Investment in branch expansion weighs on Meezan Bank’s profits

Deposits continue to grow rapidly, diluting impact of lower interest rates.

KARACHI:

After an outstanding year in 2011, Meezan Bank has had a decidedly subdued year in 2012, as the cost of rapidly increasing its branch network begins to act as a drag on its profitability.

Revenues for the bank, defined as net interest income plus non-interest income, grew by 8.3% to Rs12.9 billion for the calendar year 2012, up by 8.3% – or less than inflation. Profits were up an even slower pace of just 3.4% to hit Rs3.5 billion.

The slowing results will no doubt be disappointing to investors whose hopes had been raised by Meezan Bank’s meteoric rise in profits during 2011, when net income more than doubled. In Wednesday’s trading on the Karachi Stock Exchange, Meezan Bank stock closed at Rs27.75 per share, down about 3.7% for the day.

Yet the pessimism of investors may be premature. The slowdown in profits is, in large part, due to a 17% rise in the cost of running the bank’s branch network. During 2012, Meezan opened 35 branches, taking its total network up to 310 branches in 90 cities across the country.

That expansion in branch network has allowed Meezan to continue increasing its deposit base at breakneck speed. Deposits grew by 36% during 2012 to reach Rs230 billion. By comparison, total banking sector deposits rose by a much slower 13.8% to reach Rs6.7 trillion during that same period, according to data provided by the State Bank of Pakistan.

And Meezan Bank has a lower cost of deposits than many of its conventional peers. During 2012, its average cost of deposits came to just under 5.6%, which is lower than the minimum interest rate that conventional banks are now being required to pay out on deposits. Islamic banks, of which Meezan is the largest, are exempt from that requirement.

However, while the bank eschews the word “interest”, its lending rates are connected to overall interest rates in the country, and the State Bank’s policy of cutting the benchmark discount rate by 4.5% over 18 months has hurt the bank’s overall lending rate. Nonetheless, given its rapid branch expansion and its ability to continue growing its deposit base without increasing its cost of funds, Meezan Bank remains poised for strong growth in the coming year.

Officials from Meezan Bank declined to comment.

Published in The Express Tribune, February 21^st, 2013.

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