Bank Alfalah’s profits take a hit amid low-interest environment

Posts profit of Rs1.94b as core income drops.

KARACHI:

Bank Alfalah, the country’s sixth largest bank failed to impress its stakeholders in the semi-annual period as profitability dropped due to the State Bank of Pakistan’s expansionary monetary policy, which has taken its toll not on just Bank Alfalah, but the whole banking sector.

According to a notice sent to the Karachi Stock Exchange, the bank’s net income for the first of half 2013, ending June 30, 2013, fell 16% to Rs1.94 billion, compared to Rs2.33 billion in the corresponding half-year period of 2012. The announcement was not accompanied with a pay-out for the period.

Worryingly for the bank, its core income dropped, and the bulk of the support for the bottom-line came from non-core operations, particularly a buoyant capital market that allowed the bank to sell stocks and government bonds for a much higher profit than last year.

As the central bank continues relying on expansionary monetary policy – lowering interest rates amid falling inflation in the period – the policy hurt Bank Alfalah’s core operations as its net interest income clocked in 13.7% lower than the corresponding semi-annual period to Rs7.86 billion. A bank’s net interest income is defined as the difference between the interest rate it charges its borrowers and the interest rate it pays out to depositors.



Bank Alfalah’s – owned by the Abu Dhabi Group – provisioning expenses towards bad loans, however, took a jump as the bank shifted a decent amount of loans to the private sector, and cut down its lending portfolio to the government – which the State Bank wants. Thus, squeezing net interest margins and a higher provisioning expense shrunk bank’s net interest income after provisions by 14.1% to Rs6.99 billion.

Non-core income (earnings from fees, dividends and investment), however, moved in the opposite but desirable direction. It grew 26% to Rs3.89 billion for the period owing to the gain on sale of securities head posting a gain of seven times to Rs667 million, compared to a meagre Rs98.6 million in the corresponding semi-annual period of 2012.

The fact that the main earnings driver for the bank was rising profits from equity and fixed income trading came at a time when the stock market was bullish may be worrisome for Bank Alfalah, if the stock market, which is already overbought, undergoes a correction.

In March 2013, Bank Alfalah issued term finance certificates which were almost four times oversubscribed. The bank managed to raise Rs4.08 billion compared to Rs1.25 billion it initially targeted.

Keeping in view the International Monetary Fund’s advice to the central bank to raise the interest rates, Bank Alfalah’s bond sale can also take a hit as interest rates and bond prices move in inverse correlation.

On the flipside if the SBP reverts to a contractionary monetary policy, a higher interest rate environment will aid a strategic shift and outlook shift on the banks as net interest margins expand and core-income rises.

Furthermore, a potential divestment of Warid Telecom by the Abu Dhabi Group will lead to a sizable gain for the bank.

Published in The Express Tribune, August 16^th, 2013.

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