NBP | National Bank of Pakistan Transmission of Half yearly Report for the Period Ended June 30, 2024

Quarterly Report June 2024

Unconsolidated Condensed Interim Financial Statements

For the six months period ended June 30, 2024

Directors' Report to the Shareholders

Standalone Financial Statements

Dear Shareholders,

On behalf of the Board of Directors "the Board", we have the pleasure of presenting, the condensed interim standalone financial statements of the Bank for the half‐year ended June 30, 2024. These financial statements have been reviewed by the Bank's external auditors.

Economic Environment

After enduring consecutive negative shocks, the global economy is now showing signs of stabilization. Despite flaring geopolitical tensions and high interest rates, global growth is projected to stabilize at 2.6 percent this year. It is then expected to edge up to 2.7 percent in 2025‐26 amid modest growth in trade and investment.

During the fiscal year 2024, Pakistan's GDP growth reached 2.4%, indicating an improvement over the challenges faced in the previous year. Notably, Pakistan's headline inflation clocked in at 12.6% on a year‐on‐year basis in Jun'24 and remains well below the levels of the same month last year. Pakistan's total liquid foreign exchange reserves grew to USD 13.9 billion by Jun'24 from around USD 9.2 billion in Jun'23, comprising USD 9.4 billion held by the State Bank of Pakistan and USD 4.6 billion by commercial banks. The fiscal deficit was 6.8% percent of GDP, unchanged from the same period last year, revenue collection surged by an impressive 38%, attributed to a remarkable 75% increase in non‐tax collection and a substantial 29% rise in tax revenues. The State Bank of Pakistan chose the path of monetary easing and reduced the policy rate by 150 base points, from a steady 22% in Mar'24 and further down to 19.5% in Jul'24 due to improved inflation outlook, stable PKR against USD along with conclusion of negotiation with IMF.

The Pakistan Stock Exchange continues its exceptional run in 2024, with the KSE‐100 Index surging to 78,000+ points from 62,451 points at the end of 2023. This positioned it as the top‐performing asset class in the country delivering an impressive return. Looking ahead, the country's economic outlook is stable, with anticipated political stability, IMF deal in line, anticipated foreign exchange inflows and improved economic outlook.

Banking industry outlook is promising and is expected to benefit from stronger economic growth and a rebound in credit demand, driven by IMF support and a reduced policy rate in the second half of 2024. With a more optimistic outlook for GDP growth, inflation, and interest rates, loan growth is expected to accelerate. Credit to the private sector is expected to gradually recover, largely driven by increased demand in key industries such as wholesale and retail trade. Despite some credit cost pressures on account of implementation of IFRS‐9, overall credit quality remains satisfactory, and the anticipated easing of monetary policy in 2024 should help reduce the risk of increase in non‐ performing loans.

Financial Performance ‐ H1'2024

Amidst the challenges of the prevailing business environment, your Bank has delivered strong financial results for the six‐month period ended June 30, 2024, except for the one‐off extra‐ordinary item being the impact of the decision in pensions review petition. These results demonstrate the resilience inherent in the Bank's business model, effectiveness of the strategic efforts by management, and the commitment demonstrated by our field personnel in these demanding circumstances.

• Summary

(PKR Billion)

• Mark‐up/Interest Income

For the half‐year period under review, your Bank earned Gross Interest Income 'GII' of PKR 562.6 Bn as against PKR

432.3 Bn for the corresponding half‐year period of 2023. The PKR 130.3 Bn increase in GII was achieved through a volumetric growth in average interests bearing assets coupled with the favourable impact of higher average policy rate during H1'24. During this period, the Bank's investments averaged PKR 4,258 Bn (H1'23: PKR 3,623 Bn) and generated a mark‐up/interest income of PKR 433.8 Bn being PKR 106.8 Bn or 32.66% up against PKR 327.0 Bn for H1'23. This translates into average yield at 20.5% (H1'23: 18.2%). In the higher policy rate environment, maturity profile of the Bank's investment book is skewed as a strategy towards shorter duration securities. Similarly, placements averaged PKR 77.7 Bn (H1'23:PKR 82.6 Bn) and generated a mark‐up income of PKR 6.9 Bn (H1'23: PKR 7.2 Bn) at an improved yield of 17.98% as compared to 17.65% for H1'23.

