Bank Alfalah Limited (BAFL) Earnings Call Transcript

Good afternoon, and welcome to the first half 2025 and CY '24 Corporate briefing session for Bank Alfalah. Once again, we're very pleased to have a strong lineup of speakers from Bank Alfalah. Ms. Anjum Hai, the Chief Financial Officer; Mr. Pervez Khan, the Group Head, Treasury and Financial Markets; and Syed Akbar Ali, the Head of Capital Markets and Investor Relations. So the format of the call will be a management presentation followed by a Q&A session. [Operator Instructions] So with that, over to you, Ms. Anjum.

Thank you. Thank you, [ Youshra ]. [Foreign Language], everyone, and welcome to our corporate briefing session for 2024, where we'll also discuss the half year results. So we're looking at the first slide of the presentation where we have some basic information about the bank. So very quickly, we are a AAA rated bank. We operate up to 240 cities across Pakistan, and we have presence in 4 other countries abroad. And we have a very strong capital adequacy ratio of 17.96% at December end and which is hovering around the same range at June as well. Can we have the next slide? So here, you're looking at our market positioning. So we continue to grow our advances book. Our market share for advances has increased to 7.5%. For deposits, our market share based on averages is 6.1% for current deposits at 6.5%. I would like to add here that last year, we -- there was a strategic shift in the bank where we started monitoring -- where we started focusing more on current account deposits and growing sticky granular deposits. And as a result, we changed our metric as well to monitoring market share on averages rather than end of period. So just to give perspective to that number being reflected here. For SME lending, our market share is 8.2%. In the consumer lending business, we are amongst the top 2 players. For auto loan and home loans, we are actually the largest player in the market. We have the largest share of wallet here. For credit card and personal loans, we are the second highest player in the market. Now looking at remittances. Now because of the dynamics of the remittance business, we were strategically not pursuing this aggressively. And -- but despite that, we have maintained the same volumes, which we -- same throughput, which we churned last year, and our market share for remittances stands at 13.9%. Regarding trade, our trade volumes grew by 17% year-on-year, which resulted in an increase in market share to 9.5%. We could go to the next slide. Now here, we are looking at our network information. So we have 112,000 touch points, which include our branch network and our digital solutions. So our branch network has increased to 1,184. And we opened 133 new branches in the last 12 months and around about 38% of our branch network is Islamic. We are serving 9.3 million customers. We could go to the next slide. Now here, we are showing the trend last few quarters of our key metrics. Now just to recap, towards the mid of last year, there was an imposition of ADR taxation on banks. What it led to was it led to some distortion in the market dynamics. There was the market started pursuing advances very aggressively while there was curtailment on the deposit side. And you see that number -- you see that reflection in our numbers for the Q2, Q3 and Q4 numbers for deposits and advances. Now at that time, we also did a strategic shift. We decided that for deposits, our strategy going forward will be focused more on growing averages, growing current account growing sticky deposits. And we see that strategy play out nicely in these numbers because we see that we closed December at PKR 2.1 trillion. Here, the car mix was 38%. And over the half year, we've grown total deposits by around 7%. Our current account grew by around 16%. And as a result, our car mix has improved to 42%. Advances, as I said, a phenomenaon, ADR linked phenomenon led to our December number for advances being significantly higher. It was PKR 1.2 trillion. And some of those ADR backed positions were short term and they were liquidated in the first quarter of this year. And what we see now is from first quarter to second quarter as we see that -- this year, actually, there is normalcy in the market. The market dynamics have normalized in this domain, and we see the advances portfolio grow back to PKR 1 trillion. In the net asset or I would say, net equity number, you see that it steadily going up. Regarding investments -- investments are usually a factor of our surplus liquidity. And of course, a significant part of it is usually backed by treasury positions, which treasury -- treasury borrowing positions, which we take on based on their interest rate view to place investments. And so those borrowing positions, the treasury was carrying at December end, and it continued till quarter 2 -- quarter 1. And then it started tapering in the second quarter. So we see that the investment book is slightly down on the back of running off of the treasury borrowing positions because of, again, because of the change in the interest rate view of our treasury. Okay. Our next section is about 2024 result recap. This slide, I've already talked about the key metrics for balance sheet. We could jump on to the P&L for the next slide please, here. Okay. So our profit after tax for 2024 was PKR 38 billion, and there were quite a few factors going into this number. And there were quite a