ARMED with assets of Rs672.5bn and an ample amount of long-term government papers to park them in, the country’s sixth largest bank saw its bottom line grow faster than that of three of the big-five banks in the six months ending June 30.

Bank Alfalah Ltd (BAFL) reported unconsolidated after-tax earnings of over Rs2.6bn in the period (1HCY14), up a solid 34.5pc from Rs1.94bn in 1HCY13. Its earnings-per-share (eps) worked out at Rs1.93, against Rs1.44 last year. The bank did not announce any dividend.

Investments: The bank followed the broader sector’s practice of shuffling the investment book in favour of high-yielding Pakistan Investment Bonds (PIBs). While its net investments rose by over 20pc to Rs264bn, its PIB holdings simultaneously went up by a much bigger 349pc to reach Rs143.7bn during the period. Conversely, its T-bill holdings went down to Rs58.35bn from Rs116.5bn — a drop of 50pc.

This helped the bank post a net interest income of around Rs9.6bn, a rise of 21.3pc over last year. And this was despite the marginal reduction in the banking sector’s spreads to 6.1pc in the same period, pointed out Zeeshan Afzal, a senior analyst at Topline Securities.

The bank’s expansion plan has resulted in the addition of four conventional banking and two Islamic banking branches in the first half of the year

Citing key takeaways from the bank’s conference call with analysts, Arif Habib analysts wrote in a recent report that “noticeable in the bank’s financials were its increasing exposure in PIBs, which reached Rs77.1bn (over 11.5pc of total assets) under ‘available for sale’ securities by end-June, from Rs17.7bn (over 2.8pc of assets) by end-December.” The report added that BAFL’s investment-to-deposit ratio improved to 48pc, from 42pc.

Advances: BAFL’s advances registered a rise of 5.8pc to reach around Rs276bn by end-June, outpacing the banking industry’s credit growth of 4.4pc during the same period.

Arif Habib analysts attributed the controlled rise in the bank’s loan portfolio to its “management’s focus on asset cleansing, rather than pushing net interest margins through risky assets. As a result, its asset quality improved marginally, where the reported infection ratio seems to have come down by 40 basis points to 6.2pc”.

Non-performing loans (NPLs) on the bank’s books dropped Rs154m to reach Rs17.8bn. As a result, the bank was able to reduce its provisions against toxic debt to Rs202.9m, from Rs483m at end-December. Most of this decrease came in the second quarter, when provisions fell to Rs140.7m, from Rs549.2m in the same quarter last year.

Deposits: The bank’s deposit base expanded by 5.7pc to reach Rs555.7bn by end-June, and formed 6.9pc of the industry’s deposits. Current accounts grew by a decent 16pc to almost Rs217bn. However, some of this growth might be temporary, as customers typically transfer balances from savings to current accounts to escape from mandatory Zakat deduction ahead of Ramazan, which had fallen in June this year. Consequently, savings accounts witnessed a dip of around 20pc to Rs138.6bn by period-end.

However, high-cost fixed deposits rose to over Rs142bn, and were largely responsible for the 14.1pc rise in the bank’s interest expenses, which reached Rs15.5bn. It also led to the bank’s ratio of current and savings accounts (Casa) to drop to 71pc, from 74.6pc in the same period last year.

Tied to this deposit growth has been BAFL’s branch expansion plan, which has seen the addition of four conventional banking and two Islamic banking branches during the six months. The bank’s total network now comprises 427 conventional banking, 11 international and 142 Islamic banking branches.

Given this expansion, the bank’s non-interest expenses grew by 19.8pc to Rs9.7bn. Administrative expenses went up by a more modest 16pc to Rs9.4bn. Higher provisions against off-balance sheet obligations (up to Rs54.3m) and against ‘other assets’ (at Rs170m, against a reversal of Rs36m last year) also contributed to the higher non-core expenses.

Non-interest income: The non-core side of the business amply supplemented the core operations during the period, with income from this segment increasing by 13pc to Rs4.37bn as a result of a 56pc rise in income from forex dealings, which clocked in at Rs984.3m.

Income from banking fees and commissions (up 12.8pc to Rs1.58bn) and dividends (up 18.6pc to Rs304m) also supplement non-core earnings. However, the bank recorded a 31.5pc reduction in capital gains, which reached slightly over Rs457mn.

The period also saw the bank enter the mobile banking segment with the launch of ‘Mobile Paisa’ in collaboration with the cellular company Warid Telecom.

Published in Dawn, Economic & Business, Sep 15th, 2014