Emerging stronger after restructuring and greater cost
By SHABBIR H. KAZMI
Apr 17 - 23, 2000
The banking sector in Pakistan is going through a transition period
which will have a positive impact on commercial banks. Muslim Commercial Bank (MCB) seems
to be one of the banks capable of taking advantage of these dynamics. Successful internal
restructuring, large branch network and the newly hired management team should be able to
raise earnings of the Bank significantly.
The current discount to fair-value of its share seems unwarranted given
the expectations of strong earnings growth during the current and the next year. The
growth will be accompanied by an improvement in the Bank's balance sheet as exhibited by
an increase in its capital adequacy ratio as well as reduction in non-performing loans.
MCB is the largest private bank and third largest commercial bank in
Pakistan. Its competitive position has improved over the last two years due to two
reasons, foreign banks were hit by the sanctions imposed on Pakistan and large share of
MCB's rupee deposits. The Bank accounts for 10 per cent of total assets, 10 per cent of
deposits and 11 per cent of loans in the banking sector. It enjoys an edge over smaller
banks. Rather, it is competing with foreign banks due to advantage of much lower cost of
funds and higher capital base.
MCB has undertaken extensive management restructuring in the past three
years. It is now well poised to reap the benefits of a lower operating cost and a
professional management team. MCB's efforts to generate more treasury income will play a
key role in bottom line growth, as its relatively large capital base provides more than
adequate Nostro and exposure limits.
While the comprehensive restructuring of the Bank's operations was a
costly and lengthy process, MCB is now in a position to have greater control over
administrative expenses. Right sizing of staff and closure of loss making branches will
result in significant cost savings. Conservative credit appraisal policies will reduce
further provisioning requirements.
MCB's key departments, including corporate banking, consumer banking
and treasury have been revamped and senior bankers have been hired to head these units.
MCB has plans to have greater focus on consumer banking. It is probably one of the first
local banks to extensively explore the opportunities in this area.
At present, MCB has the largest ATM network in Pakistan. It has also
launched an innovative nationwide service called MCBSwitch whereby any bank in Pakistan
will be able to utilize Bank's ATM network. The Bank has already signed an agreement with
ANZ Grindlays Bank in Pakistan. All MCBSwitch members will also be able to use ATMs
worldwide through Master Card's International 'clients' network. The Bank also plans to
launch other consumer banking products such as car loans, home refurbishment loans and
vacation financing after test marketing. It is also perhaps the only large bank in
Pakistan to have a formal electronic banking research cell which is exploring the
technical requirements and market size potential of internet banking.
The drop in interest rates is expected to spur private sector credit
growth. The low loan/deposit ratio should enable the Bank to boost its earning capacity as
loan growth improves. Moreover, as expected decline in provisioning requirements, revamped
treasury pushing for higher forex and money market income and improving balance sheet
strength will have a positive impact on net profit after tax.
MCB may experience a squeeze in net interest spreads. However, it is
believed that the Bank will be able to retain its net interest income by enhancing its
lending to medium-sized and small clients through its extensive branch network.
As far as the numbers are concerned, MCB seems to be in an increasingly
sound financial position. The Bank has a vast branch network spread all over the country
which significantly lowers its deposit costs compared with private and foreign banks in
the country. The curtailment of operating cost due to internal restructuring coupled with
recovery of bad loans is also expected to boost MCB's future earnings.
The decision to cut interest rates was aimed to kick-start the dormant
economy by generating fresh demand for credit which in turn spur productive activity.
Credit demand elasticity has historically been low in Pakistan and it is believed that
reduction in interest rate can stimulate fresh demand for credit from medium and small
businesses. The commercial banks which cater to a large retail client base will thus be
able to compensate for the erosion in their margins.
With the restructuring of the economy, better monetary and forex
reserve management by the central bank, and the drive against loan defaulters, banking
sector is enjoys sound fundamentals. MCB with its large branch network, diversified
clientele, lower non-performing loans, dynamic and cost conscious management is well
placed to benefit. This will result in substantial value enhancement for investors.