Microfinance Banks in Pakistan
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Microfinance Banks in Pakistan, U Microfinance Bank (UBank) has recently disclosed its half-yearly reports covering the period from January 2023 to June 2023. However, the release comes with a notable delay, setting it apart from the traditional timeline of August or early September. The reports, unveiled in late November, bring to light various aspects of UBank’s financial landscape, presenting a mix of surprises and clarifications.

Restating 2022 Figures:

One of the focal points of interest in these reports is the restatement of UBank’s year-end figures for 2022. Initial speculation revolved around a substantial Rs 8 billion provisioning charge imposed by the State Bank of Pakistan (SBP), potentially posing a threat to UBank’s financial stability. The shift in leadership in October, coupled with delayed financial reports, fueled these speculations.

However, a decisive press release from the PTCL Group on October 23 vehemently dismissed all allegations and uncertainties, emphasizing UBank’s robust and resilient capital base. The recently revealed financial statements showcase an equity figure of Rs 5.3 billion at the end of June 2023, surpassing the SBP-mandated minimum capital of Rs 1 billion. Furthermore, UBank reported a noteworthy profit after tax of Rs 1.4 billion.

Revisions and IFRS-9 Impact:

While confirming UBank’s financial stability, the statements also shed light on revisions made to the 2022 figures. UBank wrote off Rs 1.7 billion as a credit loss allowance in its restated half-year 2022 statement, a significant increase from the initially reported Rs 248 million. This adjustment is attributed to the application of the International Financial Reporting Standards (IFRS-9).

IFRS-9, governing the treatment of financial instruments, necessitates a periodic assessment of the outstanding loan portfolio under the Expected Credit Loss (ECL) model. Concerns raised by the SBP regarding the treatment of rescheduled loans under this model prompted a reassessment by UBank’s auditors. The misclassification of a portion of the Covid-era rescheduled portfolio under stage one of the ECL model was deemed erroneous, impacting the recoverability of these loans.

Financial Impact and Balance Sheet Adjustments:

The adjustments in the 2022 financial statements resulted in a decrease in net advances by approximately Rs 4 billion. This, in turn, influenced the balance sheet, with total assets decreasing by Rs 2.8 billion, total liabilities seeing a dip of Rs 80 million, and total capital dropping by Rs 2.7 billion.

Performance in H1 2023:

Moving into the first half of 2023, UBank reported a substantial profit after tax of Rs 1.4 billion, a notable improvement from the restated June 2022 statement showing a loss of Rs 175 million. The markup income more than doubled, reaching Rs 19.8 billion, matched by a threefold rise in markup expenses to Rs 15.95 billion. Consequently, the net markup income saw a nominal 17% increase, reaching Rs 3.8 billion.

Operational Shifts and Deposit Dynamics:

UBank’s advances grew to Rs 69 billion from Rs 55 billion, while investments declined by around 39% to Rs 84 billion, and borrowings decreased by approximately 42% to Rs 67 billion by June 2023. Deposits, a crucial aspect, increased from Rs 92 billion in 2022 to Rs 99 billion in the first half of 2023.

In contrast to other telecom-based microfinance banks focusing on branchless banking, UBank opted for a conventional brick-and-mortar strategy, opening branches in urban cities. However, a concentration risk in deposits was highlighted in the VIS credit report, particularly within the top 50 depositors, posing potential liquidity risks for the bank. The recent half-yearly reports indicate a shift in deposit dynamics, with individual deposits surging by 87%, contributing to a substantial change in UBank’s deposit portfolio.

Strategic Vision and Future Prospects:

UBank’s resilience in the face of challenges, as demonstrated in the half-yearly reports, is a testament to its strategic vision and adaptability. The decision to maintain a brick-and-mortar presence, despite the industry trend towards branchless banking, reflects a commitment to fostering a tangible connection with customers in urban centers.

The surge in individual deposits, coupled with a decrease in dependence on deposits from banks and financial institutions, marks a significant shift in UBank’s deposit dynamics. This evolution is pivotal for mitigating concentration risks highlighted in the VIS credit report. The diversification of UBank’s deposit base, particularly the noteworthy increase in individual deposits, indicates a positive response from retail customers.

