MCB Bank Limited (MCB) Earnings Call Transcript & Summary

Good morning, good afternoon, good evening, ladies and gentlemen, wherever you are. Welcome to the corporate briefing session and 9 month '24 Results Call for MCB Bank Limited. On the call with us today, we have MCB's Chief Financial Officer, Mr. Hammad Khalid, who will take us through his presentation and prepared comments after which the floor will be open for questions. Before we begin, a few housekeeping rules. [Operator Instructions] With that, Hammad, over to you.

Thank you, Raza. [Foreign Language] Thank you, everyone, for joining us this call for covering the 9 months results period ended September 30, 2024. So as per practice, let's start off with an outlook of our operational and financial footprint. So particularly domestically domiciled bank running at 1,430 branches in the urban and rural parts of Pakistan. I'm pleased to share that we have expanded our international footprint by adding 1 more wholesale branch in Sharjah, which started its operation on October 18, 2024. So apart from that, we have presence in Dubai, Sri Lanka and Bahrain. We're proudly serving a customer base of 8.9 million through our ADC and brick-and-mortar channels. On the financial side, deposit market share stands improved to 6.09%, whereas advances, we hold 5.60% of the domestic advances and industry. In terms of remittances, we have channeled close to $3.2 billion in the 9 months period ended September 30, that signifies the importance that we place to this particular initiative as it has a very proposition intending from fee to deposit mobilization. Our financial strength is depicted by top-notch credit rating of AAA long-term and A1 Plus assigned by back in June 2024. Now moving on to the macroeconomic highlights. So there are some visible signs of improvement across all the key macroeconomic indicators as the country has taken key steps to restore economic stability with some consistent policy implementation on the previous SBA arrangement signed with IMF. So the growth has definitely rebounded to 2.4% in the last fiscal year. Coming in -- [ 88% ] coming in from the agriculture growth, where inflation has receded significantly to single [ zero ]. Thus bringing in room for the monetary easing cycle to staff. One of the key developments of the preceding quarter was the signing of extended facility with IMF. Maintaining a flow of $7 billion, out of which $1.03 billion have already been disbursed to Pakistan. State Bank Pakistan has kick started the cycle with 450 basis points since June. So also supported by appropriately tight budget where we believe a lot of work has to be done on the fiscal side to ensure that challenging targets set for the upcoming fiscal year are adequately met. On the future outlook side, IMF program will definitely require some sound policies and the frequency of reviews signed up would border that we continue our way on the structured reforms agenda signed up with the global lender. Downside risk to these signed up agenda are the political instability, emerging concerns on the law and order situation, effective monetary policy and controlled government spending to ensure that the fiscal balance is met. From MCB's perspective, we continued our journey capitalizing on the no-cost deposit base, adding PKR 107 billion to our current account base. Whereas on average, we added PKR 71 billion, which is more than what we did in the corresponding period last year 2023. Based on the numbers reported on the revenue side, cost-to-income ratio was reported at 31% approximately, slight dilution from what we reported in the correspondent period last year, but well within the budgetary targets that we set for ourselves. Profit before tax of PKR 95.1 billion on a stand-alone basis, which improves to around PKR 104 billion from a group's perspective. On the NAA-related front, we have recovered another PKR 772 million within 9 months period. Whereas home remittances improved $3.2 billion was recorded for MCB in the 9 months period. Now moving on to the financials, starting off the statement of financial position. So asset base of PKR 2.8 trillion, reflects growth of PKR 367 billion in absolute terms. On the asset mix side, our gross advances were PKR 725 billion, indicating an increase of PKR 103 billion as against 2023 numbers. So much of the increase was registered in the corporate book, corporate lending books, which improved by around PKR 93.7 billion when mapped against December 2023 numbers. So just to give you some hint that almost around 74%, 75% concentration of our credit book is held by the Corporate segment. Coverage and inflection ratios of the bank were reported at 92%. The coverage diluting -- inflection diluting to 7.59% by annual count of reduced NPLs and increased gross advances number. On the investment front, a base of PKR 1.507 trillion, a growth of PKR 258 billion in absolute terms. So much of the addition was reflected in the floating rate PIBs, which registered an increase of PKR 207 billion. PKR 30 billion net were added to the fixed PIBs. When I say net, there was a huge majority of around PKR 78 billion in the third quarter. So this is the net maturity after accounting for that PKR 80 billion maturity registered in the third quarter. Treasury bills decreased by PKR 9.7 billion, and were reported at PKR 345 billion. On the liability side, our deposit base, the bank crossed the PKR 2 trillion benchmark, PKR 2.064 trillion versus PKR 1.8 billion, a healthy addition of PKR 259 billion, out of which current addition was PKR 107 billion, taking the base to PKR 978 billion as of September 30. Saving base of PKR 1.028 trillion, a growth of PKR 151 billion. On the equity front, a base of PKR 224 billion, which reflects an increase of PKR 17.71 billion in absolute terms, now setting into 8.57% growth. Advances, gross base of PKR 7.25 billion, corporate base of 5.31%. So around 72%, 73% concentration health there. Retail is the exposure that we have to small and midsized companies plus the SME sector, so around 12% exposures there, PKR 75 billion. Consumer was reported at PKR 37.44 billion, reflects a drop of PKR 1.19 billion when mapped against December 2023 number. So this is a strategic drive. We're considering the macroeconomic situation, particularly the higher interest rate environment. We have been reducing our consumer exposures. The strategy helps to contain losses in such a volatile scenario rather than building up the consumer financing base. On MCB domestic advances are PKR 675 billion versus PKR 581 billion reported as of year-end, So there is an uptake of around PKR 94.4 billion. This is resulted in improvement in market share from 4.71% as of to 5.60 as of September 30, 2024. On