These are good times for Samba Bank. It closed first half with a 235 percent year-on-year bottom line growth. The banking minnow has cemented the first quarter gains with a strong financial performance in the second.
It seems that the fundamentals that triggered the first quarter growth helped Samba put on a good show in the Apr-Jun quarter as well. Recall that the healthy 1Q CY14 performance was characterised by heavy investment in attractive government securities, sizable bad debt reversals, and higher non-mark-up income. The investment frenzy was such that the bank’s portfolio swelled up by nearly Rs10 billion in that period. No wonder then its Investment-to-Deposit Ratio (IDR) stood at 89.11 percent, well above the Advances-to-Deposit Ratio (ADR) of 73.47 percent, as of March end.
As the first half closed, it seems that returns from high-yielding sovereign investments and incremental mark-up income from fresh advances have delivered a stunning 36 percent year-on-year top line growth. The 43 percent growth in cost of funds is proportionally higher than that, a cause of worry. Yet a 26 percent expansion in net mark-up income is to be savoured.
The story gets better as the bank showed strong growth in reversals of earlier provisioning and also made some recoveries against bad debts. That augurs well for Samba’s asset quality, even as the bank gradually expands its loan book.
However, non-mark-up income-–which comprises of fee, commission and brokerage income, as well as foreign exchange income-–could have done better. The humble 6 percent year-on-year growth under this head is primarily due to comparatively lower income from dealing in foreign currencies. But that was positively compensated by a controlled 4 percent growth in non-mark-up/non-interest expenses: thanks to contained administrative expenses.
With a PAT of Rs125 million, Samba is now headed to the closing half of the year in strong shape. However, the management must keep its focus on mitigating the inherent challenges small banks usually face, so as to put the bank on a continued solid footing.
Samba’s deposit growth-–which was about 8 percent at March 31, 2014, compared to December 31, 2013-–is decent when compared with its peers. However, during the same period, the bank’s borrowing from other financial institutions had increased nearly four times. Besides feeding in higher cost of funds, short-term borrowing from other financial institutions can also create maturity mismatch if the investment appetite continues to be funded primarily from market borrowings. This is not a sustainable way to profitability.
To tackle that, Samba needs to attract low-cost deposits-–arguably a difficult feat for small-sized banks. At the same time, it should continually expand its lending portfolio for sustainable future income.
Samba Bank Limited (Unconsolidated P&L)
Rs(mn) 1HCY14 1HCY13 Chg
Markup/return/interest earned 2,059 1,518 36%
Markup/return/interest expensed 1,246 872 43%
Net markup income 812 647 26%
Provisioning / (Reversal) (56) (43) 32%
Net markup income after provisions 869 690 26.0%
Non mark-up / Non-interest income 98 93 6%
Operating revenues 967 782 24%
Non mark-up / interest expenses 775 747 4%
Profit before taxation 192 36 435%
Taxation 67 (1) 4804%
Profit after taxation 125 37 235%
EPS – Rs 0.14 0.05