KARACHI – Allied Bank Limited (ABL) is gearing up for a potential 2% increase in interest rates during the calendar year 2019, according to insights gleaned from a recent conference call.
The State Bank of Pakistan (SBP) had already taken a step in this direction by raising the policy rate by 25 basis points to 10.25 percent in its monetary policy announcement on January 31, 2019, applicable for the next two months.
Analysts participating in the conference call indicated that ABL was expecting a significant interest rate hike of up to 200 basis points throughout CY19. In response to the rising interest rates observed in CY18, the bank strategically divested from investments in Pakistan Investment Bonds (PIBs), witnessing a notable decrease of 73 percent Year-over-Year (YoY). Simultaneously, the bank increased its exposure to Treasury Bills (T-Bills) by 39 percent YoY.
Looking ahead, ABL is poised to reverse its investment strategy, with expectations of an uptick in investments into PIBs. The bank plans to hold a higher stock of PIBs in CY19 compared to the previous year, anticipating the evolving economic landscape and potential benefits of such investments.
Despite the shifts in investment strategies, ABL reported several positive improvements in key financial ratios. The Current Account and Savings Account (CASA) ratio improved to 82 percent in CY18, up from 78 percent in CY17. The infection ratio, representing non-performing loans, decreased to 3.5 percent compared to 4.6 percent in CY17. The coverage ratio strengthened to 97 percent, a notable improvement from 93 percent in CY17.
The bank faced a 13 percent Year-over-Year suppression in dividend income, primarily attributed to liquidity constraints faced by Independent Power Producers (IPPs). A noteworthy expense of Rs411 million was incurred by ABL due to the deposit protection scheme introduced by the SBP last year, emphasizing the bank’s commitment to regulatory compliance.
With economic reforms on the horizon, the bank anticipates the potential booking of a 4 percent super tax on CY17 earnings in 1QCY19, subject to approval by the parliament this quarter.
On the operational front, ABL exhibited a 22 percent Quarter-over-Quarter acceleration in fee income, attributed to healthy returns from foreign remittances. The bank, holding a robust 10 percent market share in the remittances business, is optimistic about its fee income prospects.
While ABL boasts a strong coverage ratio and an infection ratio well below industry averages, the management remains cautious about the impact of rising interest rates. Provisioning expenses are expected to surface in this scenario, and reversals may experience a slowdown.
In terms of expansion, ABL altered its strategy in CY18 by refraining from adding Islamic branches and focusing on the opening of Islamic banking windows, adding a total of 10 such windows during the year.
The implementation of IFRS 9, expected in CY20, is anticipated to have a retrospective impact on ABL’s balance sheet, affecting equity, while the impact on profitability will be felt in the year of implementation. As ABL navigates the evolving financial landscape, the bank remains vigilant, leveraging its strengths to adapt to market dynamics and deliver sustained value to its stakeholders.
