NBP stock trading below par | Pakistan Today

NBP stock trading below par

NBP performed significantly below analyst expectations, reporting earnings of Rs3.9 billion (EPS: Rs2.3) in 2Q2011. Although the bottom line saw an increase of seven per cent YoY, the result came out to be below the previous quarter earnings, -9 per cent QoQ.

2Q2011 Result: Reviews & Analysis

The main drags faced by the bank included a significant hike in loan losses coupled with surging administrative costs, which more or less diluted the growth seen in gross income. Net interest income of the bank saw an increase of nine per cent YoY and more importantly, seven per cent QoQ. This was on account of a favourable movement in both gross interest earned as well as interest expensed. Gross interest income increased to Rs23.8 billion, a three per cent QoQ uptick, primarily because of higher earning assets. This would most likely be emanating from greater proportion of investment in government securities, given the recent trends in the banking sector to deploy liquidity in relatively less risky avenues, however, a clearer picture can only be established once detailed accounts are released. Moreover, mark-up interest paid saw a drop of two per cent from the previous quarter. Although this seems encouraging, and possibly could be if this decline is due to the efforts of the management to mobilise more low cost deposit, analysts are skeptical as the lower expense could also driven by a lower deposit base further to competition from Sindh Bank. Again, only the detailed break-up of the balance sheet once released would be able to provide the desired clarity in this regard.

Provisioning expenditure

Having said this, the worrying part of the result was the substantial surge seen in provisioning expenditure of the bank. 2Q-2011 provisioning came out to be Rs3.2 billion, up a massive 167 per cent QoQ from the Rs1.9 billion recorded in the previous quarter. We rule out the possibility that this was caused by NPL aging as most of the bank’s NPLs are concentrated already in the loss category, thereby considerably provided for. There also remains a possibility that higher provisioning expense came about owing to the 1H-2011 audit, however, the chances of this are remote as the quantum leap is extraordinarily high for such an occurrence. We believe it is likely that this is surprise jump is due to further NPL accretion seen by the bank. As per the 1Q-2011 published accounts, NBP’s NPLs-to-gross advances ratio stood at 19.5 per cent; 516ppts above the commercial bank industry average at that point in time. Therefore, if there are significant new accretions – assuming they are not government guaranteed – pressure on asset quality is likely to remain high for 2H of the year as well.

Dampener for management

Administrative costs also witnessed an increase of 19 per cent QoQ to stand at Rs7.8 billion in the year. Assuming no irregular items disclosed when the detailed accounts are published; this rise in operating expenses continues to be a dampener and point of concern for the management. Nevertheless, non-core income proved to be a heartening feature with a 69 per cent uptick on a QoQ basis. According to Mustufa Bilwani, analyst at JS Global Capital Limited, this increase in other income is most probably a result of interest booked on overdue receivables from tax authorities which is now allowed to be recognised on a semi-annual basis rather than during annual reporting. We believe this is likely to be a common feature for the bank for each half-yearly period reported unless the tax dues claimed by NBP are cleared. Upon closer inspection, we also observe that the bank recognised considerable gain on the sale of investments which has further augmented the non-operating income account. However, this was not sufficient to arrest the pressure imposed by the burgeoning cost burden on the bank. The before tax profitability declined 16 per cent QoQ, while remaining largely the same on a YoY basis. It is only thanks to a lower effective tax rate (2Q-2011: 27 per cent, 1Q-2011: 33 per cent) that the decline in PAT was arrested to a fall of nine per cent QoQ.

The analyst forecast

Investors have not taken the increase in provisioning expense kindly. This is clearly indicative that the pressure on asset quality is real and was sufficient enough to drag the earnings growth into red. The reasons of this accretion in infectious portfolio however remain unclear, nevertheless, it can be reasonably expected that the drag posed by delinquencies would continue in the 2nd half of the year as well. This comes at a time where other large banks have illustrated a decelerating trend in terms of NPL accretion and have reported better loan loss coverage. Moreover, as per recent news flows, each of the top five large banks has posted positive growth in 1H-2011 earnings (+24 per cent YoY). If excluded from the group, the combined earnings growth of HBL, MCB, UBL, and ABL rise up to 33 per cent YoY.
We opine that the management would have to vigorously focus on curtailing its cost heads – particularly relating to operating and provisioning expenses – to maintain competitiveness. Having said this, the scrip of the bank is currently trading at low levels of Rs38/share as per its close in the last trading session of the week. This translates to a P/BV of 0.507x as per our 1H-2011E estimates, which is considerably lower than other peer banks (MCB: 1.676x, HBL: , UBL: 0.908x). Based on relative valuation metrics, we believe the stock is trading below par. However, we adopt a cautious stance towards the stock as pressure on earnings is expected to remain while realisation of the management’s efforts to maintain positioning remains to be seen.

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