Corporate results: Provisions for bad loans eat up Askari Bank’s profitability

Reports a loss of Rs4.1 billion for the semi-annual period, announces 55% rights share issue .

Taimour Khan July 23, 2013
The provisions for non-performing loans rose nine times in the semi-annual period to Rs6.58 billion. PHOTO: FILE


On Tuesday, Askari Bank reported a loss of Rs4.1 billion for the semi-annual period ended June 30 2013, which was down from profit of Rs1 billion for the corresponding period last year, pulled down mainly by a gargantuan increase in provisions for bad loans that the bank made out.

According to a notice sent by the company to the Karachi Stock Exchange, bank’s core business which is represented by net interest income – the difference between the interest earned by the bank and the interest expensed – fell to Rs3.8 billion in the period under review compared to Rs4.6 billion in the corresponding half-year period of last year as the central bank continues to slash interest rates in successive monetary policies, therefore shrinking banking spreads.

Askari Bank’s Achilles heel was the enormous amount it provisioned against non-performing loans. The provisions rose nine times in the semi-annual period to Rs6.58 billion, compared to a meagre Rs0.727 billion in the corresponding period of last year, bringing net interest income after provisions down 48% to Rs2.02 billion. Major chunk of provisioning was, however, done in the last quarter after post-acquisition where it was recorded 24 times higher at Rs6.36 billion in the quarter against Rs0.266 billion in the corresponding quarter, hurting overall semi-annual earnings statement of the company.

“Provision for loans is the biggest expense for the company. It may have decided to get rid of all its bad loans at once now that it has come under new management to show profitability in the future,” said Arif Habib Corporation Head of Research Khurram Shahzad.

Askari Bank was recently acquired by cash-rich Fauji Group which paid for the deal with internally generated cash revenue. The new management seems to be cleaning the company’s books all at once instead of dragging the process.

According to Senior Research Analyst at Lackson Investment Kashif Imran, Askari Bank had close to Rs26 billion in non-performing loans and around Rs19 billion in provisions for these loans as of December 2012. The extra Rs6.58 billion  in loan provisions may have been used to effectively cover the remaining non-performing loans, but we will have to wait for detailed results to ascertain how much.

However, management has also announced a 55% rights share issue, that is 55 shares for every 100 shares held at a par value of Rs10 per share, in an attempt to raise fresh cash, which does cast some doubt on whether the amount of cash available through the Fauji Group payout is enough.

Dividend income witnessed a drop as well falling to Rs107 million for the half-year ended June 30, 2013 from Rs739 million in the corresponding period last year, while earnings from foreign currencies fell from Rs495 million to Rs230 million for the half-year period. However, these losses were offset by gains from securities, which rose to Rs572 million in the period against Rs77 million in the corresponding period in the previous year.

Going forward

The banking sector has mostly been upbeat since the Pakistan Muslim League-Nawaz government came to power. This coupled with increased private sector confidence have led investors to maintain optimism.”

“We have a positive outlook for the sector in general. Investor outlook has been positive ever since the new government came to power, and we don’t see that changing in the medium term,” said Elixir Securities Head of Research Azfar Naseem

The payout by Fauji Group and issuance of rights shares will cast some doubt on the cash positions of the holding group, which is in the process of diversifying its business. However, if the provisions for this quarter account for most of the non-performing loans then the company can be expected to post positive results in the future.

Published in The Express Tribune, July 24th, 2013.

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