the NPL front, during the 9-months period, an addition of PKR 1.2 billion. However, during the third quarter, there was a reduction in our NPL base to the tune of PKR 1.9 billion. With reference to the yields that we have generated in 9 months period, 18.15% as opposed to 17.70% reported for the corresponding period last year. As an update on NAV recovery, we have recovered PKR 772 million during the 9-months period, taking our overall recovery number to PKR 10.4 billion, which translates into approximately 85% of the PKR 29.6 billion NPL stock transfer from NAV over a span of 7 years. Investment front, treasury was PKR 345 billion versus PKR 354 billion, a drop of PKR 10 billion. On the PIB front fixed, an increase of 30 floaters, PKR 207 billion added to the base. That takes our investment base to PKR 1.5 trillion as opposed to PKR 1.284 billion. In terms of the movement on surplus and deficit on revaluation of securities, we have moved from a deficit of PKR 23.42 billion as of year-end to a surplus of PKR 3.78 billion on the portfolio-wide basis. The concentration level within the PIB segment of the floaters approximately 67%, 68% on average, and the balancing around 30-odd percent is held by the fixed-rate bonds. Now moving on to the deposit side. As I covered earlier, we have crossed the PKR 2 trillion benchmark, a base of PKR 2.1 trillion on a standalone basis, out of which the current account is around PKR 978 billion. The concentration level is almost 47%. Our saving deposits, a base of PKR 1.028 trillion, this takes our CASA to an industry high base of 97.17% as of September 30, 2024. Now moving on to the performance numbers. The gross markup income PKR 281 billion, as opposed to PKR 235 billion, so a positive variance of PKR 46.3 billion. On the expense side, a negative variance of PKR 37.7 billion, so resultantly our net markup income for the 9 months was reported PKR 115 billion as opposed to PKR 106 billion. I'll just quickly take you through the analysis for the 9 months. You would observe that on the earning asset side, gross advances, PKR 600 billion base at a yield of 18.15% reflects a drop in average advances to the tune of PKR 30.7 billion, where there is an increase of 46 basis points in the yields. So resultantly, our gross markup in income and advances was down by PKR 1.9 billion, primarily on account of the volume variance with a tune of PKR 4 billion, which was compensated to an extent by price variance of PKR 2.1 billion. On the investment front, an average base of 1.327 at a yield of 19.35%. The average investment base was up by PKR 248 billion, increasing yield of 158 basis points. So our gross markup income on investments was up by decent PKR 49 billion. Much of it coming in from the volume variance of PKR 33 billion, whereas PKR 15.8 billion was contributed by the price variance. On the deposit side, PKR 1.882 trillion at a cost of [ 9.7 ] as opposed to 51.578%. So our average deposit base is up by PKR 304 billion, increase in cost of 157 basis points. Resultantly, the gross deposit cost was up by PKR 41 billion. Pertaining to highlight that on an average, the current account concentration is 47%, mapping our absolute numbers. Resultantly, our spread for the 9 months period was 6.56%, which reflects a slight dilution of around 39 bps when mapped with corresponding period last year. Now coming back to the performance numbers, noninterest income, a base of 26.85 billion, reflects an increase of PKR 4.3 billion, translating into 19% growth. The key revenues that contributed to this increase were fee commission income, which was up by an additional 15%. Major revenues that contributed to this increase was branch banking fee, as we continuously try and add more products and services to our [ minimum ]. Debit card income, and the theme here -- there is personalization. So what we are trying to do is map the life cycle -- lifestyle of our customers, design products accordingly, build alliances and then generate revenues from this particular circle. Guarantees income and trade digital incomes are the others that contributed positively to the fee growth. Apart from that, on the ForEx side, we added PKR 1.9 billion, approximately 27% growth and dividend income was up by decent PKR 400 million plus. So despite the inflationary pressures, we were able to contain the operating expenses increased to 17.48% for the 9-month period, a base of 43.90%. This sums up to a profit before credit allowance of PKR 95.78 billion, a decrease of PKR 6.4 billion, translating to 7.2%. Credit allowance, a mutual charge of PKR 670 million as opposed to PKR 1.24 billion charge for corresponding period last year. So a positive variance of PKR 600 million reported there. This takes our profit before tax to PKR 95.11 billion versus PKR 88.10 billion. So a variance of PKR 7 billion translates to 8% growth. On the taxation side, the tax accounted for is 39% corporate tax rate plus 10% super tax. So 49% effective tax rate for the 9-month period. Tax incidents of PKR 46.66 billion, takes up, after tax to PKR 48.45 billion as opposed to PKR 44.15 billion reported for 2023. Some capital ratios. So our capital adequacy ratio on a stand-alone basis, September 30 is PKR 21.85 billion, Tier 1 of PKR 17.15 billion. So decent buffer on top of the regulatory requirement of 11.50 as of now. So bank's total capital ratio -- other ratio, sorry, a leverage of 6.17, whereas equity coverage and a net stable funding ratio are well above this asset requirement of 100%. Now a snapshot of MCB Islamic. So as we have guided the market, traction is underway as we speak, with an effective date of 15th of November, where 39 branches of MCB Bank will be carved out and passed on to our wholly owned Islamic subsidiary. So the number that we observed in the bottom right chart of 247 branches as of September 30, we expect to close this year at around 300 branches for our wholly owned Islamic subsidiary. So the strategy on the brick-and-mortar side is to scale up the Islamic operations, and maybe contain and consolidate the conventional side. So we expect to close this year at around 1,400 branches, and maybe with the passage of time, you will see more traction on the Islamic front but with some consolidation happening on the conventional side. With reference to the financial numbers, PKR 240 billion deposit base, a growth of 17% reported by our wholly-owned subsidiary. Investment base of PKR 154 billion, gross advances of around PKR 93 billion. In terms of profitability, we have made PKR 6.67 billion profit before tax as opposed to PKR 7.51 billion for the corresponding period last year, a negative variance of PKR 814 million. So this sums up the presentation. Over to you, Raza, for the Q&A. Thank you.

