MCB BANK LIMITED

HAMADULLAH ABRO
Research Analyst, PAGE

Feb 18 - 24, 2008

MCB Bank Limited falls under the category of "big Five" domestic commercial banks in Pakistan. She has an extensive branch network of 997 branches across the country, 6 overseas branches and 2 representative offices in Bahrain and Dubai. She offers wide range of products and services to cater the different financial needs of her diverse customers which include personal loans, corporate financing, fund management, agricultural loans, current and saving accounts, foreign exchange, underwriting and advisory services.

MCB is the first bank in history which went international by issuing Global Depository Receipts (GDRs) worth 150 million dollars, which were over subscribed and got listed on London Stock Exchange. It shows bank's growth on both domestic and international borders.

She is worth Rs.382.6bn with paid up capital of Rs5.5bn. Her total outstanding shares 628mn out of these 95% are free floating. Market Capitalization stands at Rs.302bn as on 14 Feb 08, advances of Rs 190.5bn and deposits of Rs 288bn (as on 30 Sep 07). Assets increased by 40.5bn in 3Q-FY07 showing a growth of 12%, Advances declined by 4% and deposits showed growth of 12% in same period.

FINANCIAL PERFORMANCE

The Bank has been witnessing robust growth in the first nine months of current year in terms of profitability but her advance to deposit ratio (ADR) which has been decreasing substantially for last nine months.

The declining trend is due to her pragmatic approach in lending in order to cut short her non performing loans, which have shown a growth of 405% (to Rs.1.4bn) in first nine months of current fiscal year. And another factor is the hike in cost of credit, which is negatively affecting the demand for credit. It is point of concern because declining trend has potential to hamper the profitability. On the other hand, bank's deposits are witnessing increasing trend and showing a growth of 12% in three quarters to Rs.288bn over Rs.257bn of the corresponding period last year. This has grown interest expense at 88% to Rs 5.7bn as against Rs3bn during corresponding period last year. Increase is witnessed due to better returns offered to attract long term deposits. [See Table # 1]

Bank's assets, mostly representing deposit money, have grown by 12% to Rs 383bn as compared to Rs 342bn in same period last year. The Bank's revenues have been growing at an impressive five year CAGR of 11.30% with average growth of 15%. In the 3Q-FY08 revenues are showing same trend and has grown to Rs.18bn over same period last year depicting growth of 16 %. Bank reported increased profits (accrual basis) because her 77% deposits were loaned. But bank's Advance to Deposit Ratio (ADR) has been decreasing due to substantial rise in cost of borrowing which stood at 66% in 3Q-FY07 against 77% over corresponding period last year. As a result bank has increased its investment which has grown to almost 100% in 3Q-FY07. Bank increased its investment due to expectations that interest rate will go up and low interest rate differential on lending to Government and private sector.[See Table # 1 & 2]

Bank reported increase of 405% in Provision for Non-performing loans to 3Q-FY07 which is of grave concern for the bank. SBP has also changed provisioning requirement which will affect banks profitability on the financial statements in the current financial year only.

Bank has reported 30% increase in profits after taxation to Rs.11.3bn in 3Q-FY07 from Rs.8.6bn in 3Q-FY06. Contributors are 21% decrease in total non-markup expenses which stood at Rs 4.7bn in 3Q-Fy07 from Rs.5.7bn in same period last year showing her improved operational efficiency. Other factor is 29% increase in its non-markup income resulting in 2.29% growth in EPS in 3Q-FY07 to Rs 17.9 as against Rs 17.5 in 3Q-FY06; this is expected to grow further in the last quarter of FY07. EPS has also been growing at an impressive CAGR of 47% with an average growth of 77% for last five years. [See Table # 1 & 2]

IMPACTS OF NEW PROVISIONING REQUIREMENT

SBP has completely withdrawn the benefit of Forced Sale Value against all non performing loans to calculate provisioning requirement and changed the definition of different categories in it, effective from first January 2008 which will affect profitability of banking sector adversely in 2008.

MCB Bank provision for non performing loans has been increasing and posted a growth of 405% in 3Q-FY07 to Rs104bn as compared to Rs.0.3bn same period last year, shows the bank will have to bear loses in the final results. It is expected in FY08 more reversal will be seen to show better profits, along with it the bank will improve its loan recovery system and implement better risk management policies. [See Table # 1]

IMPACTS OF MONETARY POLICY

The SBP raised the discount rate by 50 basis points to 10.5%, and Cash Reserve Requirement (CRR) by 100 basis points to 8% (on less than one year Demand and Time Liabilities) for 2H-FY08. Impact of increase in discount rates is the hike in the lending rates of commercial banks, which have grown to 13 per cent resulting in increased burdens on companies which are already highly leveraged and force these investors to defer their proposed projects (i.e. low demand for credit). Increased Cash Reserve Requirement (CRR) means banks will have to keep more reserve money (zero return) with central bank unless bank increases its long term deposit base. Both moves of SBP will impact negatively bank's Advance to Deposit Ratio (ADR) and deteriorate paying ability of borrowers which will result in more bad debts.

FUTURE OUTLOOK

Banking sector has shown unprecedented growth for the last five years due to healthy economic growth, economic reforms initiated by the Government and their sustainability, favorable investment climate, Government support which have made robust foundation of banking sector. But sector may not maintain same momentum in current fiscal year. Several factors support this fact, interest rates had increased consequently cost of borrowing has hiked, and new government will be in of charge of the heavy helm with political instability, deported foreign capital, increased governments borrowing from commercial banks to fill fiscal gap.

SBP moves to contain inflation and implementation of Basel II. All have negative impacts on banking sector performance. We can not expect outstanding performance as MCB Bank has had in previous years.

TABLE 1

FINANCIAL PERFORMANCE (AMOUNT IN RS 000)

.

JAN-SEP 2007

DEC 31 2006

GROWTH%

Assets

382593513

342108243

11.83

Investments-net

123318412

63486316

94

Advances

190524312

198,239,155

(3.89)

Deposits

287921856

257,461,838

11.83

ADR%

66.17

77.00

.
.

JAN-SEP 2007

JAN-SEP 2006

GROWTH%

Net Mark-up

17938564

15511184

15.65%

Provision for NPL & A-net

1441713

285582

404.83%

Provision for diminution in Inv:

130913

121198

8.02%

Bad debts written off

199

1135

-82.47%

Net mark-up after provisions

16365739

15103269

8.36%

Total non mark-up Income

4743692

3660773

29.58%

Total non mark-up expenses

4728467

5759878

-17.91%

Profit before taxation

16380964

13004124

25.97%

Profit after taxation

11247380

8642817

30.14%

EPS (Rs)

17.90

17.50

2.29


Table 2

5 YEARS PERFORMANCE

.

Rs. In Millions

. Rs

.

YEAR

REVENUES

GROWTH

EPS

GROWTH

2002

17,920

-6.80%

3.03

55.00%

2003

14,858

-17.10%

3.89

28.38%

2004

13,308

-10.40%

4.51

15.94%

2005

24,634

85.10%

15.99

254.55%

2006

30,611

24.30%

21.02

31.46%

CAGR

11.30%

15.02%

47.31%

77.06%