The National Bank of Pakistan (NBP) for the last couple of months has been underperforming at the equity market due to the bank’s soaring non-performing loans (NPLs) and the transfer of its deposits to the newly-established Sindh Bank. “In the last two months, NBP is one stock which has underperformed the benchmark KSE index by nine percent,” the analysts observed. The few reasons, which analysts cite for the NBP’s “lackluster” performance, include a gradual piling of the NPLs and the recent transfer of its deposits to Sindh Bank.
The NBP’s bad debts are said to have ballooned by Rs19 billion to Rs94 billion during last two quarters of the current fiscal year, while the bank has diverted some Rs20 billion of its deposits to the Sindh Bank. Observers, however, believe that the market participants had overreacted to the said developments given the fact that majority of the NPL accretions were related to those companies that were struck in the circular debts hence requiring no provisioning. About the Sindh Bank factor, the analysts said the NBP had transferred only Rs20 billion of its deposits that accounted for only 2.6 percent of the bank’s total deposits. “The management confirmed in its recent analyst meeting that only Rs20 billion of deposits has been diverted to the Sindh Bank… (that would) reduce the bank’s 2011 earnings by Rs 0.3 per share,” said Farhan Mahmood of Topline Research.
The analyst said, historically, the investors had been concerned about the quality of the NBP’s assets. “And that is why we have seen the scrip traded on an average 40 percent discount to industry on P/BV during last five years (2006-2010).”He said if seen in context, the bank’s NPLs had grown by Rs19 billion to Rs94 billion during the last two quarters. “Apparently it seems that the NPL ratio (NPL/advances) has deteriorated to 17.2 percent but if we exclude the NPLs that are related to the circular debt and agriculture (due to timing difference), the adjusted NPL ratio is around 13.2 percent,” Farhan said. This, he said, was clarified by the NBP management in its analyst briefing that the majority of the NPL accretion in last couple of quarters had arrived from energy companies which were stuck in the circular debt issue. “Since these NPL will not require provisioning as these payments are backed by guarantee, this will continue to distort its overall NPL ratio,” he viewed. About the transfer of deposits to Sind Bank, the analyst said after the release of 1Q2011 accounts, there were concerns that the deposits which reduced by 9 percent in quarterly terms (Rs76 billion) could be due to transfer of its deposits to newly-established Sindh Bank under the directive of Sindh government.
“However, the management has clarified that only Rs20 billion have been transferred,” he said. He also expressed concern over that the reduction in deposits could lower the bank’s 2011 EPS by approximately Rs0.3 per share. “Furthermore, the management believes that some portion of the funds will be reverted back to the bank on the back of the nascent distribution channel of Sindh Bank,” the analyst said. It was also noted that the impact of reduction in deposits would be reduced by the higher mark up on the refunds. “Last year in 2010, the company booked income of Rs 1.8 billion as a compensation for delayed funds which was resulted in additional refunds of Rs six billion for tax years 2003-2008.”
These refunds, Farhan said, would continue to accrue and increase in 2011 given the fact that bank had been obtaining the tax credit. “Hence NBP will continue to book markup on these refunds which could be higher than last year,” he said. “Thus, 2011 earnings are expected to grow by 13 percent mainly due to an expected 12 percent rise in non interest income. That means, in coming quarters we might see banks posting earnings growth mainly supported by higher NIMs,” the analyst observed. He said currently the six-month KIBOR went up by 138 BPS which was expected to remain sticky at least for the next six months.