few challenges. So the first and foremost challenge was the fact that, of course, the banking industry was -- there was an additional tax of 5% imposed on the banking industry. That took away incremental PKR 4.2 billion from the bottom line last year. On the profit -- on the revenue front, the challenge was, again, the rate cut, the turn of the cycle has started. There was rate cut, there was spread compression. And what I've talked about the ADR linked distortions in the market led to some positions, which gave a drag on the net interest income. But despite all that, we have managed to post current account growth. There were treasury positions, which the treasury had taken on, which helped us realize capital gains and helped us realize -- give some support to the to the net interest income and hence, our total income grew by 11%. On the admin expenses side, this was up because of our usual -- we were actually coming off a very high interest rate inflationary cycle. Then there was expansion and hiring all of that going into that line. Provisions were lower on the back of very good recovery pipeline last year. So all in all, these are the key challenges which we were able to ward off and still post growth on our part of the profit bottom line last year. Okay. So this slide is about the ratios and some of the things which I've been talking about, you'll see the impact of that here. You'll see that the spread compression in -- when you refer to the name or spread line or you'll see the normalizing returns on ROA, ROE because of the turn of the interest rate cycle, you'll see that in this chart. And I'll talk about this morning in a subsequent slide. we could now jump on -- yes, thank you. The half year results for June. Okay. So again, I've talked about the balance sheet numbers, so we could talk about straight going to the P&L directly. The next slide, please, [ Youshra ]. So our half year profit after tax is PKR 15 billion. It's less than last year. And the first factor, which I'll talk about is, again, incremental taxation because the tax which was imposed on banking industry was towards the end of the last year. And there's some add-on to that in this period as well. Now when we look at our profitability and especially the challenges on our total income, Again, first and foremost, again, it's declining interest rates, resulting in spread compression, which actually, we managed to ward off quite well because of the treasury positions in long-term bonds, which gave us support in the net interest income and helped us realize capital gains as well. Of course, our strategy to grow current accounts has helped in the COD significantly, and that has helped give us contributed to this growth in net -- in total income. Looking at admin expenses, admin expenses are up 41%. And the key factor going into this number is the home remittance-related marketing expense. And if I were to strip that number out, then the admin expenses of our bank have grown by around 25% year-on-year. And that encompass our, again, usual branch expansion. We've again -- we are operating on 133 new additional branches opened last year. So that has added to the full year cost this year. And the higher inflation hiring and all the other initiatives have gone into that 25% number. Our provisions are overall lower than the same period last year because of the healthy again, recovery pipeline, even though we still continue to take some subjective provisions and you will be able to see that in our quarter 2 number, which is slightly up versus the quarter 1 number. So that's the subjective provisions which we have taken on. So all in all, this results in a PAT of PKR 15 billion with 26% compression since the same period last year. Next slide, I'll pinpoint a few numbers here. If you look at the line for spreads, we see that quarter 1, quarter 2, we've managed to maintain our spread. Again, as I said, because of the treasury backed positions, which helped us maintain this managing our ALM book in a fashion which helped us sustain the compression better than anticipated. Our return on assets stands at 1%. Our ROE stands at 22% our coverage ratio -- sorry, our infection ratio is 4.1%. So there's no hardly any significant increase in NPL. Again, and whatever increase there or a factor of subjective classification and coverage is 107%. I think we can now move on to our next slide with the final slide, before we open for Q&A. So here is our -- heavy showing our digital performance. And we see growth in this front. So our digital throughput in the 6 months of 2025 was PKR 9.1 trillion as against PKR 9.5 trillion which we processed in all of -- in the 12 months last year. So significant increase in throughput versus last year, 80% year-on-year. So -- and all of these results and adds to our fee commission, gives us float, and of course, gives us cross-sell opportunities. So it's very critical for the bank. Our Alfa app customers stand at -- and these are the 30-day active customers which we track and they stand at 1.1 million. And another thing which I would want to highlight on this slide is our digital migration ratio, which we monitor quite closely. And this is up at 89%. And at December, we were at 84%. So this shows that our digital strategy is playing out nicely and we're getting good traction on all our product lines in this front. I think with that, we can open the floor for questions. I can't hear you, Youshra. If you are...

