freed-up funds at current yields, which are substantially low [when] compared to [those] in the same period last year. This would lead to lower yields and earnings attrition going forward,” noted Elixir Securities analyst Ujala Adnan in a recent report.

“Capital gains alone contributed more than 18pc to the bank’s total revenues, up 13pc over the previous year. Non-interest income excluding capital gains remained weak and declined by 7pc [over] the corresponding period of last year.”

Income from banking fees and commissions virtually stayed stagnant at Rs2.6bn, while dividend income slipped slightly to Rs734.7m. However, the bank was able to carve out a share for itself in the remittance and forex business, as income from this segment grew 41pc to Rs1.46bn during the period under review.

The bank’s non-core expenses also stayed elevated, rising 14pc during the quarter to Rs10.6bn.

Meanwhile, the NBP stock, like all banking stocks, has underperformed the benchmark KSE-100 index this year; it is down 24.4pc from January 1.

Published in Dawn, Economic & Business, June 29th, 2015

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