The Bank's loan book averaged PKR 1518.0 Bn and generated a mark‐up income of PKR 121.9 Bn i.e., PKR 23.8 Bn or 24.3% higher than PKR 98.1 Bn of H1'23. This too was achieved through both, a volumetric growth by PKR 80.1 Bn, as well as the favourable rate variance with particular growth observed in SME/Commercial and retail loan portfolios. Pertinent to mention, this growth in income was achieved despite the Bank carrying a higher proportion of lower‐ margin and non‐performing loans extended to certain state‐owned entities.

Likewise, the Bank's cost of funds for H1'24 also closed higher at PKR 490.8 Bn as compared to PKR 359.2 Bn in H1'23. This increase of PKR 131.6 Bn or 36.6% was mainly driven by an increase in cost of deposits by PKR 76.8 Bn and the borrowings/repo/Swap cost by PKR 54.7 Bn. While average cost of deposits stood higher from 11.19% in H1'23 to 14.04% in H1'24, total cost of funds increased from 14.8% to 17.7%. Consequently, the Net Interest Income 'NII' for the period under review closed at PKR 71.8 Bn, depicting a decline by 1.9% against PKR 73.1 Bn of H1'23.

• Non‐Fund Income

Non‐Fund Income 'NFI' for the H1'24 recorded a YoY increase to close at PKR 25.1 Bn which is PKR 6.0 Bn or 31.7% higher than PKR 19.0 Bn of H1'23. While fee & commission income recorded a YoY increase of 14.7% to close at PKR

12.1 Bn (H1'23:PKR 10.5Bn), the dividend income increased by PKR 0.7 Bn or 28.0% to close at PKR 3.0 Bn. On the other hand, while FX income decreased by 1.7% to close at PKR 4.0 Bn as against PKR 4.1 Bn for H1'23, capital gains recorded an increase by PKR 4.9 Bn or 532.2% to close at PKR 5.8 Bn (H1'23:PKR 0.9 Bn). Going forward, the NFI is expected to remain strong following the recent developments such as high forex reserves, strong stock market indicators and improvement in the overall economic environment

• Operating Expenses

Amidst the high inflationary pressures, total operating expenses of the Bank for the half‐year period under review amounted to PKR 49.1 Bn which is 11.3% higher YoY as compared to PKR 44.1 Bn for the similar period last year. HR cost that constitutes around 64.8% of the total operating expenses, amounted to PKR 31.8 Bn depicting a YoY increase of PKR 3.6 Bn or 12.7%. While property related expenses amounted to PKR 6.1 Bn (H1'23:PKR 5.12 Bn), IT related expenses amounted to PKR 3.8 Bn (H1 '23: PKR 3.5 Bn) as the Bank is diligently upgrading its IT infrastructure through core banking system and major software maintenance. Accordingly, the Bank's cost‐to‐income ratio (excluding extraordinary item) for the period stood at 50.7% as against 47.8% for the similar period last year.

• Credit Loss Allowances

The Bank prudently identifies credit loss allowances in its asset portfolio under the expected credit loss model and maintains a robust level of provisions as per the applicable regulatory requirements. During H1'24, the Bank's non‐ performing loans decreased by 1.1% to reach PKR 218.5 Bn from PKR 220.8 Bn as of Dec 31, 2023. These translate into loan infection ratio at 14.2% (Dec'23:13.5%). Gross NPL ratio stands high as the Bank carries a significant amount of legacy NPLs.

For the six‐months period under review, reversal amounted to PKR 1.8 Bn was recorded as compared to a total charge of PKR 0.41 Bn for the corresponding six months period of 2023. Key contributor towards this drop were the diminution in value of investments recorded a YoY decrease of PKR 1,512 Mn and recorded reversal amounted to PKR 257.7 Mn as against PKR 1,254.3 Mn charge in the comparative period. Whereas, credit loss allowance against loans & advances recorded a net reversal of PKR 1,819.4 Mn as against a reversal of PKR 946.9 Mn for the corresponding 6M period of 2023.

