A look at the Bank's half yearly results from the investors point of view

Naween A. Mangi
Sep 07 - 13, 1996

The Muslim Commercial Bank, last week, announced their results for the six month period ending June 30, 1996. Although the figures looked strong at first sight, analysts opinions on the real strength of the stock from the investors point of view, were far from consistent.


The headline numbers showed that deposit growth over the year was a fairly solid 21%, from Rs 88.6 billion last year to Rs 107.5 billion end June 1996, while the deposit base grew 8% in the last six months. More than 50% of total deposits come from savings accounts. Pre-tax profits jumped by as much as 74% over the year from Rs 272.6 million to Rs 475.2 million.

A closer look at the figures reveals that income came largely from interest income which rose 20% year-on-year from Rs 5.2 million to Rs 6.2 million. Non-interest income, mainly commission, exchange and brokerage (which increased from Rs 557 million to Rs 912 million) rose substantially by 60% from Rs 0.7 billion to Rs 1.1 billion.

On the expenditure side, interest expenditure rose 24% from Rs 3.4 billion to Rs 4.2 billion while non-interest expenditure rose 19% from Rs 2.1 billion to Rs 2.55 billion. The increase in non-interest expenditure came mainly from a 100% jump in contributions to the staff welfare fund to Rs 30 million, a 49% rise in depreciation charges on property, a 36% increment under the head of "other expenditure" and a 15% climb in salaries, allowances and provident funds. Salary growth was slower and since salaries account for 70% of the Bank's total operating expenses, this had a significant impact on profits.

The growth in profits was driven principally by the 64% increase in commission and exchange income and the 13% slower growth in operating expenses. The growth in commission and exchange income has been attributed by analysts at Global Securities to the rebound in export business given the improvement in cotton exports and higher exchange gains of foreign currency transactions due to favourable currency movements.

On the lending side, advances grew 17% over the year from Rs 44.8 billion to Rs 52.6 billion, and just 3% over the last six months. Analysts at Global Securities attributed this to the State Bank's tight credit policy, but they expect higher growth in the second half as the cotton season commences and forecast loans to grow 13% to Rs 59.5 billion.

Investors angle

Now from these results, it appears that MCB has grown fairly well and given their expansion in both technology and products, as well as the considerable amount the new management has achieved post-privatisation, one would imagine that the Bank will continue to do well. They have shown strong commitment to expand their ATM network to provide a 24 hour cash facility to customers, and they introduced the Khanum Bachat scheme recently which promises to yield Rs 257,000 after a ten year term on a Rs 1000 monthly payment. They have also developed their computer link-up with Islamabad and Lahore from Karachi to improve services, and they recently received permission to open a joint venture commercial bank in Tanzania with a 80% equity stake.

Some analysts do forecast good growth; up to 43% in profits, to be driven from falling provision charges, slowing growth in operating expenses, and significant trade related income. With EPS forecast to grow from Rs 2 last year to Rs 2.9, Rs 3.6 and Rs 4.6 by 1998, analysts are recommending a buy on the stock.

There are, however, other considerations. Although it was widely claimed earlier this year that 1996 marks the end of the loan provisioning which the bank has been making against the infected loan portfolio which the management inherited from the pre-privatisation days, many analysts now say that this is not actually the case. And in fact, provisions, which still need to be made, a fact confirmed by sources at MCB itself, are being reduced in order to maintain margins. An estimated Rs 4-5 billion have been provided for in the last four years, but the current state of the total amount of bad debts in not known. Management at the Bank also said that provisions would be made in the next few months and total provisioning required would fall substantially by the end of 1996, and would perhaps, completely end in the next couple of years.

In the meantime, MCB has other problems as well. Their capital adequacy ratio, required by State Bank regulation to be maintained at 7.5% is far below at just 3.4%. The capital base of the Bank has grown from Rs 1.5 billion to Rs 1.8 billion, and according to top-level management at MCB, a rights or a bonus issue later in the year will further increase their capital. But this situation will, as analysts at AKD Securities (who have recommended a sell on the stock) have pointed out, result in a ploughing back of earnings and thus any expectation of a cash dividend remains minimum. And capital gains can hardly be expected given current market conditions.

Therefore, it does not seem that the investor has all that much to gain. But from the standpoint that the Bank has indeed accomplished a significant amount over the last five years, and in many ways has performed far better than was expected on the back of a strong growth strategy, the prospects of the Bank are far from dismal and the outlook would have to be on the positive side.