MCB Bank Limited (MCB) Earnings Call Transcript & Summary

[Technical Difficulty] 2023 results conference call. I have the pleasure of having Mr. Hammad Khalid, CFO MCB Bank, on the call with us today. As is usual, Hammad will go through a presentation discussing the financial performance of the bank over the past quarter, and then we'll open the floor for questions. So with that, I'd like to transfer the call to Hammad to take us through the first quarter performance.

This one -- thank you, Murad. And thank you everyone for joining in the results release call for the first quarter 2023. So as per routine, I'll just quickly take you through the financial and operational landscape of MCB Bank. So our domestic footprint on the branch side is 1,436 with one branch operating in export processing zone. International footprint pretty much limited to 8 branches, 6 in Sri Lanka, one wholesale bank in licensed in Dubai and one that we have launched in Bahrain. So despite all the challenges that have been thrown on us, particularly in [indiscernible], we have been able to hold on to our growth with the profitability growth number reported by our overseas operations to the tune of 220% when up against corresponding period last year. We are probably selling a customer base of 8.7 million through our ADCs and our mobile banking platform. It is pertinent to highlight that we have registered live users of around 800,000 within a span of 1 year and 1 quarter, which is almost 7x of the legacy platform registered user base. On the financial side, we hold 6.12% of the domestic industry deposits, advances by 5.64% and trade market share has improved to 7% based on the March 31, 2023 numbers. Home remittance our key business line, we have improved our share to 12.3% as we shared around USD 3 billion every year through MCB's network. Our long-term credit rating is stipulated by PACRA in June 2020, which affirms the financial strength of the institution. We continue to be rated as one of the highest paying dividend in the financial sector industry with PKR 6 payout for the first quarter. On a branch network, we operate 1,600 plus branches by wholly owned subsidiary operating 200 branches, 199 to be specific as of March 31, 2023. And in terms of market capitalization, we are the second to Meezan Bank as of March 31, 2023. Now I'll start off with the key highlights of the economy. So the global headwinds that [indiscernible] over the last 3 quarters have resulted in the recession, you are to be more sharper than expected and broad-based with Pakistan not being an exception there. So from a country perspective, our challenges are definitely compounded on account of rising inflation, soaring inflation, coupled by the political, financial, fiscal and the emerging law and energy crisis that we have on our hands. Pakistan obviously remains in the midst of balance of payment crisis. The State Bank reserves dropping down to a [indiscernible] $4.4 billion, providing import cover of less than a month. However, the silver lining has been in the last 2 months, advance payment numbers, which provides some refuge on account of the structural reforms imports went down somewhere despite [indiscernible] side as well. The [indiscernible] still remains a limbo though the country has come to meet all the covenants and conditions specified by the Fund. However, I believe still I have advanced the formations of the vendors to satisfaction seems to be a moving target. We have been trying our level-best, we started back in February, we have advance payment for the last 3 months or so. So we remain optimistic that this would be sorted out, as it will definitely unlock many multi-lateral and bilateral funding revenues for the country. So over the last few quarters, there has been a sharp slowdown -- so second concession is depreciation and a steep increase in the discount rate. The discount rate has gone up by 500 basis points since [indiscernible] with currency losing around 25% of the value in year 2023. Worker remittances recorded a $20.5 billion, which is a drop of around 10% and market has corresponded to it last year, with the last 3 month numbers seem a bit encouraging there is some [indiscernible]. With 2023 being in an election year, one of the key elements would be the smooth transition of democratic power. We do understand that this current time program ends in June. So whatever the structural reform has signed with the fund have to be carried on for the shorter term, so giving no levee for the current set up to take any populist move. From MCB's perspective, this has been a good quarter. The key highlight being a substantial increase in our current deposit base when we map against the December 2022 number. On actually terms, we have gone up by around PKR 147 billion on the current account side. On the average, when up against corresponding period last year, there was an increase of PKR 178 billion year-on-year. On account of this substantial beat, the names have reported at around 66%. Cost-to-income ratio primarily on the back of a better income number has dropped to 32.77%. Though the cost side, the operational cost side was contained to 25% increase, which I think in question said that we have observed over the corresponding period last year seems a bit -- a positive number. 