Hammad, thank you so much for the presentation. [Operator Instructions] On the first question in the chat box comes from Waleed Rathore. And he has 2 questions. His first question is, are there any maturities expected in 4Q? And what was the yield of the maturing instruments?

Well, some maturities on the treasury bills are due in the fourth quarter. And obviously, since the floaters are pegged with the treasury bill maturities, there would be some floaters, which would be repriced in the fourth quarter. We do understand that the drop in the yields of investments secondary market is more pronounced than the one that we have seen on the discount rate side. So 450 basis points on the discount side where the yields on the investments are the retracted more than 700 basis points on average generally. So we believe that there would be some compression in place starting first quarter 2025, not much of an impact in the fourth quarter since the repricing of the maturity is near to the tail end of the year.

Got it. The second question is what is the bank's gross ADR? And what effective tax rate can we expect for the full year 2024 if the ADR ratio closes between 40% and 50%?

Well, since it's a moving number, I can just give you an estimate on that. Currently, the ADR based on September 30 financials is close to 35%. And while we aim to achieve the 50% benchmark by the end of this year, although I do understand it's a very challenging ask, and this applies to the entire banking -- not specific to MCB. Since most of the banks, most of the top 4 or 5 banks are with the ranges, plus minus 2% or 3%, not more than that. So if the ADR for MCB remains between 40% to 50%, the tax incidence would be close to PKR 7 billion, that's an estimate that we carry as of now.

