NatWest Group PLC (NWG) 2009 Q2 法說會逐字稿

Good day everyone and welcome to the review of the first half '09 performance and acquisition of RBS' Pakistan banking assets conference call. Today's call is being recorded. At this time, for opening remarks, I'd like to turn the conference over to your moderator for today, Mr. Alistair Scarff. Please go ahead.

Good afternoon everyone and thank you for joining us. On behalf of myself and Hamza Murath of KASB I'd like to welcome you all to this afternoon's conference call. Once again, we're very fortunate to have Imran Zaffar, Head of Investor Relations for MCB to speak with us this afternoon.

There's obviously some very interesting times over in Pakistan with the recent upgrading of the rating of the country, but also at the individual bank level, the acquisition of the RBS banking assets. So without any further ado, let me pass you across to Imran to run through his prepared comments. We'll open up the lines post his comments for Q&A. Thank you. Over to you Imran.

Thank you Alistair. And good morning, good afternoon depending on where you are. I'll run through the call. First, I'll just speak about the acquisition of RBS' Pakistan operations. Then I'll turn to the second quarter result. And then we can move onto the Q&A session.

In terms of the acquisition of RBS Pakistan, as you must have seen in the press releases, we've acquired 99% of RBS Pakistan for PKR7.2 billion and that represents a below book value multiple. The transaction is still subject to regulatory and other approvals and consents. We're currently in discussions with the State Bank and we hope that the transaction can be closed by year end. That's our expectation.

The remaining 0.6% of the shares we will make a tender offer subject to the necessary approvals and consents as well.

Essentially, in terms of the acquisition, we've acquired a good business with a strong franchise, particularly in the affluent segment and the mass affluent segment at a reasonable or fair price. RBS Pakistan's operating profit before provisions stood at around PKR3 billion in financial year '08. The provisioning charge was PKR3.5 billion and that led to a net loss of PKR500 million.

Similarly in quarter one, the profit before tax for RBS Pakistan was PKR1.1 billion, and the provisions were PKR1.4 billion.

Now we're -- now in terms of the -- I'll come back to the issue of asset quality and if there are any specific questions, we can discuss those in the Q&A.

In terms of what the transaction does for us, number one it gives us -- it increases our market share by effectively around 2%. We're adding around PKR75 billion in terms of deposits and advances of around PKR6 billion to PKR7 billion.

The acquisition also made sense to us because it helped us to strengthen our platform by adding over 300,000 customers, of which around 120,000 customers are retail customers. A significant portion of the retail customers are also from the mass affluent and the affluent segments, an area that we've been interested in, and can be evidenced for instance from the launch of our Privilege franchise. The Privilege -- effectively it gives our Privilege business the scale and the expertise that it needed.

The second element, that we've added good experienced professionals to our team, but we've also managed to fill in certain customer and product gaps, in particular certain gaps that we had in our product portfolio on the Retail side, particularly cards. And it would have taken us some time to fill those gaps and we've managed to fill them in relatively quickly with this acquisition; and also in relation to certain Treasury products.

There are also certain synergies which we can leverage in terms of combining the two platforms, particularly in terms of system consolidation. And we see some saving in terms of combining the core systems of the two banks. But we'll need to be smart about how we do this, because one of the things that we're very conscious of and we want to avoid is any disruption to RBS' customers and the service levels that they enjoy. We want to make sure that those service levels are maintained, both for RBS customers and the MCB customers can also benefit from them.

Also, we'll be careful and we'll be smart in the way we combine the platforms, because we really would like to transfer some of the best processes that RBS Pakistan has in terms of its operations. And the combined entity should be the best of both platforms.

So any kind of specific questions I'll -- we can address them in terms of the Q&A session, but now I'll just turn to the MCB results for second quarter '09.

