MCB Bank has released its first-quarter 2025 results, revealing a 10% year-on-year decline in pre-tax profits. However, staying consistent with its reputation as a dividend-friendly stock, the bank announced a Rs9/share interim dividend.
However, it’s not the income statement that’s making headlines, it’s the stark shift in balance sheet strategy, which shows a significant pivot back to government bonds and away from private sector lending.
A Quick Reversal in Lending Behaviour
After the Advance-to-Deposit Ratio (ADR) spike in Q4 2024, where banks aggressively expanded private credit to avoid penal taxation, MCB’s ADR has now plunged from 54% to 36%.
- Advances shrank by Rs282 billion (a 27% drop), bringing total loans back to levels last seen in late 2022.
- Meanwhile, investments ballooned by Rs650 billion (a 56% increase), raising the Investment-to-Deposit Ratio (IDR) to a record 87%.
This dramatic shift reflects not just MCB’s strategy but a broader banking industry retreat from lending, as credit appetite remains soft in a sluggish macro environment.
Sector-Wide Lending Slump
The downturn in lending isn’t unique to MCB:
- Total banking sector advances fell 15% in Q1 2025 to Rs 15 trillion.
- Non-bank financial institutions (NBFIs), despite comprising only 8% of total lending, contributed to a third of the Rs2.4 trillion drop, largely due to temporary lending tied to Q4’s tax-linked lending surge.
Deposits Rebound; Margins Under Pressure
On the liabilities side, MCB recovered from a Q4 2024 deposit outflow of Rs140 billion, posting a 9% increase in deposits by March 2025, double the industry growth rate of 4%.
However, income margins took a hit:
- Net markup income declined, partly due to the changing interest rate outlook.
- Non-markup income saw modest gains from fees, commissions, dividends, and FX operations.
- But administrative costs surged, growing faster than headline inflation, dragging the cost-to-income ratio down by 8 percentage points year-on-year.
Outlook: Low Credit Appetite, High Liquidity
Although inflation is easing and external account stability has improved, private sector borrowing demand remains tepid. With industrial production weak and the agriculture sector giving mixed signals, a meaningful rebound in credit activity appears unlikely in the near term.
Meanwhile, the conversation around interest rate cuts has returned, but banks like MCB appear to be hedging their bets by loading up on risk-free government securities rather than lending to an uncertain private sector.
