WEB DESK: As discount rates fall, banks surplus funds rise and so does their exposure in investments. It gets trickier in case you are an Islamic bank, as Meezan Bank, the countrys largest Islamic bank has been doing lately.
When ideally, a cut in discount rates should mean an up tick in financing or advances, it is resulting in increased exposure to SBP open market operations. Meezan Bank has almost doubled its exposure in Bai Muajjal with the SBP, parking its surplus liquidity at competitive rates.
The countrys largest Islamic bank posted its first half CY15 results yesterday with a more than decent 19 percent year-on-year earnings growth. And unsurprisingly, the impetus came from the top line, which grew impressively by 28 percent year-on-year. It was a drastic improvement in gross spreads ratio that really made the difference, more than making up for suboptimal non-funded income contribution.
Cost of funds for Islamic banks is naturally more manageable than the conventional counterparts, but Meezan did a great job to further rationalize the deposit and improve the earning mix. That the ADR slipped to as low as 33 percent for the period ended, should not come as a surprise, as the bank was more contended in parking excess liquidity in whatever is available as investment avenues and open market operations.
Recall that the yields Islamic banks can churn out of investments in Shariah compliant instruments is nowhere close to what the conventional banks make on PIBs and treasury bills. Yet, a decline in financing facilities in absolute terms, indicate banks are either still shy of lending or there is a genuine lack of credit demand in the market. Whatever the case, Meezan Bank is not complaining, as long as the profits keep coming.
The other income fell short of expectations, as contribution from forex income and capital gains dwindled. That does not seem a huge area of concern as long as the top line keeps performing.
Source: BR research