Understood. The next question again in the chat box is from Deepa Khatri. And she's asking why your ROE declined from 2023 December? How will you manage to increase it in the near future?

Thank you for your question, Deepa. So if you map MCB's ROE with last year, there's a slight dilution, very slight dilution. However, as I said earlier, the dropping yields of the investment base is more pronounced than what we have observed on the discount rate side. Plus, you need to factor in that there is a serious negative carry on the saving deposits as of now. So currently, with 17.5% discount rate, the banks -- the conventional banks have to offer 16% as the MDR, have to keep 6% CRR. So you add another 100 basis points to the cost, plus the monthly payment frequency, you add in the 70 basis points. So effectively, PKR 1 of saving deposit is costing to be around 17.7%. Whereas on the yield side, if I even map it with a 3-month treasury bill, it's around 15.3%. So there is 250, 260 basis points negative carry for every conventional bank on the saving deposits portfolio. How do we manage that or how do we take care of that? The only solution that we have is to mobilize low-cost deposit base. And we have been saying that. You would have observed that -- if you're following MCB, you would have observed that we have improved our current account concentration from around 37% back in 2019, '20 to 47% to 48% as of now, averaging around 47% now. And the guidance that we gave to the market was to scale it up to 55% in the times to come. So hopefully, that will help us in managing the drop in ROE that you have pointed out.

The next question is from Hassan Raza. It's a mix of deposit growth in ADR. So he's asking how do you see deposit growth in 4Q in the backdrop of the coming ADR-based tax incidence? And assuming that there is a shift on the regulatory side and this rule on ADR becomes on average ADR through the year, do you think it will make banks a lot more selective in terms of picking up deposits, and therefore, lead to a secular low growth in overall deposits.

Thank you for the question. So the take is that considering the current discount rate and if they return that as saving deposit generate, I believe, if we map it with other investment revenues, it's the highest currently. So 16% is what you get if you deploy your funds in a saving account in a conventional bank as minimum deposit I'm not discussing the special rates here. So I do understand that you can top it up with another 50 basis points, if you are talking about a chunkier or a large volume of deposits. So in the fourth quarter, as far as MCB goes, we have been sharing that with the market that we don't have even a single rupee of special rate deposit parked in our domestic local currency franchise. So whatever you see in the saving deposits portfolio is at rack rates. That's the minimum deposit rate that we offer. So there has been a natural flow towards saving account. As I shared earlier, the yields are way ahead of other investment revenues on a saving account. And we do expect the natural flow to be there. And we are not going to be shy away from this deposit. That's the core as far as we are concerned. That stays with the institution with respect to the interest rate movement, we have a loyal customer base with us. So we will continue with the deposit base, simultaneously working on improving our advances space. So hopefully, we will see some decent traction there. So with reference to your other comment on the average ADR, that applies to the next year, which starts from the 1st of January. And it is again -- it is again coming out of an article that was published a few days back that FBR is currently working or thinking on revising the formula for ADR rather than the last of the calendar year, it might be revised to average. So this would come into play for the next year, and we will strategize accordingly. So obviously, we can't be selective on any deposit that come knocks at our door, and we have to offer them minimum deposit. We can't say no to that. There's no such option at all.

Got it. The next question in the chat box is from Umar Hayat, and he's asking, can we expect the same payout next year also?

Well, Umar thank you for the question. As I said earlier, the top end yields on the investment side is more pronounced. We do expect some NIM compression to shape up into next year. However, it's a bit too early to comment on the payout side. I believe there's a good strong case of continuing with the same payouts. As I said earlier, the strategy has been to mobilize no cost current accounts. And if we are able to gain the traction that we anticipate by the tail end of this year, you will see [Foreign Language] similar or better results in the times.

The next question is from Syed Murtaza Hassan, and he is asking where do you see interest rates going to by the end of December?

Well, our take is that there is room for another 200 to 250 basis points cut as depicted by the secondary market yields and what we discussed in our [indiscernible] So yes, around 250 basis points in other parts. So we might see the interest rate to 115% by the end of this year.

Thank you. The next question is from Shankar Talreja. I think there are 2 questions. Can we expect a prolonged dent in net interest margins of banks or at least for 2025, given that demand for advances may continue to be lower in the medium term? And the second question is what sort of advances growth you are expecting for the industry in 2025?

