ISLAMIC banking has continued its upward march in the country, with the industry’s assets growing 28pc year-over-year and crossing the Rs1.3tr-mark by March.

Similarly, the sector’s deposit-base went up 28.7pc to Rs1.12tr, according to central bank data. Twenty-three Islamic banking (IB) branches were opened in the January-March quarter alone, taking their total number to 1,597.

However, the potential for growth in the industry can be judged from the fact that there is just one full-fledged Islamic bank among the country’s top 10 commercial banks. In fact, conventional banks have taken their sweet time to realise not only the huge market for Shariah-compliant financial services but also the cost-savings that invariably come with the model (Islamic banks are exempt from the central bank’s minimum deposit rate requirement).

This is also reflected by the fact that by end-March, full-fledged Islamic banks controlled 60.6pc of all IB assets, with Shariah-compliant divisions of conventional banks holding just 39.4pc.

A relatively new entrant to the field, MCB Bank’s Islamic banking subsidiary — MCB Islamic Bank Ltd — received a ‘certificate of commencement of banking business’ from the State Bank of Pakistan last month. The bank said its 34 IB branches will be merged with the new subsidiary.

By opening a separate Islamic banking subsidiary, MCB has departed from the model adopted by many conventional banks, which generally maintain distinct IB windows only

By opening a separate IB subsidiary, the bank has departed from the model adopted by a clear majority of conventional banks, which generally maintain distinct IB departments only.

By the end of June, MCB’s Islamic banking division had just over Rs21bn in assets and Rs6.62bn in customer deposits. The segment had contributed Rs402.2m in net earnings to the bank’s consolidated bottom line during the first half of the year (1HCY15).

Financial performance: Despite the imposition of the one-time ‘super tax,’ MCB’s unconsolidated after-tax earnings for 1HCY15 rose 15.4pc to over Rs13.5bn. The bank declared a Rs4 per share dividend, taking its total payout so far this year to Rs8 per share.

However, the bank’s post-tax second-quarter (2QCY15) earnings dropped 9.4pc to Rs5.6bn from Rs6.2bn in 2QCY14, mainly owing to the Rs1.9bn tax charge it booked in the quarter.

Meanwhile, its pre-tax profit surged 33.7pc to a record Rs23.8bn in 1HCY15, from Rs17.8bn last year.

Banks have been roundly criticised for designating the government as their biggest customer, while sidelining credit-starved segments of the private sector and depositors alike. Over the past couple of years, banks have also heightened their efforts to mobilise current accounts in order to minimise their deposit costs.

Meanwhile, banks deposit costs have shrunk considerably after the linkage of the minimum deposit rate on savings accounts with the central bank’s policy rate and the cumulative 400 basis point-cut in the policy rate since last November.

In this context, the rise in MCB’s current accounts has been among the highest in the industry. These accounts grew by a sizable 24pc to Rs282bn in 1HCY15. Against this, its savings accounts went up by a much lower 3.8pc to Rs397.2bn, while its high-cost fixed deposits dipped 13.4pc to Rs53.8bn.

“MCB’s current and savings account (Casa) have reached an impressive 93pc, backed by the 28pc growth in non-remunerative current account deposits (39pc of total deposits),” wrote JS Global Capital analyst Amreen Soorani in a research note.

The impact of such a deposit make-up was reflected in the bank’s second quarter results, where its interest expenses dropped around 1.8pc on a yearly basis to Rs8bn. For 1HCY15, these expenses rose by a marginal 3pc to Rs16.6bn.

Meanwhile, MCB’s net investments reached Rs627.5bn by end-June from Rs511.1bn at end-2014 — an increase of almost 23pc. Against this, its net advances grew by only 4pc to Rs315.3bn.

Citing a conference call with the bank’s management, Elixir Securities analyst Ujala Adnan said MCB “disclosed a tilt towards increasing its Treasury bill portfolio instead of Pakistan Investment Bonds during the current year. A large proportion of these T-bills have a maturity of six months. [Meanwhile], the PIB portfolio has a maturity of [at least] 2.5 years”.

This asset mix helped the bank record a hefty Rs41.5bn as interest income during 1HCY15, up 10.4pc from last year. And owing to the slow growth in its core expenses, its net interest income rose 16pc to Rs24.9bn.

JS Global’s Soorani remarked that the bank’s investment-to-deposit ratio stood at an all-time high of 82pc, while its advances-to-deposit ratio dropped by 293bps to 41pc during the period.

On the other hand, capital gains emerged as a major source of non-interest income for the bank. MCB booked capital gains of Rs2.9bn during 1HCY15, up significantly from last year’s Rs628.5m. Around Rs1.12bn of these capital gains came from PIBs while another Rs1.8bn were booked from the equity portfolio.

As a result, the bank’s total non-interest income amounted to over Rs9.4bn during 1HCY15, up a big 73pc from Rs5.5bn last year.

However, the bank’s stock has followed its sectoral peers this year, dropping around 25.7pc from January 1 till last Wednesday. That compares with a marginal 1pc gain in the KSE-100 index during the same period.

Published in Dawn, Business & Finance weekly, October 5th , 2015

On a mobile phone? Get the Dawn Mobile App: Apple Store | Google Play