18.62% as compared to 25.47% and 19.16%, respectively, at YE'2023. While leverage ratio stood at 3.10%, other financial soundness indicators also depict a strong & resilient position of the Bank.

• Compliance & Risk Matters in the New York Branch

With close oversight from the Board of Directors and Head Office Senior Management, the New York Branch continues to comply and execute on actions pursuant to the public enforcement actions issued by the New York State Department of Financial Services and the Federal Reserve Bank.

• Sale of Shareholding in UNBL‐UK

Under a joint venture agreement, the Bank held 20.25 million (45%) ordinary shares in United National Bank Limited (UNBL‐UK). The transaction for the sale of the Bank's entire shareholding in UNBL‐UK was concluded subsequent to the reporting period date after obtaining all the regulatory approvals on July 01,2024. The carrying value of asset classified as held for sale was PKR 2.36 billion and total consideration received by the Bank is equivalent to PKR 8.1 billion.

• Contingency Regarding the Pension Case

The Honourable Supreme Court of Pakistan (in Review Jurisdiction) has, by its order dated 27th March 2024, dismissed all the civil review petitions filed by NBP (CRPs No 368 to 409 etc.), as a result of which the Supreme Court decision dated 25th September 2017, in respect of the pension litigation, has now attained finality and in compliance of the judgement bank has made payments to majority of petitioners as well as non‐petitioners. The next date of hearing for making remaining compliance has been fixed on October 15, 2024.

• Credit Ratings

NBP is rated as 'AAA' by both the recognised credit rating agencies in Pakistan. In June 2024, M/s VIS Credit Rating Company re‐affirmed the Bank's standalone credit rating as "AAA", the highest credit rating awarded by the company for a bank in Pakistan. Similarly, M/s PACRA Credit Rating Company also assigned the Bank long‐term entity rating as 'AAA' (Triple AAA) and short‐term credit rating as 'A1+' (A‐one Plus).

• Future Outlook

As Pakistan's leading commercial bank, your Bank will continue to play its National role towards supporting a robust economic momentum in the country, while also maintaining a strong & resilient balance sheet to create long term sustainable value for its shareholders and other stakeholders. In the foreseeable future, the Bank's business strategy will remain focused on digitising and extended financial solutions across all business and retail sector with particular focus on financial inclusion of the underserved sectors including SME, Microfinance, Agriculture Finance as well as Islamic financing on a priority basis. We are following a strategy of de‐risking in the overseas footprint where necessary.

• Acknowledgement & Appreciation

We appreciate the continued efforts & dedication of our employees towards providing financial services to the Nation. We would also like to acknowledge the support of the Government of Pakistan, the State Bank of Pakistan, the SECP and other regulatory bodies for enabling the Bank to achieve its potential and contribute towards the socio‐economic development in the country.

For and on behalf of the Board of Directors

INDEPENDENT AUDITORS' REVIEW REPORT

To the members of National Bank of Pakistan

Report on review of Interim Financial Statements

Introduction

We have reviewed the accompanying unconsolidated condensed interim statement of financial position of National Bank of Pakistan (the Bank) as at June 30, 2024 and the related unconsolidated condensed interim statement of profit and loss account, unconsolidated condensed interim statement of comprehensive income, unconsolidated condensed interim statement of changes in equity, unconsolidated condensed interim cash flow statement, and notes to the unconsolidated condensed interim financial statements for the half year then ended (here-in-after referred to as the "interim financial statements"). Management is responsible for the preparation and presentation of these interim financial statements in accordance with accounting and reporting standards as applicable in Pakistan for interim financial reporting. Our responsibility is to express a conclusion on these interim financial statements based on our review.

The figures for the quarters ended June 30, 2024 and June 30, 2023 in the unconsolidated condensed interim statement of profit and loss account and unconsolidated condensed interim statement of comprehensive income have not been subject to review and therefore, we do not express a conclusion thereon.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity". A review of interim financial statements consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim financial statements are not prepared, in all material respects, in accordance with the accounting and reporting standards as applicable in Pakistan for interim financial reporting.

The engagement partners on the review resulting in this independent auditors' review report are Shahbaz Akbar (A. F. Ferguson & Co.) and Zulfikar Ali Causer (BDO Ebrahim & Co.).