[Operator Instructions]

Do you hear me? This is Muhammad [indiscernible].

Yes, we can hear you.

[indiscernible] retrieve investment...

We're just going to first take our questions...

[ Youshra ], can we -- I think he was about to state his question. Maybe let's take -- let's do it first and then we can jump on to the chat.

[Foreign Language]

[Foreign Language] activity is a factor of where they see the interest rates going. So depending on the changing view and the fact interest rates -- then there are opportunities to realize some capital gains. [Foreign Language].

[Foreign Language] Thank you so much.

We move on to the next question, which is from the line of Mr. [indiscernible].

Again, congratulations on the great results and the payout, which has increased since last year. My question is very similar to what Mr. [ Hanisab ] has asked. And what we've seen in the banks that have posted the results so far is that there's a buildup in borrowings further and that strategy is slightly contrary to what we've seen in Bank Alfalah. So what's the view that is different at this point in time?

Pervez, do you want to take this question?

Yes, sure. So as Anjum were we simply mentioned that it all depends on our view in terms of where we are heading on the interest rate side. So we, at Bank Alfalah believes that we are very close to the interest rate bottom. And that's why we thought that markets have rallied enough. So we have just liquidated some of our positions. If we get an opportunity again, so obviously, we will build our positions again. But as of now because we believe that we are very near, very close to the interest rate bottom, so we have liquidated some of our profitable positions.

I'll just take you up on what you said right now, and that leads me to ask you just one more question and you start them [indiscernible] that I'm done. What's your view on the interest rates going forward?

So as I very clearly said, that we are very close to the interest rate bottoms. So that's the view. So we, at Bank Alfalah, our view is that interest rates will there is still a room of 50 to 100 basis points for a rate cut.

Next question is from the line of Mr. [ Raza Inam ].

Actually, I have a couple of questions. My first question is that the commission and remittance is significantly down compared to last year. And secondly, the marketing and pricing expense is significantly up from last year. So with the government is starting that commission remittance scheme. So when can we expect -- can you provide some guidance on this?

Okay. So both the lines are linked. The -- so what happened was that last year, there was a change in the commission structure of -- by Central Bank, the rebate structure. And this rebate structure favored the smaller players and the smaller banks more than the large players. And Alfalah in the remittance domain was the second highest player in the market. And hence, we were impacted more because of this change in the rebate structure. And we were expecting this to balance out eventually. And in early July, a State Bank has at least addressed the rebate part of this equation. And the rebate is now flat and uniform for all players. So we do see that there is a lot of normalcy returning in that -- on that front, though, there is still a little bit of competition. And of course, people have heard the news and there are discussions happening at the senior level in government because these remittances had increased significantly from $31 billion to $38 billion coming into the government kitty, which now is a challenge based on the new budget allocation, this is -- there's a discussion going on as to how to ensure that these flows remain in the formal channels and continue to grow. And we expect that -- and again, there are discussions going on. We expect that something positive will emerge on that. What I can share with you is the fact that things have already started to normalize. And the earlier run rate for our -- I should say the drag is now lower -- significantly lower than what it was earlier.

Related to investment book. Can you tell what current portion of your investment is in fixed PIB and what is the direction?

Okay. So in our domestic investment book, we have roughly 35% or 36% invested in fixed rate PIBs and we also have some fixed rate sukuks. And the yield is -- I think PIB is somewhere around 13.7%. And the sukuk are, I think, well above 14%.

Our next question is from the line of Saad Muhammad Hanif. Okay. Next question is from Mr. Anas Motiwala.

[indiscernible] family office. I have a couple of questions. One is I think around -- we spent around PKR 8 billion, PKR 9 billion over the last 6 months. So your expense is exactly [Foreign Language] rebate shareholder and you were onboarding them, and you were giving them the rebate [indiscernible] to continue market share. [indiscernible].

Okay. So we have these remittances, we have remittance partners in different countries. so these funds are passed through to those remittance partners who eventually keep some commission for themselves and give some to the actual remitter. And that's how you create this diversion from the informal structure to the formal structure. That's how -- and these are the funds which are sort of used to -- motivate them to use a formal structure.

Fair enough. And to the [indiscernible] run rate had -- should we expect this to continue? And what's going to happen is that the income side is also going to start accelerating faster than what spending on it, but you do expenses key run rate, this is going to continue going forward?

See, so as I explained, the rebate, which we get from Central Bank, -- now the rebate structure has been fixed. So at least now there's even playing field between the banks and all the players in this domain that everybody gets the same commission rate for a dollar mobilized. So that will help us reduce this expenditure, of course. But again, as I said, there are still some directions awaited and ultimately, banks use these funds to sort of support their business. So if there's any distortion in the market, which leads to anybody offering a higher price, then there could be price distortion. But that's something which could may or may not materialize going forward. So there's always -- that's the dynamic of that business. But so far, what we've seen is that the things have eased off. The pressure which was there, has eased off very significantly. There is a little bit of spend still in the pipeline, but not as significant as it was earlier.

Perfect. And in terms of -- because I know you guys have been guiding more towards now current account growth instead of the total deposit growth that we should keep tracking. So is there any sort of an indication in terms of like how many branches we're looking to add going forward? And what kind of current account or overall deposit growth that the bank is looking forward?

