KARACHI - The fee income growth of the MCB Bank is expected to increase further if MCB succeeded in its bid to acquire the RBS Pakistan operations, which has both a strong infrastructure and quality human resource, says JS report. This probable development could boost the consumer financing business of the Bank, which is under pressure at present on account of higher growth in NPLs. Nonetheless, it may regain momentum in the upcoming months of current calendar year once economy starts picking up, report assumes. It is important to note here that being one of the late entrants in the consumer financing, MCBs fee income growth lagged that of its peers with lowest fee income in the Big-4 banks. According to report, the bank is currently enjoying deep discount to regional peers in terms of industry valuation. It has superior asset quality against persistent local peers with Higher Net Interest Margins (NIMs) being provided room to MCB to absorb predictable fall in KIBOR in months to come. Report also envisaged that the Pension Fund advantage of the Bank wwould remain intact. Farhan Rizvi, financial analyst at JS Research said the spreads of banking industry is expected to decline by 60-80 bps from the current 7.47 per cent (in May 2009) by the end of the year, however, MCBs cost efficient position, would ensure it has more capacity to absorb the impact of this decline than peers. He said the bank currently carries more than Rs6bn of unrealised capital gains which are to be recognised over 3 years. However, since pension fund sold off most of its holding in MCB, the quantum of gains is expected to decline. Thus the cost ratio would still remain lowest amongst major peers. While MCBs NPL to advances ratio has deteriorated to 8.0 per cent in 1Q2009 as against 4.9 per cent in Dec 2007, it still remains significantly superior to its peers average of 10.1 per cent, he added. He said the valuation premium of MCB is premised on its expected out performance with a much superior 3 years (2009-11) average ROE of 21.5 per cent versus local peers average of 14 per cent. The bank has historically traded at an average premium of 45 per cent on PBV to its local peers. Moreover, it carries the lowest asset quality risk with NPL ratio of 8.1 per cent versus peers average of 10 per cent. The valuation is even more compelling when compared with regional peers as MCB trades at a massive discount of 57 per cent and 26 per cent, respectively to peers one year forward PE and PBV. The most striking aspect is the fact that MCB has both a superior ROE (23 per cent v/s peers average 15 per cent) and CAR (16 per cent v/s peers 14 per cent). He said We believe the NPLs would have risen sharply in 2Q2009 largely driven dismal Large Scale Manufacturing figures (contraction of 13 per cent in 4M2009), however MCB would continue to be better positioned vis-a-vis peers. This analysis is driven by the fact that banks exposure is more diversified and less skewed towards the high risk textile and consumer segments. Moreover, reversals are expected with regards to its exposure in financial sector (particularly lending against shares to brokers) as equity market condition has improved substantially since hitting rock bottom in Jan 2009", he added. He said MCB continues to enjoy higher spread and NIMs compared to peers with a record high NIM of 9.7 per cent recorded in 1Q2009. This is significantly better than the peers and industry average of 6.3 per cent and 6.1 per cent respectively. MCB banks low cost to income ratio is primarily driven by continued surplus in its Pension Benefit Obligations (PBO) which allows reversal on the fund to be set off against admin cost. Resultantly, MCBs cost to income ratio has hovered around 25-30 per cent versus an average 40 per cent for peers.