Lower growth prospects in NIM to affect BoP recovery

KARACHI - The achievement of financial recovery would be a hard task for the Bank of Punjab (BoP) in the
upcoming years on account of lower growth prospects in the Net Interest Income (NIM) of the bank.
The BOP would have limited growth opportunities in the years ahead in anticipation of posting sluggish growth in
advances. The expected stagnant pace in deposit mobilisation and rising cost of fund would remain a major
concern for the bank during CY09-10. An impairment charges could be reflected in the upcoming quarterly
accounts of BoP.
It must be recalled that the government of Punjab (GoP) has injected equity of Rs10.0 billion against the future
issue of right shares by making an advance subscription.
It is saying that if the bank fails to meet the regulatory requirements by December 2011, due to the provisions
against infected loan of Rs12.3 billon then the government would further inject equity of Rs8.0 billion net of tax to
meet the shortfall.
According to Muhammad Imran, Research Analyst at First Capital Research, the Capital Adequacy Ratio (CAR)
of the bank is below from the regulatory limit. Therefore, the bank is required to meet the regulatory requirement
of 9.0 percent. For this purpose, the bank may also need to reduce some risky exposure by reducing its
advances base.
Analyst said after the last years qualification of accounts, the deposit mobilisation is still a big task for the bank.
Due to which its cost of funds will remain on the higher side even in the declining interest rate scenario. This
higher cost of fund and declining rate on advances (inline with the decline in base rate) will keep the margin
under pressure. In 2008, NIM of BOP was 0.62 percent. In addition to this, Net Interest Income (NII) growth will
also be hurt from the stagnant advances growth.
The provisions against the exposure of Rs12.3 billion will restrict the bottom-line growth. Moreover, the NPLs of
Rs42.7 billion do not necessary imply that the fresh NPLs will not arrive in future course of business, analyst said.
Furthermore, by fully availing the relaxation given by SBP, the bank did not recognise impairment loss of Rs1.10
billion through profit and loss statement. If the bank had charged it to profit and loss statement, its loss after tax
would have increased by the same amount (Rs2.12/share).
Meanwhile, during the year 2008, the Bank of Punjab (BoP) reported a loss after of Rs10.1 billion (EPS
Rs-19.02) as compared to profit after tax (PAT) of Rs4.4 billion (EPS Rs8.41) in 2007. Alone in 4Q2008, the
bank posted a net loss of Rs5.7 billion (EPS Rs-10.84).
BOP report revealed that the banks performance was marred in 2008 due to the rising cost of funds along with
deteriorating assets quality. Furthermore, during the year, Net Interest Income (NII) of the bank plunged by 68
percent to Rs1.14 billion as against Rs3.60 billion in the preceding year. However, interest earned remained
almost at the par to previous years level at Rs17.8 billion.
Non interest income, on the other hand, also declined by 23 percent to Rs4.2 billion in CY08 on the back of
massive drop in gain on sale and redemption of securities, which was recorded at Rs0.73 billion as against
Rs2.04 billion in 2007. On the expenses side, major impact came from soaring provisions against NPLs which
increased by Rs17.2b. Administrative expense also increased by 24 percent to Rs2.8 billion.
In contrast to the last year, the 2008 accounts of BoP do not carry any qualification by the Auditors. Last year the
auditors qualified the accounts on the treatment of a loan to a specific group amounting Rs8.3b. In a note, the
auditors discussed the following key findings associated with the bank.
A more surface deep analysis revealed that the total NPLs of the bank were Rs42.7 billion as on Dec 31, 2008,
almost 13 folds more than the NPLs observed at the end of Dec 2007. Major NPLs of the bank are from textile
and ginning segments (Rs11.3b), followed by construction (Rs8.3b) and retail and wholesale trade (Rs6.7b).
Gross NPLs to gross advances of the bank is 27.9 percent versus 2.5 percent, a year earlier. While on net basis
it is at 16.1 percent as against 0.6 percent at the end of Dec 2007.
BoPs paid up capital and reserves (net of losses) were Rs5.06 billion against the regulatory requirement of
Rs5.0 billion.
Capital adequacy ratio (CAR) remained well below from the regulatory requirement of 9 percent. Interestingly,
indicative from the directors report, even with the injection of Rs10.0 billion by Government of Punjab (GoPb)
against the future issue of right shares, the CAR of the bank is at 7.68 percent - still below the regulatory
requirement. However, the bank has been granted a relaxation to meet this requirement by Dec 2011.
Moreover, advances from two groups of companies aggregating to Rs12.3 billion have not been subjected to
the provisioning criteria as prescribed in SBPs prudential regulation.
BoP provided provision of Rs19.0 billion in its full year accounts. In spite this, however, the loan loss coverage
ratio of the bank is only 51 percent. The lower coverage is mainly due to the two reasons. First of all, the bank
took the benefit of forced sales value of the assets as mentioned in the note.
In the absence of FSV benefit loss, before tax of the bank would have been magnified by Rs2.0b. Secondly,
which is more material and has already been discussed above, is the absence of provision against advances of
loan amount Rs12.3 billion.