54% remains the PBT, which is PKR 23 billion high ever profit reported by the institution. And one of our key steps, we have reserved around PKR 205 million of the [indiscernible] plus stock that was faster than the counter measured in 2017. Now moving on to our balance sheet number based on PKR 2.11 billion, a growth of PKR 29 billion in absolute terms. On the asset mix, with the ABS pressures receding on account of the P&L-based accession -- ADR-based accession abolished for the current year. We registered a drop of PKR 95 million versus the open primarily reflected in the corporate portfolio with a were paid off by the banks. Corporate book decrease of PKR 117 million were retail, which comprised of small companies and SMEs have reported a growth of PKR 7.1 million. ADR based on the reported numbers were PKR 45.63 which coverage and inflection ratio reported at 82% as 8%, respectively. On the investment front base, a consistent base of say around PKR 946 billion, treasury bills approximately PKR 80 billion base, which has PKR 151.5 billion over the year-end. PIBs base up by around PKR 13 billion odd. Much of it is seen in the floating rate PIBs, which have gone up at 12.2%, if you have [indiscernible]. So the current concentration level of reported PIBs within this segment as on a continuous increase. Cash and bank balance of PKR 181 billion with lending to financial institutions providing a bridge for us between the 2 treasury bill options [indiscernible] PKR 1 billion. On the liability side, our total deposit base of PKR 1.5 billion and a growth of PKR 161 billion in absolute terms, out of which PKR 147 billion, which is 91% of the total increase over the year-end was reported in current account. So I shared more color how we have been able to achieve this strong growth in our current account numbers when we -- in the ensuing slides. So on the saving accounts in place of PKR 23 billion term dropping by PKR 9 billion thereby improving around our CASA ratio to 197%, one of the leading CASA ratios for the industry. Equity base of PKR 182 billion versus PKR 171 billion, an uptick of PKR 11 billion over the year-end. On the advances front, the base of PKR 703 billion prime concentration risk with a profit segment PKR 500 billion approximate is because of funding and PKR 7 billion over the year-end. As I shared earlier, primary drop was in the shorter term working capital requirements by most of our corporate clients. On the consumer front, a base of PKR 42 billion versus PKR 43 billion as of year-end, pretty much a segment based over the last 3 quarters as the focus shifts to maintaining the asset quality of our existing work due to the issues faced by [indiscernible] and import restrictions in backend delivery time lines. Overseas base of PKR 35 million versus PKR 29 billion, an uptick of PKR 6 billion during the quarter. On the NPL side, a base of PKR 55.3 billion versus PKR 51.6 billion an uptick of PKR 4 billion primarily on account of the devaluation impact of our currency denominated non-performing loans. Out of this PKR 4 billion approximated PKR 2.8 billion is account of that. Apart from that, there have been some subjective and objective classifications made during the first quarter amounting to around PKR 1.3 billion PKR 1.4 billion. These are exposures to our seed business. And in circumstances peculiar to these 2 particular clients has resulted in an objective classification as substandard, warranting a 25% provisioning charge. The gross advances based a CAGR of 6.09% taking 2018 as a base, whereas the yield has significantly improved from 8.99% to 15.39% based on the sharp increase in the discount rate. However, you would observe that some of it still has to reflect in the advances side in the second and third quarter of this year. As an update on the recovery of our NAV led NPL stock, the bank has recovered further PKR 205 million from the PKR 29.6 billion NPL passed from NIB. The totaling to around PKR 8.72 billion over the span of 6 years, summing up to a percentage of 30%. One of the key developments in this particular revenue is that the exposure, which has adopted a -- legal costs, we believe that we would be able to recover that inshallah within this year, a maximum by the first quarter of next year. So a decent background there as well. We expect the number to be reflected in the profits to follow, which would further improve our recovery ratio from the NIM stock to around 40%. In terms of investments, 8% concentration of presales based around PKR 78.87 billion. PIV is the major concentration, 83% of the proper investment base, which prime contribution to between PKR 540 billion PIBs, where the fixed rate PIBs are around PKR 291 billion. In terms of repricing schedule approximately 50% has already been repriced as we speak today since there was a maturity repricing schedule around 1 month from March 31, 2023. So we are in the best position to purchase the interest rate hike that we have we have seen in this calendar year. We would have observed a sharp increase in the revaluation deficit of around PKR 14 billion from that [indiscernible] from that biggest December 2022 number [indiscernible] significant increase of 400 basis points registered in the first quarter. So much of it is coming in from the fixed rate PIBs, as the weighted average yield to maturity and the weighted average yield of acquisition, there's a gap of around 800 basis points. So the good part is that approximately PKR 80 billion out of this PKR 280-odd billion will be maturing in the third quarter of 2023 this year. So moving on to the deposit base, a good sold to share gap. So a total base of 1.5 billion current accounts, impressive growth of PKR 1.7 billion to PKR 827 billion as of March 31st. The major drivers for this current account growth is that post segmentation of our regional business and to business and services segment. The business segment was vested with the responsibility to deepen the existing relationships. Relationships which are maintaining a deposit balance of less than PKR 10,000 with the bank. So we are actively engaged with our customers, providing a more personalized standard and experience interactive on a pretty regular basis, ensuring that they keep their funds with MCB Bank or they enhance the deposit with the bank. On the