Operational Efficiency and Performance Metrics:

While the adjustments to the 2022 figures and adherence to IFRS-9 standards necessitated a re calibration

of financial statements, UBank’s operational efficiency remains a focal point. The surge in profit after tax for the first half of 2023, accompanied by a growth in advances, signifies a positive trajectory. The meticulous management of credit loss allowances and adjustments showcases UBank’s commitment to maintaining financial health.

The impact of the pandemic on the banking sector, especially in the context of rescheduled loans, underscores the importance of robust risk management practices. UBank’s response to the challenges posed by the misclassification of loans under the ECL model reflects a proactive approach to address evolving regulatory concerns.

Industry Comparison and Market Dynamics of Microfinance Banks in Pakistan:

The unique position of UBank, with its emphasis on conventional banking practices, sets it apart from other telecom-based microfinance banks. While industry peers may focus on branchless banking, UBank’s strategy aims at establishing a physical presence in key urban areas like Karachi, Lahore, and Islamabad. This approach is likely to resonate with a segment of customers seeking in-person banking services.

Comparisons with other banks in the microfinance sector, such as Telenor Microfinance Bank and Mobilink Microfinance Bank, highlight the diversity in strategic approaches within the industry. Each bank’s approach to deposit mobilization, branch network expansion, and risk management contributes to the overall dynamics of the microfinance landscape in Pakistan.

Financial Insights:

  1. Equity Strength: UBank’s disclosed equity stands at a robust Rs 5.3 billion, showcasing financial stability and exceeding the SBP-mandated minimum capital of Rs 1 billion.
  2. Profit After Tax Surge: The bank reported a noteworthy profit after tax of Rs 1.4 billion in H1 2023, a significant turnaround from the restated loss of Rs 0.175 billion in June 2022.
  3. Credit Loss Allowance Increase: UBank’s credit loss allowance for 2022 saw a substantial increase from Rs 0.248 billion to Rs 1.7 billion, reflecting adjustments made due to the application of IFRS-9.
  4. Operational Adjustments: Net advances decreased by Rs 4 billion, influencing the balance sheet with a reduction in total assets, liabilities, and capital.

Income and Expense Dynamics:

  1. Markup Income Surge: UBank’s markup income experienced a remarkable surge, more than doubling from Rs 8.4 billion in June 2022 to Rs 19.8 billion in June 2023.
  2. Markup Expenses Increase: Correspondingly, markup expenses also increased threefold from Rs 5.2 billion to Rs 15.95 billion, impacting the net markup income.
  3. Net Markup Income Growth: Despite increased expenses, the net markup income showed a nominal 17% increase, reaching Rs 3.8 billion.

Operational Performance:

  1. Advances and Investments: UBank’s advances grew from Rs 55 billion to Rs 69 billion, while investments saw a decline of around 39% to Rs 84 billion by June 2023.
  2. Borrowings Decrease: Borrowings decreased by approximately 42%, from Rs 115 billion in 2022 to Rs 67 billion in June 2023.
  3. Deposit Dynamics: Deposits increased from Rs 92 billion in 2022 to Rs 99 billion in the first half of 2023, with individual deposits experiencing a significant surge of 87%.

Conclusion and Forward Momentum:

As UBank continues to navigate the ever-evolving financial landscape, the release of these half-yearly reports not only instills confidence in stakeholders but also serves as a transparent account of the bank’s journey. The disclosed figures, adjustments, and strategic insights provide a foundation for informed decision-making by investors, regulators, and customers alike.

The proactive response to challenges, coupled with a commitment to transparency and adherence to global financial standards, positions UBank for sustainable growth. The coming months will likely witness the fruition of strategic initiatives, the impact of evolving market dynamics, and the manifestation of UBank’s vision for financial inclusion and stability.

In conclusion, U Microfinance Bank’s recent financial disclosures mark a milestone in its ongoing narrative, reflecting resilience, adaptability, and a strategic vision that propels it forward in the dynamic landscape of the microfinance industry.


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