Pakistan’s first and the largest Islamic bank, Meezan Bank Limited (MEBL) has posted profit after tax of Rs2.9 billion (EPS: Rs2.4) for 1Q2019, up 49%YoY on the back of increase in net spread earned, up 57%YoY. It turns out to be slightly above market expectations on the back of 1) reversal in provisions and 2) foreign exchange gain. The bank also announced final cash dividend of Rs1.0/share and issue bonus shares of 10%.
We attribute significant rise in net spread earned to the non-applicability of Minimum Deposit Rate (MDR) on Islamic banks, which has resulted in higher sensitivity of income to the tightening monetary policy (policy rate up by 475bps since January 2018 to date to 10.75%).
Other income grew by 7.7%YoY to Rs1.9 billion, whereas fee & commission income grew by 17.5%YoY. Further, the bank booked foreign exchange gain of Rs417 million as compared to gain of Rs373 million during the corresponding period last year.
Other expenses during the outgoing quarter were up 24%YoY to Rs5.6 billion. This was on the back of 23% increase in operating expenses.
While pretax earnings increased by a considerable 86% YoY in 1Q2019, net earnings growth was restricted to 49% owing to higher effective tax rate, up 13ppts to 48%.
The government in its last economic reforms package imposed super tax on banks for the year 2017 to 2020, due to which banks are now recording additional super tax (2017 annual earnings) in their 1Q2019 accounts.
Key risks facing the Bank include: 1) deterioration in Pakistan macros, 2) uptick in provisioning charge, 3) lack of investment avenues and 4) lower than expected rate hike in the policy rate.