Mid size banks

OVERVIEW: In the local banking industry, challengers, or so called smaller players, are furiously proving their mettle. To trespass the comfort
zone enjoyed by a handful of the country's largest banks, mid-sized banks have been raising their game.
The group comprised the following nine banks: Faysal Bank (FABL), Bank Alfalah (BAFL), Standard Chartered Bank (SCBPL), Askari Bank
(AKBL), Habib Metropolitan Bank (HMB), Bank Al Habib (BAHL), Meezan Bank (MEBL), Soneri Bank (SNBL) and NIB Bank Limited (NIB).
Profits
Barring NIB, which recorded losses, the other eight mid-sized banks cumulatively posted 22 percent, year-on-year jump in profits in 1HCY11.
Both BAFL and MEBL showed an impressive profitability growth, at 77 percent and 92 percent, respectively. While SNBL's bottom line swung
to profits in 1HCY11, from losses in the corresponding period last year.
The group marked a significant improvement compared to the last year since the three banks had recorded a decline in annual profits and
NIB has seen a sharp rise in losses, in CY10
Mark-up returns
Aided by a significant growth in their investment portfolios and higher Kibor level, the aggregate
(nine banks) top-line grew by a whopping 19 percent, year-on-year, in the 1HCY11; outperforming the five largest banks by around 4
percentage points.
FABL's merger with RBS bank has had a favourable bearing on the group's top-line, as its mark-up revenues increased to Rs13.7 billion in
1HCY11, from Rs 8.7 billion the same period last year.
The NIB was the only exception, with 26 percent, year-on-year decline in mark-up revenue in 1HCY11.
Earning assets
Following the financial industry's footsteps, the mid-sized players also stayed aggressive on the investment front, as they lifted the collective
investment portfolio to Rs957 billion at the end of June 2011, representing a jump of 27 percent in the first six months of CY11 and 48
percent higher than the investment base maintained at the end of CY09.
This lifted the collective IDR (investments to deposits ratio) to 51 percent at the end of June, 2011, from 43 percent at the end of December
2010. At this level, the group's IDR is nearly 6 percentage points higher than the collective IDR for all commercial banks.
MEBL witnessed the highest growth in investment portfolio during the first six months of CY11, driven by accumulation of Ijarah Sukuk.
NIB enjoys the highest IDR at 66 percent, as of 30th June, followed by BAHL at 65 percent, while SCBPL has the lowest, at 34 percent.
The combined advance's pool eased down by around 2 percent in the first six months to Rs1,044 billion at the end of 30 June' 2011. This is
despite 7 percent and 9 percent increase in the advance portfolio of SCBPL and FABL, respectively.
The mid-sized banks had stayed active in lending in CY10. This can be determined from the fact that group's combined advances had grown
by 15 percent in CY10.
Mark-up expenses
In light of growth in deposits, the collective mark-up expenses registered a 17 percent gain in 1HCY11, compared to the same period last
year.
The cumulative deposit base jumped by 7 percent during the first six months to Rs 1,877 billion, as of June 30, 2011. At this level, the group's
deposit base accounted for around one-third of the total deposit base held by all commercial banks.
Aside from AKBL, all mid-sized banks witnessed improvement in the CASA ratio during the first six months of CY11. SCBPL enjoys the
highest CASA ratio at 80 percent as of 30th June 2011, while HMB has the lowest, at 48 percent.
Net mark-up income
The combined net mark-up income accrued a year-on-year gain of 22 percent in 1HCY11. The banks have collectively taken the gross
spread ratio to 39 percent - a year-on-year jump of 1 percentage points - in 1HCY11, which is around 17 percentage points shy of the top five

banks aggregated gross spread ratio.

SCBPL enjoys the highest gross spread ratio at 64 percent, while NIB faces the lowest, at 13 percent.
Non-mark-up income
Investment banking activities also drove profitability upwards, as six out of the nine mid-sized banks witnessed a double-digit year-on-year
growth in non mark-up income in 1HCY11. On growth front, SNBL led the pack, with a 59 percent jump in non mark-up income.
Non-mark-up expenses
During this period, non mark-up expenses witnessed a mixed trend. FABL witnessed a 121 percent growth in expenses on account of
acquisition of the operations of RBS Pakistan along with adoption of its administrative staff.
On the other end, NIB registered a 26 percent, year-on-year, a decline in expenses in 1HCY11. However, the group's administration
expenses as a percentage of total revenues stayed static at 27 percent in 1HCY11.
MEBL carried out an aggressive branch expansion plan in 1HCY11, by adding another 25 branches to its existing network, followed by FABL,
which expanded its branch network by 16 branches. However, SCBPL shrank its branch network by 19 branches.
Toxic assets
The mid-sized financial intermediaries managed to scale down growth in NPLs to a merely 3 percent during the first six months of CY11 to
Rs 150 billion at the end of June 2011.
The HMB's asset quality deteriorated significantly, on account of an 18 percent jump in NPLs during the first six months of CY11. Whereas,
both SCBPL and SNBL witnessed a 12 percent jump in NPLs.
On average, the infection ratio of the mid-sized banks, stood at 13 percent at the end of June2011; which was a notch below the five largest
banks average of 13.2 percent. BAHL enjoys the lowest infection ratio, at 2 percent, followed by BAFL and MEBL, at 8 percent each, while
NIB has the highest, at 36 percent, among the nine banks. The group's coverage ratio stood at 75 percent as of 30 June, 2011.
Future outlook
To realise scale, increase reach and reduce cost of operations, the way forward for mid-sized banks is to increase their footprints in
branchless banking segment alike some larger players such as UBL and HBL.
Moreover, these banks should increase their presence in rural areas, where banks penetration stands low, and where higher agriculture
commodity prices are fuelling economic prosperity.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business
Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business
decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper]
has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past.
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