In terms of earnings per share, earnings per share was PKR5.3, which was up on an unconsolidated basis by 2% and on an unconsolidated basis, our earnings per share was down by 19%. Now the year-on-year decline on a consolidated basis was primarily due to the elevated contribution that we had last year from (inaudible) in the second quarter, and that was as a result of the sale of MCB shares to Maybank.

The tax rate this year is also higher for the second quarter. Last year we benefited from certain reversals.

Otherwise the top line growth that we saw in terms of higher revenues more than offset the higher provisioning level, the OpEx as well as the lower -- the pension fund reversal that we took in this quarter compared to last year this quarter.

In terms of a dividend, we've announced a cash dividend of PKR2.5 per share.

Now in regards to the P&L, the dynamics if I start from the top line; in terms of net interest income, it was markedly up from last year. But it also held up well quarter-on-quarter. And that was due to both our good balance sheet growth as well an improvement in our deposit mix.

The non-interest income was up on a yearly basis but was down on a quarterly basis at PKR1.1 billion. The reason for the decline quarter-on-quarter was primarily due to higher income from FX dealing and lower capital gains. Going forward, we'd expect the earnings from FX dealings to normalize back to the normal level that we generate.

Call fee -- but perhaps importantly, the call fee commission income was up 8% year-on-year as well as up 4% quarter-on-quarter and that's despite the slowdown in the economy that we have seen over the last year. It's been partly as a result of certain re-pricing initiatives that we took earlier this year as well as late last year, and we've seen good contribution from our trade business, from cash management and also the remittance business.

Turning to provisions; provisions were up this quarter; they were at PKR2.2 billion of the provision charge that we took through the P&L, PKR500 million of it was due to the diminution in value of investments. And we've -- and the charge for loans was PKR1.6 billion.

What we have seen in terms of the source of the provisioning is really, although the rate at which NPL stock is increasing for us, that's come down markedly, but there's deterioration in terms of the characterization of NPL. We effectively do see a provision charge in line with the guidance that we gave you earlier in the year.

On the cost side, since last year we've been very focused on controlling our costs in the current inflationary environment. And when we look at the non-interest expense line, excluding PF reversal, the year-on-year growth for the quarter was 8%. And non-interest expense was, prior to PF reversal, PKR3.6 billion.

Our personal loan costs for the half year rose by around 5%. To a degree the cost line, there are certain items in it which we have limited control over. So we saw growth in terms of rents, in terms of utilities, communication and also transportation charges.

PF reversal for the quarter was PKR1.1 billion. Last quarter it was PKR650 million, and the corresponding quarter last year it was PKR1.6 billion.

For reasons I mentioned earlier, the contribution from associates was lower this quarter, particularly on a year-on-year basis. So, especially, we saw profit before tax on a consolidated basis come down 3% year-on-year to PKR5.5 billion. But due to our higher tax rate, the net income line declined more.

On a quarterly basis, our profit before tax was down 13%. And that's primarily due to the lower FX [earnings] and higher provision levels.

In regards to the balance sheet, deposits were up 7% quarter-on-quarter to PKR362 billion.

Year-on-year numbers, last year in June the number -- the deposit numbers were elevated because of the proceeds from the acquisition of MCB shares from certain of our shareholders by Maybank, which were -- which added to our deposits June and last year.

Our current deposits increased by 13%, and that's been a very big positive for us quarter-on-quarter. With the source of these -- the increase in current deposits has been primarily from Tier 2 cities and also the rural area.

Our overall deposit mix improved with current accounts accounting for now 36% of deposits. That's up 200 basis points quarter-on-quarter. And CASA deposits account for 84% of our total deposits.

In terms of advances, advances were up around 6% quarter-on-quarter. The primary source of the increase was on the corporate side. But what we did do was we reduced our exposure to SME and the Consumer segment.

Total NPLs increased this quarter by PKR1.5 billion. They were primarily -- primarily, the sectors that contributed were the SME and Consumer segment.

Gross NPLs rose marginally to 7.6%. Our provision coverage was up around 300 basis points and is now 67%.

