THE country`s largest Islamic bank with over Rs362bn in assets had a fairly stable first half of the year.

Deposit growth continued to remain strong, but a lack of new Shahriahcompliant sovereign instruments meant that the bank was not able to fully park its surplus funds in profitable avenues.

Despite that, Meezan Bank Ltd (MEBL) managed to post an after-tax profit of Rs2.25bn for the period (1HCY14), translating into earningsper-share (eps) of Rs2.25. The earnings were up a healthy 16.6pc from Rs1.93bn (eps: Rs1.93) in the same period last year. The bank announced an interim cash dividend of Rs1.5 per share (15pc), after having paid a Rs2 per share (20pc) dividend last year.

Meanwhile, deposit growth at the bank exempt from linking its deposit rates with the central bank`s repo rates, like other Islamic banks -nonetheless led to rising `return on deposits and other dues expenses, which shot up 22.2pc to Rs7.36bn.

However, the bank has been increasingly trying to shore up current account deposits. `The strategy of aggressive marketing campaigns to enhance current accounts paid offand the share of current accounts in the deposit mix increased to 29pc [in CY13], against 26pc last year,` it said in its annual report for CY13.

Total deposits grew by 26pc yearon-year outpacing the 13pc growth in the overall banking industry`s deposits to Rs289.8bn by endDecember 2013. MEBL had a significant 57pc share of Islamic banking industry deposits of Rs551.5bn in CY13. Current accounts and savings accounts (Casa) improved to 68pc of total deposits, from 66pc.

Deposits have since risen by 9.6pc to reach Rs317.7bn by end-June.

And its deposit mobilisation efforts will be further helped along by the planned addition of another 67 branches this year, to bring the total number to 418.

Investments, advances down: Finding enough avenues to park surplus funds appears to be increasingly becoming a problem for Islamic banks.

MEBL`s asset management arm Al-Meezan Investment Management Ltd complained about the lack of new Shahriah-compliant investment opportunities in its financial report for the quarter ending March 2014.

[T]he last ljarah auction was conducted in March 2013. Since the endof the first half of [FY13], the market has continued to face excess liquidity pressure, as banking deposits have been on a consistent rise, without any increase in deployment avenues; instead, the avenues have been decreasing [as] three ljarah`s have already matured [by 9MFY13].

(SBP records show the latest ljarah auction was conducted on June 20).

As a result, the bank`s net investments dropped 26pc to Rs112.05bn.

Its net Islamic financing assets also dipped 8.8pc to Rs116.4bn in the six months. In their first quarterly report, the bank`s directors attributed the lower financing `mainly to repayment of seasonal financing, which is in line with our budget`.

Nonetheless, the bank`s core income improved by over 18pc to Rs13.46bn in the six-month period.

But due to higher core expenses, net spread earned rose by a more moderate 14pc to Rs6.1bn.

The asset quality of the bank continued to remain strong, and it was among a handful of banks in the country with coverage ratio against non-performing loans (NPLs) exceeding 100pc.

In the period under review, the bank set aside a net Rs78.2m as provision against NPLs, up from Rs14.8m in 1HCY13. However, provisions in the second quarter jumped by over four times to about Rs116m.

Yet, on an overall basis, the bank was able to record a net reversal of Rs53.8m in its total provisions, helped along by a big reversal in provisions against diminution in value of investments.Besides, the bank continued to focus on the non-core side of the business, reflected in the significant 48pc growth in non-core income to Rs2.31bn. This was a result of strong growths in banking fee and commissions (up35.3pc to Rs759.1m) and income from forex dealings (up 178pc to Rs958.5m).

A segment-wise analysis of the bank`s performance in CY13 shows that trade financing emerged as a major engine for growth, with volumes growing almost 57pc to Rs315bn, from Rs201bn in 2012. Under this category, the bank`s corporate trade business grew at an even higher rate of 69pc to Rs222bn. The Islamic bank also entered the shipbreaking finance business last year.

Meezan also announced in May that it will acquire HSBC`s Pakistan operations and convert it into Islamic mode. The foreign bank reportedly has 10 branches in the country, with assets totalling about $455m at end2013. The transaction is awaiting final approval from the SBP and other relevant quarters.

The move comes as competition in the Shahriah-compliant financial industry heats up, with one conventional bank establishing its own Islamic banking subsidiary, a few others aggressively expanding their existing Islamic banking branch networks, and one small bank converting itself into full Islamic mode.

At the KSE, Meezan`s stock of par value Rs10 has lagged behind the benchmark 100 index this year, rising 7pc to around Rs41 per share last Thursday. •

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