Fears began circulating about the health of small banks late last year after a troubled bank was placed under a state-sanctioned moratorium. Yet, the financial performances of some of the smaller banks for the first quarter of this year have silenced their critics.

One such outfit — Samba Bank Ltd (SMBL), with Rs50.6bn in assets by end-2014 — saw its earnings for the first quarter of this year (1QCY15) rise by a big 63.9pc to reach Rs548.9m, against Rs334.9m in the same period last year. This translated into earnings-per-share of Rs0.1, up from Rs0.07.

This followed an equally profitable 2014, where the bank’s net earnings had risen by a huge 168pc to Rs226m. This was the second-largest annual increase in profit (in percentage terms) of 20 listed commercial banks last year, according to an analysis by WE Research.

“The bank has executed its plans to drive business growth, increase profitability, focus on recoveries and ensure good governance. We will continue to build on the good start made in 2014 by further expanding the business, improving customer coverage developing products and services,” SMBL Chairman Dr Shujaat Nadeem noted in his annual report to shareholders.

A look at the bank’s annual accounts also shows that it has come to rely mainly on its investment book for the bulk of its core income of Rs4.6bn for the year. Its net investments had reached almost Rs20bn, while an overwhelming amount of these — 95pc — was parked in government papers.

Following its larger peers, Samba also shuffled its investment book so it could attain maximum benefits from the bonanza that Pakistan Investment Bonds have come to mean for the industry. SMBL reduced its holdings of lower-yielding Treasury bills to Rs1.48bn from Rs7.72bn, while simultaneously increasing its PIB portfolio by a big 178pc to Rs17.5bn.

Prudent lending and efforts to recover bad loans have reduced non-performing loans on the bank’s books, allowing it to reverse provisions against them

The bank also tried to benefit from the rising stock prices, parking most of its leftover funds into equities. It had listed and unlisted shares worth around Rs313.6m on its books by year-end, almost double the amount it had in CY13.

Deposits: SMBL is a subsidiary of the Samba Financial Group of Saudi Arabia, which holds a 84.51pc stake in the bank. The bank’s branch network comprised 28 outlets by end-2014.

But despite its limited branch network, it was able to record a 28.5pc annual increase in total deposits, which reached over Rs31.6bn by end-2014, the latest period for which detailed data is available. That compares with the 11pc growth in deposits recorded by the overall banking industry. SMBL’s parent company had around Rs108.7m in deposits with the bank.

Nonetheless, the deposits are overly concentrated in high-cost fixed deposits and savings accounts, putting the bank on the hook for larger interest expenses. By end-2014, 39.7pc of its deposits (Rs12.55bn) were in fixed accounts, followed by 37pc (Rs11.69bn) in savings accounts and 18pc (Rs5.67bn) in current accounts.

More worryingly, it is the bank’s fixed and savings accounts that have been growing faster — rising 20pc and 29pc respectively during CY14 — as opposed to current accounts, which went up by a lower 17pc. Unsurprisingly, the bank’s interest expenses grew 54pc to Rs2.8bn, and they rose by a further 58pc year-on-year to Rs849.5m in the quarter ending March.

“This is understandable to some extent, as smaller banks have to offer more incentives, in terms of higher savings rates, to attract depositors. But this also results in higher interest expenses, which can really eat into their bottom lines during times of low interest rates,” commented one market analyst.

Advances: The bank’s net advances grew 19pc to Rs21.8bn last year, helped along by a 20pc growth in the corporate loan portfolio, according to Dr Nadeem. The highest share of advances were in textiles (25.7pc), followed by power (16pc) and manufacturing (13.7pc).

Non-performing loans: Prudent lending and efforts to recover bad loans have reduced non-performing loans (NPLs) on the bank’s books. These had dropped to Rs2.14bn by end-CY14 from Rs2.34bn a year earlier.

As a result, the bank was able to book reversals in provisions against NPLs to the tune of Rs49.4m in 1QCY15; this came on the back of overall reversals in provisions of Rs99.4m last year.

Capital levels: The major cause for concerns over smaller banks had been over their capital levels. After repeatedly granting extensions to banks to bring their capital (net of losses) to Rs10bn and their capital adequacy ratio (CAR) to 10pc, the State Bank decided to put a troubled bank with negative equity in a six-month moratorium in November.

However, Samba is not in any danger on this front, as its capital stood at Rs10.3bn and CAR at a tall 37.08pc by end-2014. The bank’s parent company had deposited Rs1.6bn early last year as an advance against a rights share issue by bank, which took its capital above the Rs10bn threshold.

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