So just in the 6 months of this year, we've, I think, opened around 33 branches. But going forward, at least for this year, we are going to not be very aggressively going any more branches on the -- will be open, but we are also optimizing the network. There are certain branches, which have not -- where we do not have the same visibility as they used to be. And that has impacted much. So we are also looking at branch closures and relocations. So possibly for the rest of the 6 months, you will not see the net number grow too much. And again, it's a factor of the business, overall dynamics of the country. But this is -- when we plan for next year depending on what we foresee the interest rates to be and the other dynamics to be inflation and other things, then we will plan our branch expansion policy for next year. But for now, rest of 2025, more or less this number will remain on a net basis.

Fair enough. Just one more follow-up on that. We know a certain banking competitor has been able to increase their deposits very aggressively. So I'm just trying to understand what the -- because the market is not that big, but it's obvious to who I'm referring to, but they've been able to grow their deposits very aggressively. So if you can just paint a picture of the industry, where are they taking the deposits from? Are they going to areas which weren't explore? Are they taking someone else's market share? Or are they creating new deposits? How is someone able to grow so aggressively? They basically added Alfalah's deposits over the last year or so. So I'm just trying to understand how something like that is possible.

So I'm able to just answer questions. relating to my book. And what I could say is there is, of course, growth in the system. There is undue growth. So and other banks may have taken the share of somebody else's. We don't have all the results out as yet, but there is overall growth in the total deposit in the system and how it has exchanged hands, we will see that going forward. But as far as we are concerned, we are clear on a couple of things that we feel that the stable growth in averages pays off in the long run while we may get -- it adds to the excitement when we see a very significant growth at a period end. But what is contribution on the bottom line is not as significant usually. And many other times when banks are competing with each other for market share, they result in out pricing and they result in distortion in market pricing and negative carry which is not something which we want to indulge in. So our focus right now is on current deposits, growing granular deposits, growing profitable deposits, not so much focused by a cutoff number but growing averages. So if the market dynamics change, and of course, we are -- any deposit where we have a positive spread is what we are looking at. But we are not sort of motivated by sort of the objective is not to have a certain period -- post a certain period a number. So that's our thought process, which I can articulate for you.

Fair enough. I understand that we're not chasing growth for growth's sake. I have one more question on the leverage side of the bank. So the goal for the bank is not to relever -- because I know the trade was essentially to borrow from the repo market and park it in floaters and I think you were getting 100 basis points spread, but the bank is not seeing value in that anymore. The bank will slowly, slowly -- as the interest rates come down, like continue to delever their book? Is that how the treasury is looking to play this next leg of the cycle?

Okay. So let me take this question. I have partly answered this question earlier as well that the strategy is when you are in a downward sloping -- sorry, falling interest rate environment, then obviously, you tend to borrow as much as possible because as and when interest rate cut, interest rate are cut, obviously, the carry gets bigger. But when you are either close to the interest rate bottom or if you believe that interest rate cycle will turn, then obviously, you tend to liquidate. And this is exactly what we have done so far. So we believe that we are very close to the interest rate bottom. And that's why we have liquidated some of our borrowing that we -- although we were getting a positive carry, but I believe the gains -- the capital gains were far, far greater than the positive carry we were getting. So that's why we liquidated the position.

Fair enough. I just have one more question on your slides only, I was seeing that the digital lending has gone up. I think it was a number like PKR 30 billion or something like that. So I would imagine this is probably non-collateralized lending or something? Is there something innovative going on, on the digital side of things or it's too early for anything meaningful to come as of yet?

No. There is, of course, innovation going on, and that's how we are showcasing it in that slide because a lot of these numbers are instant loans, which we are able to book through our Alfa app, they are able to submit their applications to Alfa app, instant loans and other stuff. And right now, this is, of course, sort of the target population is a prescreened population, which we target and as our models develop and become more sophisticated, this will be opened to a wider target audience.

I hope that answers your question. So Ms. Anjum, there are quite a few questions on the chat box. I'd like to take a copule of those. So there, [ Waleed Rathore ] is asking, I think the first half of this question has been answered. He asking the composition of floater and fixed PIBs and T-bills in the total investor book. And he's asking for the yields on the floating PIBs fixed and T-Bills and if there will be any repricing in the investment portfolio in the second half of the year? So maybe we can answer the second part, which is the repricing in the investment portfolio in the second half.

So the answer is yes. We have a fairly good amount of repricing left, which will be done from July until December, and that will certainly have an impact on our floating rate bonds return.

All right. And average duration of the fixed portfolio, if you could comment on that.

If I recall, I think it is around 2.3, 2.4 years.