MCB the key beneficiary of improving sector
By SHABBIR H. KAZMI
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.