retail services side, what we have done is that we have vested with the responsibility to activate the dormant relationship, which unfortunately constitutes a very big component of form 7 million customer base that I showed earlier. So they have been actively engaged with those customer base, and I'm pleased to share that we have been able to sort of set a deposit base of close to PKR 8 billion, PKR 8.5 billion in current accounts on an account of affiliation of these dormant relationships. Apart from that, we are engaging quality new-to-bank relationships. Relationship that is an account with a decent amount providing a cross selling opportunities to the bank. The conversion exercise plus the service quality levels. This is one of the key components of strategy is improvement of the service quality levels. I'm pleased to share that approximately 800 branches out of a total domestic footprint of 1,400 are being remotely reviewed or monitored by our service teams taking action as and when required to ensure that we deliver what we have promised to our huge customer base. And on account of this decent traction in the current account side, we have been able to implement the concentration level to 54% from an earlier reported concentration of 49% as of year-end 2022. The total deposit base has reported the CAGR of 9.23% over the post last 5 years. However, current accounts from the revenue have grown by 16.13%. And going forward, this is the strategic focus by the bank. We will continue to maintain minimum 50% concentration by [indiscernible]. Moving on to the performance numbers, PKR 23 billion profit before tax, the highest ever profit in the history of MCB Bank Limited. On the net interest income side, starting with the mark of input, PKR 63.8 billion versus PKR 39.7 billion a matrix of PKR 24 billion, transacting with a recent increase of 61%. On the advances side, it was evenly contributed by the price on government papers by the investment side, the first time will be a function of the price variance as volumes are pretty much stagnant versus corresponding period last year. Markup expense and the negative variance of PKR 12.18 billion. So pretty much muted when we map it with the sharp increase in discount rate due to the strong buildup in the core deposits, which is the current account number, which has gone up by PKR 178 billion in average from that biggest first quarter 2022. Net market income increase of PKR 12 billion in absolute terms transforming into 66% growth. On the noninterest income the kind of a stagnant base at 3% growth, prime contribution coming in from the key commission line, 27% growth reported with major revenues being income from cards, remittances, spread and guarantees. Despite the serious information pressures that we've observed the increase in the minimum wage, the adverse impact of U.S. dollar and due to our parity, plus growth in our operational footprint. We have been able to contain the operational expenses to 25% for the first quarter of 2023. So proper provision of PKR 23.6 billion versus PKR 14 billion per corresponding period. On the provision front, we took a further gross charge of PKR 452 million for our equity portfolio. Another PKR 500 million account of the Euro bond exposures as the country ratings were down rated. We have exposure start in bearing in [indiscernible] of around $16 million in Bahrain and around $17 million in UAE. That's the total exposure in the Europe ones, which have matured in '24. Based on the standard performance of the recovery team, which was a provision reversal charge of PKR 290 million, which after setting of the subjective and objective classification charge that we took in the first quarter is a decent number. This sums up to a profit before tax of PKR 23 billion, PKR 8 billion in [indiscernible] accounts passing to 54% growth. The taxation rate for the banking companies have been revised, the corporate tax rates charged out by 59% plus super tax charge rate of 43% effective charge to 43% versus our corresponding year effective charge of 40%, thereby profit after tax of PKR 13 billion versus PKR 9 billion reported profit for last quarter. In terms of profitability ratio, there from the spend in performance for the first quarter, ROE stood at around 30%. Where ROE improving to around 25%. Cost-to-income ratio stands in to 32.8%. So in terms of our capital base, capital ratio, capital adequacy ratio of 15.01%, having a strong [indiscernible] of around 650 odd basis over the statutory requirement. In terms of our leverage ratio, 6.15, which is way above the regulatory requirement of 3% and equity coverage ratio of 245 and net funding ratio of [indiscernible]. So last slide of the presentation, a snapshot of our wholly owned subsidiary numbers. So a deposit base of PKR 163 billion, a growth of -- from PKR 154 billion reported as of year-end advances base of 94. We have been consistently building up our operational footprint on the Islamic banking side, adding around 21 branches in the last year with further revision of 2 branches in this year. The strategy in this branch is scale it to a midsize Islamic bank. I think around 25 to 30 branches every year from this month onwards. On the profitability side, we would observe that a decent number has been crossed for the first quarter, PKR 840 million profit after tax reported by wholly owned subsidiary against the PKR 1.6 billion reported for the full year 2023. So things are on track as far as the operational financial viability of our wholly owned subsidiary is concerned. This is the first reporting period where the cumulative losses have been covered, and there is a positive retail imbalance reflective in the financial part of March 31 of 2023. So this covers up the presentation from my side. Over to you, Murad for the Q&A.

