WHEN Bank Alfalah’s management and shareholders meet later this week, one of the items on the agenda is the approval for an equity injection of up to Rs300m in the bank’s brokerage subsidiary.

The decision to invest further in Alfalah Securities is yet another example of the bank investing in alternative businesses. During 2014, it undertook multiple initiatives that, it hopes, will help it weather expected decline in income from government debt instruments this year.

“They clearly want to turn it into a profit-making operation,” said Taurus Securities analyst Zeeshan Afzal while discussing the proposed equity injection in the brokerage subsidiary. The standalone balance sheet of the subsidiary for CY14 shows that its assets dwindled to Rs64.2m, and its losses rose from Rs11.6m in CY13 to Rs18.1m.

After witnessing a dull 2013, the bank’s performance rebounded in 2014

Meanwhile, the bank continues to remain a strong player in the small and medium enterprise segment and it will be one of its key focus areas going forward. “Bank Alfalah (BAFL) has shown intent to pursue SME and consumer sectors more actively to generate higher credit spread in an overall muted volume growth environment,” wrote KASB Securities analyst Farid Aliani in a research report.

Last week, news emerged that the bank has entered into an eight-year collaboration with USAID to provide financial services to SMEs across the country. According to details, the US will provide $10m, which will back $60m worth of loans given by partnering banks to SMEs.

“Active support has been provided to agro-based businesses, particularly the cotton and wheat sectors. The SME business saw significant transformation from simple lending solutions to understanding the holistic needs of customers and providing complete SME banking solutions to them,” the bank’s directors wrote in their annual report to shareholders.

“The focus in 2014 remained on implementation of the revamped business model under the advisory services of International Finance Corporation (IFC). We have successfully transformed our business strategy to serve this sector [and] are looking to provide end-to-end solutions, which focus on meeting the financial, non-financial, transactional, investment and advisory needs of SME customers,” they added.

And in December, the bank also received an equity injection of $67m from the IFC, for a 15pc stake in the bank, boosting its capital adequacy ratio to 12.8pc.

After witnessing a dull 2013, the bank’s performance rebounded in 2014. It posted an unconsolidated profit-after-tax of Rs5.64bn for the year, up 20.6pc from Rs4.68bn in CY13. This translated into earnings-per-share of Rs4.09, against Rs3.41 last year. It announced a cash dividend of Rs2 per share.

This came on the back of a sizable 26pc rise in interest income to Rs55.4bn. Unsurprisingly, this was largely a result of the addition of almost Rs152bn worth of Pakistan Investment Bonds to the balance sheet, taking its stock to Rs183.8bn by year-end. This also catapulted the bank’s net investments by 45pc to over Rs318bn and the investment-to-deposit ratio to 53.5pc from 41.8pc.

The additional investment into PIBs was partly made possible by the mobilisation of cheap customer deposits. Against the industry’s growth of 11pc in the year, BAFL’s deposits grew 15pc to almost Rs606bn. Current accounts went up by 15.2pc to Rs215.5bn, while savings accounts rose 13.4pc to Rs196.1bn.

However, fixed deposits also grew sharply to Rs153.5bn from Rs123.6bn in 2013; the bank referred to this as a ‘one-off opportunistic increase’.

Elixir Securities analyst Ujala Adnan noted that the bank’s “deposit mix was compromised during the year as it increased its fixed deposits to 25pc of total deposits, while savings and current non-remunerative accounts fell to 32pc and 6pc respectively”.

Advances: On the other hand, the bank also increased its lending, with its net advances growing 11.4pc to Rs290.6bn in CY14. This was slightly higher than the industry’s loan growth of around 10pc. According to its annual report, the energy sector had the highest share in the bank’s gross advances at 16pc, followed by textile composites (8.4pc) and individuals (8pc).

Referring to the bank’s conference call with analysts, Adnan said “there would be muted credit offtake, while BAFL would be capitilising on increasing its lending to higher return-generating areas such as SMEs and consumer loans”.

“It can improve its lending, particularly on the consumer side [owing to higher margins on consumer loans]. Apart from that, it has the second-largest Islamic banking operation, which it can utilise for further growth,” added Afzal.

Yet, going against the industry-wide trend, BAFL’s non-performing loans (NPLs) registered an 8pc increase and reached Rs19.4bn. While information regarding the specific loans that went sour during the year wasn’t available, by the end of December, the oil and gas sector had the biggest share in the NPL pile, followed by textile composites. This forced the bank to raise its provisions against NPLs to Rs1.45bn from Rs0.95bn in CY13.

Cost of operations: The bank has been on an aggressive branch expansion spree over the past few years, and added 74 new branches during CY14 to bring its network to 648 outlets, including 157 Islamic banking ones. This was largely responsible for the heavy 20.5pc growth in non-core expenses to Rs20.9bn in the year.

Published in Dawn, Economic & Business, March 23rd, 2015

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