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  4. GREATER EMPHASIS ON CONSUMER BANKING PRODUCTS                                

MCB the key beneficiary of improving sector fundamentals

Jan 21 - 27, 2002

Muslim Commercial Bank (MCB) is the largest private sector bank and the third largest bank in Pakistan. Its competitive position has improved substantially over the years. Being a local bank with a large balance sheet size and huge capital base it was in an excellent position to capitalize on the vacuum created by contraction in activities of foreign banks. MCB has been able to propel itself into the top echelons of the sector through cost efficiencies resulting from extensive restructuring and improvement in income.

MCB's net profit after tax for the year 2000 was 29 per cent higher than earnings for the previous year. Its five-year CAGER earning per share growth during 1995-2000 was 63 per cent. Its future earnings growth is expected to come from improved net interest spread and the reduction in tax rate for commercial banks. Operating profit (before provisions) registered a healthy growth of 58 per cent due to better management of assets and liability growth and aggressive cost cutting approach.

Net interest income increased by 7.8 per cent to Rs 6.9 billion for the year 2000. The 10.3 per cent fall in mark-up received due to low interest rate environment during most of the year 2000, was offset by the bank using its strong deposit franchise to cut interest paid by a staggering 22.8 per cent. This is believed to be due to a change in deposit structure, away from high cost deposits towards savings and current deposits.

Other operating income climbed by 21.3 per cent, which in keeping with the industry trend was the result of the massive depreciation of Pak rupee during the year 2000. This is an area of operations where MCB has a distinct advantage over other listed banks with its good treasury management team. MCB had been offloading some of its federal investment bond holdings at a premium cost.

Operating expenditure also increased by 11.7 per cent. This was primarily due to Rs 601.8 million in provisioning against non-performing loans compared with no provisioning in the year 1999, and loan write-off of Rs 483.94 million, which provided the tax shield in the bottom-line.

Deposits in Pakistan tend to be interest rate inelastic. The large banks are able to maintain deposit levels without making major adjustments for higher interest rates. They benefit due to two reasons: 1) large proportion of rural deposits which tend to be more stable and 2) their large branch network. MCB is a classic example of this argument. Between 1996 and 1998, its yield on earning assets peaked in 1997 and settled in 1998. Its cost of funds depicted a more sedate move upwards. During the collapse in interest rates between 1998 and 2000, its adjustment was far more than the yields of its earning assets. Therefore, MCB is expected to benefit from reversal in the interest rate trend.

Part of the cost of funds behaviour is due to changes in the deposit mix being experienced by the banking sector. While the focus in mid nineties was on mobilizing as much deposit as possible, the focus is now on more selective accumulation of deposits. MCB has been consciously de-emphasizing the costliest funding segment, giving it more flexibility in asset-liability structure management.

The trend in the operating cost to total income ratio merely follows the provisioning for NPL trend. The operating cost to deposit has consistently been on the higher side in comparison to the private listed banks and reflects the high intermediation cost that the bank has to bear in order to maintain its cheap funding base. It also defines a key area where management can trim fat and raise profitability. The bank has been gradually cutting its number of branches and employees which is expected to continue to benefit profitability going forward.

Salary expense normalized after the jump in 1999, which came as a result of provisioning under International Accounting Systems, with a 3 per cent YoY increase seen in year 2000. As a result of this, the ratio of non-interest income to operating costs showed gradual improvement last year.

MCB's NPL coverage ratio is 37 per cent which is below the Big Five average of approximately 45 per cent, though it is an improvement on the year 1999 coverage ratio of 33 per cent. This concern is highlighted by MCB's risk-adjusted capital adequacy ratio of just above 8 per cent. On a more positive note the drive against defaulters initiated last quarter of 1999, stronger laws for recoveries and the functioning of the Corporate and Industrial Restructuring Corporation should control NPL accretion.

MCB paid 7.5 per cent dividend and issued 20 per cent bonus shares for the year 2000. It has also paid 10 per cent interim dividend for the year ending December 31, 2001 and more is to be expected. Since the market float is also high investors are expected to benefit from this improving trend.