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Banks post mixed results

During 2020 State Bank of Pakistan (SBP) has reduced interest rate, which is likely to impact earnings of commercial banks. Banks were also stopped from disbursing dividend and issuing Bonus Share to facilitate ample liquidity is the system. Over the months, shares of commercial banks witnessed selling pressure. As half year results have been announced, followed by briefings for analysts, sharing banks’ perspective may remove certain ambiguities.

Topline Securities has revised earnings estimates for Meezan Bank (MEBL). The earnings revision stems from: 1) stellar deposit growth which surpassed Banks’ own expectations, 2) increase in frequency of Islamic instruments which is expected to provide support to net spread earned and 3) strong economic recovery. Strong core performance with 20%QoQ increase in net spread earned, 10% bonus announcement and higher than expected deposit growth in 2Q2020 were the highlights of the 2Q2020 results. The brokerage house has maintained its ‘Buy’ stance for MEBL

MEBL recently reached a landmark of Rs1 trillion deposits. It also became the fastest commercial bank to reach this milestone. The Bank since inception (2002) has delivered a CAGR of 38% till 2019 in deposits. Sequentially, the deposits delivered a growth of 12.6%, the more surprising and impressive growth of 24%YoY for 2Q2020. The deposit mix of the Bank has shown marked improvement with non interest bearing Current Accounts (CA) rising by 24% YoY in Jun-2020. Sequential improvement was seen with CA % increasing from 34% in 1Q2020 to 37%, additionally the Fixed Accounts also decreased from 28% to 25% which is likely to reduce profit expensed on deposits going forward. In the past 18 months 138 branches have been added to the network which stands at 798 branches. Deposit per branch has also improved from Rs1.2 billion in 2019 to Rs1.4 billion for the period end Jun-2020. Over the past 5-year deposit growth has averaged 20%, while the brokerage house expects the Bank to close at 19% for 2020.

During 2Q2020 debt profile of the Government showed an increase of Rs127 billion in GoP Ijarah Sukuk. Further, 3Q2020 Government target shows another Rs90 billion to be auctioned. The liquidity generated by the deposit engine is expected to be placed here. The current IDR of the Bank stands at 30% which is expected to go up going forward and will provide buffer as the financing assets are re-priced in 2H2020.

Asset quality for the bank has remained strong with infection ratio of 2.3% much lower than the industry average. The Bank in 2Q2020 has taken a charge of Rs1.4 billion, taking 1H2020 total to Rs3 billion. The Brokerage house has a cautious stance and expects it to continue in the latter half of the year. Having said, the Bank has a coverage ratio of 127%, albeit down from 147% in 1Q2020. It may be kept mind that extra provision of Rs1 billion during 2Q2020 in the general category was recorded as a precaution against any unforeseen stress on borrowers. As of now Rs29 billion (6% of loan book) have been claimed under the relief scheme of SBP on account of Covid-19.

 

As mentioned earlier the brick and mortar model for the Bank had yielded solid results. As a result the cost had also inflated considerably growing 30% YoY in 2019; the 1H2020 numbers show an increase of 27%. This includes addition of 38 branches this year; the momentum is expected to slow down in light of Covid-19. It takes 2 years for the branch to become profitable under normal circumstances, but with slowdown in economic activity the situation will be under review and depending on how quickly activity picks up, the bank may alter strategy. Cost to income has come down as a result of increase in income from 46% in 1H2019 to 40% in the same period currently.

Bank Alfalah (BAFL) posted earnings of Rs1.62/share for 2Q2020, down 9% YoY while flattish QoQ primarily due to higher provision expense. The Bank’s Net Interest Income (NII) declined by 2% QoQ. The decrease in interest expense by 12% was expected however the 7% decline in interest income hindered the result. The most likely scenario is the sharp re-pricing on the consumer and SME portfolios. Non Interest Income grew by 54% QoQ. This was attributed to the capital gain of Rs1.7 billion from the government securities portfolio. This overshadowed the decline in fee income of 21% and forex income of 10%.

Provisions spiked massively for the quarter. General provision amounting up to Rs2 billion was a created as buffer against Covid-19, while the rest was subjective however no major concern is foreseen. In 1Q2020 the Bank had provided for equities to the tune of Rs940 million by recording the entire provisioning amount which has reduced to Rs400-500 million range as the market performed in 2Q2020. Operating expenses for the quarter have been reported at Rs7.6 billion depicting a decline of 7% QoQ. The Bank continues to focus on efficiency which is also evident from the decline in cost to income ratio to 48% for the period. This hovered at 56% in the previous quarter and 55% last year.

Bank of Punjab (BOP) reported earnings of Rs0.79/share for 2Q2020, up 0.4%YoY and 41%QoQ. However, the interest earned depicted a decline of 7%QoQ possibly due to earlier than expected re-pricing on the asset front. The decline in interest expense which so far we have seen is in the range of 15-20% for listed banks, came in at 7% for the quarter possibly due to increase in deposits by 13%QoQ. Given the low CA ratio, likelihood is that the growth came in interest bearing deposits, as a result Net interest income declined by 4% QoQ. The silver lining in the result was the capital gain recorded in non funded income of Rs3.7 billion. The most likely scenario is that certain portion of the PIBs accumulated at high yield may have been sold. Another positive was a decline in operating cost of 11%QoQ. Despite stagnant loan book of Rs383 billion since December 2019, the Bank booked a provision of Rs2.8 billion.

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