An exclusive weekly Stock Market report for PAGE by Khadim Ali Shah Bukhari & Co.

Updated on August 29, 1999

Stock Market

Living up to expectations the KSE 100 Index came under heavy investor pressure to drop by 69.5 points to close the week at 1223. This was an expected turnaround, which we had highlighted in our last weekly report. Profit taking was witnessed through the week as players had accumulated large positions, which were off loaded at attractive levels. Further aggravating the position was the absence of any talks between Hubco and the government, which were expected to start at the end of this month. For the coming week the KSE 100 index is likely to remain in choppy waters with inherent weakness continuing to extend the correction phase. We believe that investors in the near term should remain on the sidelines allowing the market to consolidate.

Sector Review

Muslim Commercial Bank

Interim Results: When no action is the best course of action!

Banking is an interesting business at even the dullest of times-a business where money is to be made buying (borrowing) and selling (lending) money itself has to be interesting at all times. However, considering that banking in Pakistan has undergone a sea of change since May '98, banks' performance will be very interesting to track for a couple of years. Prior to the nuclear tests, Pakistan's banking scene was characterized by a rather strange anomaly where banks mobilized deposits thanks to government subsidized Foreign Currency Accounts, and then made a neat spread lending to the government! The root cause of this rather comic situation was the government's insatiable appetite for foreign exchange, which led to a rapid build up of Foreign Currency Deposits, allowing small private sector commercial banks to run circles around their larger counterparts. Alas, the party came to an abrupt following the nuclear tests. With depositor confidence receiving a deathblow as FCAs were frozen, banking in Pakistan suddenly became a lot more logical from now on, bigger would indeed be better.

MCB's latest interim results also make interesting reading in the backdrop of what we have discussed above. A brief summary follows:

                                                                                                    % Chg.

PKR in million	1HY99	1HY98	2HY98	y-o-y	h-o-h
Mark Up Income	8,161	8,653	8,545	-6	-4
Less: Cost of Funds	5,072	5,591	5,474	-9	-7
Net Interest Income	3,089	3,062	3,071	1	1
Total Fee Based Income	1,187	1,180	1,264	1	-6
Total Income	4,276	4,242	4,335	1	-1
Operating Expenses	3,482	3,588	2,869	-3	21
PBT & Provisions	794	654	1,465	21	-46

These figures are an accurate reflection of future trends. Asset yields came down as interest rates fell, while a low reliance on FCAs for deposit mobilization led to lower cost of funds. This is an important aspect of these results, as this demonstrates the advantage that banks with extensive branch networks now enjoy-it is no longer possible to mobilize sufficient deposits based on a combination of an attractive product and better service, sheer presence is now a vital factor as well. Considering that we are stressing the deposit mobilization ability of larger banks, courtesy of a greater presence in the market, it is important to compare operating costs between different sized banks to get an idea if lower cost of funds is truly an advantage worth pursuing, or more importantly, is it worth paying a premium for, from an investment point of view. We note with great satisfaction that operating costs have declined in absolute terms, and considering that domestic liquidity has been strong, these expenses would also be forming a lower proportion of total assets.

The one big unknown remains the provisioning side, which we know little about at present. However, these results suggest (considering that cost of funds is down sharply, along with gross interest income) that asset growth has been moderate, giving us comfort that prospects of incremental NPLs remain low. The way forward for MCB is indeed arrested growth of the loan book, and a focus on increasing profits by increasing asset turns. The poor capitalization base of the bank rules out any chance of growing the loan book rapidly without compromising the financial viability of the bank. Looking at the recent performance of the bank, we are comfortable-so far so good, it is a pity that we still believe valuations for the bank are stretched. We do suspect that collapsing interest costs may very well result in earnings exploding without significant asset growth, but we need to be much more confident of the provisioning side before we are willing to take such a bet. We hence stick to a meek NEUTRAL recommendation. Stay tuned for future updates.