Well, I believe with the average thing coming into play, the average ADR Maintenance coming into play. There would be a push out of drive to maintain similar credit exposures starting from day 1 of 2025. So there won't be some decent growth. But if we are taking 2024 December as a base, I believe the growth potential would be limited to around 10% of [ north ] approximately. So that's the maximum that I foresee in the current circumstances. I do understand that there is a limited credit appetite out there for the financial institutions to actually go down. And then we can look at other revenues, other business opportunities which are out there, expanding our credit exposures, although we are currently working with a selective few names. There is the bottom line that we have been sharing with the market is that anything and everything that falls within the risk appetite that we have defined ourselves, we'll take exposure to that. I believe with the tax incidence being so huge, we have to look into all the available avenues. So we might be expanding the international credit exposure footprint plus the domestic exposures that we have currently. Based on the current exercise that we are in, we have observed that there is a huge unutilized limit assigned to certain companies. And as we speak, we are after them to ensure that, that limits get utilized. The impact of which, as you were pointing out on the net interest margins is expected since the entire industry is running for the same pool of good quality assets. So no other bank is going to increase its credit charge by balancing out the tax incidence.

The next question is from Abbdul Rehman Siddiqui, and he's asking, can you please share how the cost of savings deposits is 17.7%? I believe that was the number in the presentation, maybe it's the average for the 9 months, but...

No, I just covered that in an answer. So Rehman the minimum deposit rate as of now on the saving deposit is 16%. And we are supposed to maintain 6% CRR, cash reserve with the Central Bank of Pakistan. So approximately 94% of the saving deposits have left to the bank. So if you price that in, that adds 100 basis points to the cost, plus the payout on the saving accounts selected products is on a monthly basis, and we have seen some greater traction on that particular product. So if you factor that into the equation, your approximate cost for a saving deposit as of now would be around 70.7%.

The next question is from Haddiqa Shahid. And she's asking, given the lower gross ADR of MCB, is the bank considering opportunities to lend to NBFIs to meet its ADR requirement? As seen in 2022, the banking sector began aggressive lending to NBFIs by the end of the year to meet the threshold.

Thank you Haddiqa for the questions. As I said, I'm exploring each and every avenue to actually increase our credit portfolio. And again, the bottom line remains that anything and everything fall in within the risk appetite.

Hammad, as of right now, we don't seem to have questions in the chat box. So maybe I'll take the opportunity to ask a couple of questions of my own. My first question is, obviously, it's a comment first up that, congratulations on reaching the PKR 2 trillion deposit mark. But what that is accompanied by is a 6.1% market share on the domestic side in terms of deposits. Is that a number that you're comfortable with? Or given MCB's standing and reputation and brand, do you think that the bank could aim for a higher market share? Or do you think that you're comfortable where you are?

No, we are not at all comfortable where we are. We would definitely want to increase our domestic deposit market share. And however, having said that, Raza, the strategy is to actually focus more on the current account mobilization. And we do understand that it's a bit challenging with the current interest rate regime [indiscernible] no current accounts. So as I said earlier, there has been a natural pull towards saving accounts. We have seen tremendous flows to the savings accounts, particularly the monthly payout what I was referring to. So -- I can't share a definitive number as of now, where we would like to see, but we'll definitely like to increase our market share. We are working on different lines to improve our market share on the deposit side. And in the times to come, we would see some decent traction. Even if you map MCB quarter-on-quarter, you would see an increase in our market share, second quarter versus third quarter. So that is our core business line. So we are not going to shy away from this particular line, and we'll continue building up [indiscernible].

Understood. My second question is with respect to your cost to income, I believe it was roughly 30% in your results and which is probably on the lower side in the whole banking sector. But we are aware that interest rates, of course, are at least -- are still on the higher side. And as they normalize, as conditions normalize, is there a sort of a recurring or sustainable cost to income that MCB has in mind?

Well, traditionally, if you look at MCB, Raza, we have been operating below 40% for a very long period of time. So the benchmark for the shorter term for us is 35%. We do understand there would be some pressure on revenues as we said ahead and are considering that what we have as an operating expense block, it would be very difficult to reduce it from the current level. So we -- what we can do at max is to continue to increase which we have been doing for the last many years. And despite on all the spends of the technology on the digital transformation side, on the brick-and-mortar as we have been expanded or improving our brick-and-mortar channels. So I believe 35% as a benchmark, it has to remain below 40% i would say.

Got it. We have a question from the line of Syed Fawad Baseer.

Am I audible?