Thank you, Hammad. We'll now move towards the Q&A session. If you have a question, you can either put your question in the Q&A box, and I can repeat or the management or you can raise a hand, raise your hand and ask a question directly. So we'll just wait for questions to get in. But Hammad, I mean, I think also about on asset quality, I mean, obviously, that is a key area for all who are looking at banks. So far, we haven't seen any major concerns or stresses arising at any of the banks and the same is the case with you. But how do you see that evolving over the course of the remaining 3 quarters of this year?

Thank you, Murad, for the question. So operating in this particular environment, I believe no financial institution is completely insulated from the anticipated credit losses that seem to be [indiscernible]. So there are different concerns on the asset quality side. However, based on the risk reverse suppose that MCB has been adopting over the course of last few years in terms of [indiscernible]. I believe we don't expect a significant depreciation in our NPL base going forward. So we are fairly confident of our credit underwriting standards. The post -- pre and post disbursement procedures that we adopt on a given portfolio. And the focus at this point in time has completely shifted to ensure that the asset quality of our existing portfolio is maintained. Since the ADR pressures have already been seeded in account of the abolishment of [indiscernible] ADR. So going forward, I believe the guidance that we gave early to the market, we were expecting a gross charge say PKR 1-odd billion on an annualized basis. I believe we might have to increase that charge. However, based on the strong recovery pipeline that we have in place, we still anticipate a reversal to the charge in the quarters to follow. However on a gross basis, I believe the credit charge. Previously, the guidance was around 0.5% to 0.6%. Maybe you might see it scaling it up to somewhere around 0.8% to 1% of the gross outstanding portfolio.

And on NIV, you mentioned that there's -- we're expecting some recovery of 1 large chunk either by the end of this year or early by first quarter next year. Is that one big amount that's coming through because you highlighted that you'll probably get nearer to your original target of 40% recovery on the NIV book.

Yes, that's what we anticipated to recover in the initial year of acquisition, maybe somewhere around 2018 and '19. However, on account the detail [indiscernible] has taken awhile. Things were heading in the right direction, we expect a decent coming from the [indiscernible] and improving our recovery numbers from this account from 30% as of now, to around 40% by the end of this. So we are saying hopefully things will head in the right direction; inshallah.

All right. A couple of questions on the Q&A box. Can you please share MCB's share in import trade and as well as export trade? I think you mentioned about…

Yes, that's a trade, but the dispute between export and import. I don't have readily available. We can't do a drop-in that information would be available with me. So whoever has asked this question -- after the call we will share these numbers.

And on your interest rate expectation for the upcoming monetary policy?

Well, I believe our policy that the interest rate hike has actually -- the cycle has already bottomed up. We don't expect any further help from this point onwards. Inflation, obviously, as we said, covered in the presentation is so it's not a control the guidance that we saw in the last monetary policy. I believe it's anybody's guess as of now. But the data and the bank is that we didn't expect any further revision from this -- any further increase in the interest rate in business.

All right. Question from [ Mustafa Musahir ]. Could you please repeat the industries which have attracted classification in the first quarter?