Capital adequacy was very strong, with total CAR at 19% at the end of the quarter. But it will decline as a result of the RBS acquisition, but we are still comfortable with our capital base.

Just a few comments in terms of looking forward. The economic situation is improving. Although stresses remain within the economy, we've seen inflation and interest rates both trending downward. And although margins will decline from the level they were at the first quarter, which was the highest ever for us, we expect spreads to remain stable this year, if not marginally better. And the rate of increase in terms of NPL stock has come down.

And although there's some uncertainty still, we would cautiously -- I cautiously say that we expect a better picture to emerge later this year into next year.

We'd also anticipate that if the economic situation improves then the system growth should also improve correspondingly.

On the cost side, we remain focused on controlling our costs. And really, in terms of our primary focus, they remain on growing the balance sheet profitably, managing our asset quality and controlling our costs. And that remains our focus for the remainder of the year.

Alistair, can I pass it back to you and just -- we can open it up to questions?

Great. Thank you very much, Imran. [Brendan], if you could run through the instructions on how to ask questions that would be great.

Thank you, Mr. Scarff. The question and answer session will be conducted electronically. (Operator Instructions).

Well, I'll take advantage of the -- while the queue is assembling to ask the first question, if I may Imran? If I could -- I was just wondering if I could focus on the RBS acquisition.

If I could ask two questions. One, are you done in Pakistan now? Meaning, does this -- you mentioned two aspects of the [Zilian] transaction, both in terms of product, capability, and personnel, so are you done in Pakistan?

And secondly, now that you've had a better look at the insides of the Bank, have there been any surprises, positive and negative, that you hadn't anticipated when you went into this first transaction?

Okay. If I can take the second part of that question first, right now we've actually gone through a pretty extensive due diligence process. But in terms of the keys being passed to us that's not the case at the moment. Later on during this year we'll have greater access to RBS and also their information. But until we have approvals from the State Bank, and also certain other bodies, we won't have complete access to the MIS of RBS.

But in terms of the due diligence process, we looked at, effectively, all the aspects of the Bank and in particularly we were focused on both the -- primarily on -- particularly the asset quality of the portfolio. And we've -- and our -- we've fairly assessed that portfolio in terms of our pricing for the transaction.

Also, RBS has been relatively -- or, actually, very prudent in terms of how it's been provisioning for the portfolio, both the historic ABN portfolio, as well as the portfolio that they acquired from Prime Bank. So, overall, we're relatively comfortable. But at this point we don't have the keys to RBS, so to speak.

In terms of -- now, if I go back to the first part of your question, we do -- we are -- we continue to look at any opportunities that open up to us in terms of inorganic growth. But at the moment, there aren't any opportunities that we are specifically looking at in addition to what we've just completed with RBS. And in fact, there are not necessarily so many assets which are up for sale, especially in the domestic market, which would affectively make sense to us.

So if I can leave the answer at that, I think that's the best way I can answer it.

If I could just indulge, and have just one quick question as a follow-up. Offshore, how does that fit into the strategy of the Group? Is that a high priority, medium priority, or low priority?

Sorry, what is?

An offshore expansion strategy. Some of your peers have expansions in the Gulf States, the Kazakhstan and the like, how does the Bank view offshore expansion?

Well, we've -- as I've shared on occasions, we've been looking at international expansion. And in particular, we've been looking and we've been thinking about the Middle East, Central Asia, and also the Asia Pacific side.

In terms of priority, the Middle East and Central Asia makes sense to us. But the other options are also being considered and certain options which are further than what I just mentioned to you. But having a desire to expand and finding the right assets, they're two different things. And we're continuously assessing opportunities, both from a strategic perspective as well as from a pricing perspective as well. So we have interest. We are looking. But it's easier to look than to conclude any transaction.

Understood. Brendan, over to you.

It appears that we currently have no questions lined up. (Operator Instructions).

