Bank of Punjab’s asset quality expected to improve remarkably: report

SOURCEThe Express Tribune

KARACHI:  The Bank of Punjab (BOP), backed by the government of Punjab and listed at the Pakistan Stock Exchange (PSX), has re-emerged as an attractive bank for depositors and borrowers and provides investment opportunities for shareholders as well, says a research report.

The bank has recovered from the painful era of one of the biggest financial frauds in the history of Pakistan.

It has made a comeback on the banking horizon after settling bad loans on its balance sheet. It has regained the required Capital Adequacy Ratio (CAR) and met the Minimum Capital Requirement (MCR) for continuing its operations after the Punjab government injected fresh equity and the bank raised additional funds by issuing right shares to the existing shareholders.


With this, the new bank management is having ample quality assets in hand that can be offered to new borrowers. The current environment in which the benchmark interest rate is going up also supports the bank to make fresh lending with the prospect of higher interest income.

At the PSX, a barometer of the economic and listed corporate sector’s performance, BOP has attracted new investors and has emerged as the volume leader as well.

In this backdrop, Taurus Securities – a subsidiary of the National Bank of Pakistan – has found BOP shares attractive for investment at a time when the stock market was passing through a rough patch.

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In its research report, the brokerage house anticipated a potential upside of 28% in BOP’s share price to Rs14 per share by December 2019 from Rs10.9 in mid-October.

“Our investment thesis highlights the bank’s rise from misery amidst colossal pending loan losses and capital inadequacy to being touted as the next value opportunity in the banking sector,” it said.

The bank has already taken a gigantic charge of Rs14.1 billion (CY17 EPS impact Rs3.42) last year to cover unaccounted for loan losses on a massive scale (previously guaranteed by the Letters of Comfort issued by the government of Punjab in favour of the bank), cleaning the advances portfolio almost entirely.

“Resultantly, any risk of catastrophic provisioning on the advances portfolio is a thing of the past? The bank’s asset quality is expected to improve remarkably going forward, supporting growth and build-up of reserves,” it said.

Capital adequacy has been beefed up through another issue of tier-II eligible subordinated debt (PPTFC-II) amounting to Rs4.3 billion in the first half of calendar year 2018.

Together with the earlier PPTFC-I amounting to Rs2.5 billion and a Rs2-billion loan from the government of Punjab, Taurus expects the bank to remain compliant with the MCR going forward.

“We expect CAR to arrive at 12.4% and 13.8% for CY18 and CY19 respectively compared to the MCR of 11.90% and 12.50% for the same years,” it said.

“With interest rates expected to rise in the foreseeable future, we expect the bank to register strong earnings growth going forward compared to its peers,” it said.

Year-to-date in calendar year 2018, advances of the bank are up 18%, and 20% on a year-on-year basis, surpassing the sector average of 15% year-to-date and increasing its market share.

“The bank’s current advances market share stands at 5.5%, which is one of the highest among peer banks,” Taurus Securities said.

“The bank’s yield on net advances has improved significantly over the last three years despite declining interest rates, enabling it to earn highest spreads over Kibor compared to the peer average.”

However, mobilising core deposits has been a challenge for the bank, resulting in a substantial exposure to higher cost corporate and government deposits. Half of the bank’s deposits belong to public-sector entities.

“Nevertheless, deposits have grown at a CAGR of 16% in the past five years compared to the industry growth of 13%, providing stable funding for the bank to continue growth with a lower leverage compared to the peers,” it said.

Published in The Express Tribune, October 22nd, 2018.

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