Well, what I specified was that out of a total increase based upon PKR 4 billion for the first quarter, around PKR 2.8 billion is on account of the devaluation impact of [indiscernible] So the balancing PKR 1.3 billion, PKR 1.4 billion is the account of objective and subjective classification that was made in the first quarter. It's 40 field liquid business. So the second stance is peculiar to that account. So we have classified it objectively as the market, which was the [indiscernible] so 90 day overview. There is some decent traction over there, and we believe that the [indiscernible] but based on the guidance provided by the credential [indiscernible].

The second question is how do you see the current -- how do you see the momentum of current growth for the remaining quarters of this year?

Well, a decent traction. It would be wonderful if we are able to replicate the performance that we have done and achieved in the first quarter of PKR 147 billion. As of now, as we speak, the numbers are better than what we have reported. Obviously, I can't share it since they are not on topic. But the traction is there. And based on the multiple strategies that we have been focusing on that I have covered already, I believe we'll be able to deliver a better result that we have done for the first quarter. Let's stay hopefully, think on this point on the controller.

His last question is, if you can share the yield on the fixed rate PIB book?

Well, on an average, the yield is close to 10.76%. On the fixed denominated PIB.

And you said about PKR 80 billion of this is maturing in the third quarter.

It's maturing in the third quarter of this year. Okay.

The bank has capital well above the regulatory requirement and asset quality has remained impressively strong. Is there any possibility of the bank increasing its payout ratio similar to its peers?

Well, I can't give that possibility out altogether. So normally if you review MCB's performance over the last few numbers over the last few years, the peer pressure has been starring around 80% at the last time. So this time around, obviously, it has dropped to that level. So depending about how the situation unfolds, how things reflect in the financial performance for the remaining quarters. So we will be reconsidering what we can manage in a comfortably place as you recognize in terms of capital adequacy levels. So no issues there. However, as the situation unfolds, this is a dynamic process. We continue to see the Board engages with the [indiscernible] continue reviews whatever is required to be retained in the business as the institution. So it's a bond that it be taken as [indiscernible].

A question from Umair Naseer.

I have a question regarding the LC opening. We've heard that, obviously, with the expectation of current account surplus with numbers going -- improving in the last 2 months. Is the situation improving in terms of LC opening? And my second question is regarding a similar question to what Murad asked earlier. We have seen that a lot of companies are announcing buybacks given the fact that valuations are quite attractive. And obviously, it's an opportunity for companies to either look for dividend payout or allows a buyback. So would the bank be considering such an option or improved payout will be preferred?

Thank you for the question, Umair. So just to respond to your first one, LC obviously the situation had gone through is way better than what it was back in January 2022. So you could recollect that a mechanism was wrote out by the central bank start of February 2023 this year, where the banks were allowed to actually privatize essential items with the balance of payments reflecting a better threshold over the last 2 months or so. There is some room available for the banks to actively operate and they don't have the import restrictions as they were in the last quarter 2022, when the first month of 2022 stand to actually make sense. So I don't see the pressures that were there playing their part as of now. With reference to your second question, yes, as I said, there is a dynamic process. So we are open to each and every option that we have available, be it a buyback or be it increasing the payout. So it depends how the financial performance for the ensuring corporate shapes out. In case we are able to deliver strong results as we have done for the first quarter, the possibility of moving increasing the dividend payout or maybe announcing a buyback. It's always there.

Question on the chat box. Can you please share the ballpark amount of the recovery from NIB book that you mentioned in case for a potential recovery in the next couple of quarters?

Well, it would be somewhere to the tune of PKR 1.2 billion to PKR 1.5 billion is what we anticipate. And as I said earlier, this is one from [indiscernible] apart from that there is a strong deposit background that I said at that point [indiscernible]. So hopefully, we'll be able to deliver a strong result in the second.

Hammad just on that, if I remember correctly, I think there were 2 accounts where you had seen or you were facing delayed recovery as per your original time line. So this is one of those accounts, right? And so there is another account after this reserve.

So can you repeat that, Murad?

I was saying that there were 2 accounts, if I remember correctly, I think from our call a few quarters ago where you mentioned that there were 2 key accounts which had approached the court and where the recovery time line was turning out to be longer than what you anticipated initially. So one of the -- it's one of these accounts, there is another account, which is outstanding still very...