Okay, then I can ask my second question. In terms of asset quality trends, some of your peers seem to be facing continued deterioration. Could you share with us how you view the date of asset quality in the market? Would you say that we're getting towards a trough, we still have maybe a further downward step? Or do you think we're now on an upward trend?

Well, if we look at the stock of NPLs and what's been happening in terms of the market and what we've seen is that there was a marked increase in the total system stock of NPLs towards fourth quarter. And since then, it's actually been declining.

So going forward, assuming that the economy is improving and, particularly also from our perspective when we look at our forward flows, you can cautiously say that perhaps we're reaching the trough of the asset quality term and things should improve into next year.

In terms of the provisioning levels, this year's still going to be a high provisioning year, partly because there is a certain stock of NPL which is already there and the categorization of those NPLs that are changing and you can see that from our results as well.

And does that shape your appetite for credit, given that albeit things may be not as dark as they were three to six months ago? Could you maybe share your outlook in terms of the appetite for credit? And maybe what you think the market could be looking for in terms of growth in the second half?

Absolutely. In terms of the credit demand in the market, we've been lending on the Corporate side. The Government's also had significant borrowing requirements that it's been partly funding from the banks. In terms of -- so corporate lending in particular is likely to continue going forward.

In terms of the appetite for taking one on SME and Consumer risk, it's limited at this moment. Clearly, it will depend on how the economy pans out. But essentially the Consumer, in particular, is likely somewhat stressed after the high inflation environment that we've seen over the last year and a half. So appetite towards SME and Consumer is limited. On the Corporate side we continue to lend. But again, we have tightened our credit criteria in terms of just underwriting in general.

Just reminds me one other point in relation to the RBS assets, given that it does have an exposure to these areas, which you've highlighted there is limited appetite for, have you taken a charge, or is there an intention to take a restructuring charge in relation to this transaction?

Well, we've looked in a significant amount of detail at the asset book of RBS. It's true they have significant exposure to Consumer and also the Commercial side. But they've also been -- but RBS more broadly has been -- in terms of its provisioning criteria, it's been very conservative and in some ways much more than what the regulatory requirements which, in themselves, are pretty conservative. They've been taking -- they've cleaning up the book and taking provisioning charges and just generally improving the coverage level.

So we're fairly comfortable in terms of not needing to take any specific restructuring charge, but we would expect that at least next year the provisioning charge at RBS would be at elevated levels. And then thereafter I think things should improve.

Thank you. Brendan, over to you.

It appears that we have no further requests for questions at this time.

Hamza, would you like to have one before I have my final question?

Yes, sure. Hello Imran. I have a question regarding the NPL's formation. I think MCB is one of the only banks whose sub-standard category NPLs have declined quarter-on-quarter and also half-year-on-half-year. So in your view what's the probability that any of these NPLs are -- potentially which are in the loss category, would be reversed in one year's time? Is there a probability or these are gone for good?

The categorization is effectively done under the State Bank criteria, but we've got a very good restructuring team, who have done a pretty good -- who have done an excellent job over the last couple of years in terms of managing our bad debt book.

And I think going forward I can't say to you what percentage or what amount of restructuring we'll be successful in. But I would just say that our restructuring, if we look at the experience, or the track record of our restructuring team, and if the economy continues to improve, you would anticipate a positive development on that side. But whether there are going to be material reversals, I wouldn't say at this point.

I just have another follow-up question. Can we assume that the NPL's formation is mostly from chunkier accounts, the corporates? Or is it smaller accounts but the number is higher?

The corporate side's been pretty good in the second quarter. We've seen most of our NPL increases comes from the SME and the Consumer side, which are smaller accounts.

Okay.

Thanks. Brendan, over to you and if not I'll have my concluding question and then tie up.

We have one question. It's from Raza from AKD Securities. Please go ahead. Caller, your line is open. Please proceed.

Hello. Imran, just a few questions --

Hello Raza.

