With its core business sailing smoothly, Allied Bank appears to be now gearing to invest in technological and infrastructure upgrades and alternative revenue streams to prop up future earnings.

The country’s fifth largest bank, with over Rs865.8bn in assets, posted strong first quarter results.

Last year marked, albeit belatedly, an entry into the Islamic banking space. Some sector watchers expect the bank to open 15-20 Islamic banking branches this year, up from the current four.

In fact, branch expansion is one of the major goals of the bank. It had opened 50 new outlets last year, and its total network extended to 998 branches by end-March.

The focus on the retail side was also reflected by its decision to officially separate its commercial and retail banking groups during the year.

For the quarter ending March 31 (1QCY15), the bank posted after-tax earnings of Rs4.21bn, up a healthy 30pc from Rs3.24bn in the same period last year. This corresponded with earnings-per-share of Rs3.68, against last year’s Rs2.83. The bank announced a dividend of Rs1.75 per share.

This followed a slightly muted performance during CY14, when the bank’s after-tax profit grew by a marginal 2.5pc to Rs15bn, trailing behind the industry’s earnings growth of over 45pc.

Major growth drivers remained the strong deposit mobilisation in the retail and commercial segments, along with planned growth in conventional network and alternative delivery channels — ABL CEO Tariq Mahmood

“Major growth drivers remained the strong deposit mobilisation in the retail and commercial segments, along with a proactive strategy geared towards continuously enhancing the asset quality of the bank, and planned growth in conventional network and alternative delivery channels, enabling expansion in outreach,” wrote the bank’s CEO Tariq Mahmood in his CY14 annual report to shareholders.

Meanwhile, the rise in first quarter earnings came on the back of a 23pc growth in core income, which reached Rs18.5bn. Unsurprisingly, this was primarily a result of the 13pc quarterly rise in the bank’s overall portfolio of Pakistan Investment Bonds (PIBs), which went from around Rs264bn to Rs297.3bn during the period.

Nonetheless, a closer look at the investment book shows that the bulk of this additional investment in PIBs was classified as available-for-sale (AFS). The AFS PIB portfolio jumped from Rs72.4bn to Rs110.5bn during the three months, while PIBs in the held-to-maturity category were largely static at around Rs185bn.

This realignment is likely to result in healthy revaluation gains for the bank in a declining interest rate scenario. “Banks get hefty revaluation gains on their AFS PIB portfolios when interest rates are cut, as bond prices and interest rates move in opposite directions,” explained a sector source.

“In its conference call, the [management] stated that the bank continued to invest surplus funds in PIBs owing to muted loan demand, which increased the concentration of PIBs in total investments to 68pc. [However], the bank is not very optimistic about increasing its exposure to PIBs any further given the reduced spread on the bonds, which will be locked for 3-5 years,” noted Elixir Securities analyst Ujala Adnan in a research report.

“The current asset allocation will largely shield ABL from declining interest rates in 2015, as 67pc of the bank’s investments remain unaffected. At Rs20bn, the bank also boasts the largest equity investment portfolio amongst private banks,” pointed out Amreen Soorani, an analyst at JS Research.

In 1QCY15, the bank earned dividend income of Rs1.27bn, which helped its overall non-interest income to rise 9.3pc to Rs3.05bn.

Advances: On the flip side, the bank’s loan book shrank 2.6pc on a quarterly basis to around Rs298bn by end-March. In its post-result announcement presentation, ABL attributed this dip to limited fresh credit opportunities and seasonal factors.

Deposits: The bank’s ratio of current and savings accounts to total deposits rose to 75pc by March 31, from 69pc at end-CY13. Tied with the bank’s branch expansion strategy is the goal to shore up more low-cost customer deposits.

This seems to be working, as the bank’s non-remunerative current accounts rose slightly to Rs211.1bn, while high-cost term deposits declined by 7.3pc to Rs169.6bn.

Provisions: The bank booked Rs729.7m in provisions against non-performing loans in 1QCY15, against a reversal of Rs38.5m in 1QCY14.

ABL was among a consortium of banks whose syndicated financing to Byco Petroleum had gone down the drain last year. The bank’s exposure to the refinery stood at over Rs2.74bn. While the participating banks were allowed to book the necessary provisions by June, ABL has already booked three quarters of the required provisions against the loan, and will book the remaining amount before the end of this quarter.

The higher provisions also improved the bank’s coverage ratio to 90.6pc from 86.4pc at end-December.

Future outlook: Discussing the outlook for the banking sector, ABL’s CEO noted in his annual CY14 report that “the growth momentum sector is contingent on various factors, including a surge in aggregate demand, performance of the large-scale manufacturing sector, control over the energy situation and the trend of government borrowing from the banking sector etc”.

Published in Dawn, Economic & Business, May 25th, 2015

On a mobile phone? Get the Dawn Mobile App: Apple Store | Google Play