Regarding the RBS acquisition. Basically, I've been noticing that RBS has quite a few percentage of high cost deposits, so how confident is MCB that it will be able to shed these deposits and still maintain liquidity? Or what's the strategic point of view as far as strategies are concerned for MCB, because I understand that once RBS' books are merged into MCB's books there will be a substantial impact, particularly in the (inaudible).

And secondly, how confident is MCB that they will be able to regain the affluent clientele that you referred to? Is there a chance that there'll be attrition in the customer base? What if people want to shift from MCB; so just two questions?

Okay. On the first question, in terms of the deposit structure of RBS, the majority of the deposits are from the preferred banking platform. And by the very nature of that business, the affluent or the mass affluent segment will generally have greater proportion of term deposits, because essentially those people have greater savings.

And now in terms of our strategy towards the funding structure, what we need to look at is much more a customer view in terms of profitability. So we will look at customer profitability, but what you have to remember in terms of the prepared, or the affluent and mass affluent segment is by its very nature that structure would be there.

Now, RBS is making roughly around the 3% return on assets in terms of its preferred banking operation. And to this segment, although you might have some more -- you might have term deposits you also have a greater opportunity to sell other products, regenerating products, such as bank [debts], etc.

So in terms of your shedding or not shedding term deposits, we're really going to be taking a customer view in terms of the relationships and the attractiveness of those relationships to us. But generally, RBS is a fairly well run bank and we wouldn't expect material changes in that sense.

In terms of the customers, we're very conscious that really we want to, in terms of retaining the customers we want to ensure that the service levels to RBS customers aren't disrupted and that's really going to be the key going forward.

RBS already has a very strong set of people servicing these customers and we want to retain them. And in fact, what we would like to do is to be able to add our own -- in essence, the strategic focus that we've had in terms of the affluent business in regards to our own Privilege platform, we want to service our customers, our mass affluent and affluent customers through that high service level platform.

So essentially, we want to maintain the service levels as far as the preferred operations operate of RBS and that's going to be key to retaining customers.

I wonder if I can just ask a follow-up question. This was just about the integration issues. What sort of integration issues are we looking at? Specifically, are we going to see overlapping branches closing? Are we going to see employees from RBS? I do understand that they're relatively overstaffed compared to MCB. So, what can we expect on that front? And can we expect one time costs if we are going to let some employees go? So what do you expect about that?

Okay. At one level, when you look at the business of RBS, making the comment that they're overstaffed isn't necessarily fair. The segment that they're serving is much more service conscious and in general you would expect there to be a greater number of people for each branch in terms of the mass affluent and the affluent segment.

Now in terms of branches, it's true that we've got a significant portion of branches which overlap, but what I would say there is two things. Firstly, it gives us an opportunity to consolidate the branches, but what we also -- we also have plans to increase our branch network and effectively, we're looking to increase our branches by over 40 branches currently. And what we'll be able to do is free up certain of perhaps our own people on -- who we can use to expand into staff these new branches that we're looking at. So in terms of restructuring, we don't anticipate there to be a significant number of -- any material changes in terms of staffing levels.

Okay, all right. Fantastic. Thank you.

It appears that there are no further questions at this time. I will now hand the call over to Mr. Scarff for any additional or closing remarks.

Thank you Brendan. If I could ask my final question and then we might -- may do the closing comments after that. Imran, if I could just draw the -- a broader question in terms of your cash on deposit growth there. It's obviously been a key area of expertise and competitive advantage of the Bank. [Leveraging] off the previous questions, how does the Bank perceive it will maintain that initiative under this blended strategy or I guess enlarged bank? Is that still going to be one of the key focus points of the Bank, this transactional model to yield these higher levels of CASA accounts?

Well, absolutely. We're -- effectively a large proportion of the RBS business is effectively a mass affluent and an affluent section. But as a large domestic bank we need to be having a leading position in terms of the middle income, the mass market in Pakistan. And there, as well as the Corporate segment, what we're really focused on is developing our transactional capabilities and our payments capabilities and that's really the strategy under -- through which we're looking to continue to generate low cost deposit. And that's going to be the fundamental strength of our Bank and our strategy going forward. So that strategy is totally in tact.

In fact, if I would just add to that, our specialist business -- in terms of the RBS acquisition there are a couple of advantages that we gain in terms of transactional capability both on the Retail side, but also on the Corporate side.

They have some pretty good systems in terms of cash management, liquidity management, those kind of areas. And when we look at these products and services, we think once we start selling them over the larger MCB platform, there's significant revenue generation potential there.

Excellent. Well, that brings to a close my key questions. In the absence of any further questions, Brendan are we all clear?

Yes, we have one more question from [Sofian] from JS Investments. Please go ahead.

Yes hello. Can you hear me?

Yes Sofian.

Good afternoon. I just wanted to know after the RBS acquisition occurs, what is the Bank's strategy going forward for the next year keeping in mind the current macroeconomic environment with interest rates expected to go down and although NPLs are on the improving side. But we're still concerned with -- as has already been mentioned, we're still concerned with asset quality for a lot of the banks and how MCB's strategy is to deal with this situation and as well as to what their overall strategy is for the next upcoming year or so?

I don't know if you were on the call earlier, but really primarily our focus for the foreseeable future is that we're going to continue to focus in terms of growing the balance sheet profitably.

Okay.

Keep a tight control on costs and maintain our asset quality, both through prudent lending and also in terms of actively managing our portfolio. So those are the primary three areas that we're going to be focused on. Does that answer your question or were you looking for something else?

No, that's the question. Just in terms of if you could just a little bit focus on the NPLs where you see them going forward for MCB itself. I think Hamza also asked a similar question, but I think if you could just go in a little bit more detail, that would be a little bit more helpful.

The NPL situation, it's largely a function of the macro environment. What we've seen is that probably the worst of the economic crisis is over. We've seen inflation trending downwards, the external situation improving but there are clearly still stresses in the economy, but that's been translated particularly in terms of -- if we look at provision levels, they're going to be a function of two things; one the total stock of NPLs in the economy and secondly, the categorization of those NPLs.

In terms of the total NPL stock, that's been declining both for system as well as for us. In terms of the portfolio, I think portfolio provisioning levels are going to be relatively high this year, but probably we've seen -- we're expecting that the trough of the asset quality curve is perhaps later in this year, but things should improve going into next year.

In terms of the second quarter, we saw the corporate portfolio behave quite well and really the -- just over 1 billion of NPLs that we accumulated were primarily from the SME and Consumer segment. I think those -- particularly the Consumer segment's going to remain under stress for some time yet, particularly given the impact of higher inflation on people's disposable incomes, etc.

So going forward, anticipate an improving situation, provision levels likely to remain higher this year, and Consumer and SME to remain under some stress.

Okay, thank you.

If I could ask one quick follow-up question on that one. Imran, in terms of your NPL progression, you have mentioned that your stock of NPLs has come down from the system. If you were to try and break it up in terms of upgrades versus write-offs or collections, how would you break it down, just in very broad terms? What I'm leading to is [specific], has the NPL stock been decreased largely by write-offs as opposed to either recoveries or upgrades?

Well, I said the NPLs -- I said the rate of NPL stock increase has come down. It's still increasing, but the rate has come down, that's what I meant by it. And in terms of the cross position of the NPL stock, if you don't mind, I'd like to get back to you on that in terms of specific numbers. I don't have them to hand.

That's perfectly fine.

In the absence of any further questions, I'd like to take this opportunity to thank Imran again for his time this afternoon and his actual comments. Congratulations on an excellent acquisition on the RBS assets at such a discounted book and on behalf of Hamza and myself, thank you all for joining us this afternoon. If you have any questions, please feel free to pass them through to ourselves or to Imran. Thank you and good afternoon. Thank you.

Thank you everyone.

That concludes today's presentation. Thank you everyone for your participation.