Big banks post 21% growth

There is a word of cheer from the financial sector, and hopes of a further increase in profitability of the banks.

By M. Aftab (Analysis)

Published: Mon 14 May 2012, 10:06 PM

Last updated: Tue 7 Apr 2015, 11:11 AM

The five big banks report a 21 per cent growth during the first quarter of fiscal year-2012, compared to the like quarter of last year. Another sign of their health is that this profit is attributed to lower provisioning of their delayed and defaulted advances of the past. Put together, these banks earned a profit of Rs23 billion during the quarter. The continuing global financial crisis has not impacted the Pakistani banks, analysts say.

The five big are: National Bank of Pakistan, or NBP, Habib Bank, or HBL, United Bank, or UBL, Muslim Commercial Bank, or MCB and Allied Bank, or ABL. Another good point is, while NBP is still largely government-owned, the others are privately owned. UBL’s ownership vests in UAE, HBL’s in the Aga Khan Group, but both MCB and ABL have private Pakistani business groups. The Big-5, together, have more than 55 per cent of the overall banking sector deposits, and represent 70 per cent of the market capitalisation, listed on the Pakistani bourses.But ironically, the profitability of the State Bank of Pakistan, or SBP, the central bank, has declined.

The central bank has registered a decline of Rs11.6 billion — or 3.1 per cent—in its profitability “due to operating losses, decline in exchange rate and increase in the interest expenses in fiscal year-2011,” SBP’s audit report unveiled this week says. The report said, “a decreasing spread ratio and an increasing burden ratio is not a healthy sign for the profitability of the bank and requires corrective measures by SBP’s management.”

On the other hand, what is the story of the Big-5 commercial banks. The Q1 of 2012 saw an overall provisioning of the Big-5 at Rs1.4 billion. It is 83 per cent less than the provisioning of Rs7.8 billion in Q1 of 2011. This was also possible because bank lending stayed restricted during the Q1 of 2012.

Rather than significantly expanding new credit lines to the private business, or enlarging the old ones, the banks, in general, stayed focused to lending to the government which is safe and secure. The government continues to borrow hugely to fill its growing budgetary deficit as defense spending due to war on terror continues, tax collection is not meeting the set targets, and industry and business stay under the shadow of the growing energy crisis-hitting production and business operations. Analysts also see an improvement in the repaying capacity of the borrowers, on the back of a two per cent reduction in the benchmark Discount Rate (DR), set by the SBP. It lead to some lowering of the commercial bank lending rates. An analysis of the Big-5 shows the Big-5 also were able to reverse the impairment amounts of Rs2 billion.

Improved management and healthy repayment of advances by creditors led to smaller provisioning for defaulted and delayed loans. This is in contrast to the fact that in fiscal year 2011 Net Interest Income (NII) was the key engine of earnings growth. But a sharp decline in provisions led to this year’s profitability. In contrast to 2011, a reduction in the banks’ lending rates, following the easing of the DR, lowered the banks’ margins of earning assets. This is particularly true in the case of investment in the government paper and other securities which account for 85 per cent of overall investment by banks.

The movement in the DR and interest rates tell the story. SBP and the inter-bank market report, while the average six-month Karachi Inter Bank Offered Rate (Kibor) was lower to the extent of 182 basis points (BPs), the average yield on the government paper and securities declined in the range of 140-175 BPs. These include the government’s Pakistan Investment Bonds (PIBs) and Treasury Bills (TBs). It meant a two per cent reduction in the Non Interest Income in the first quarter of 2012.

But, on the other hand, the country saw a small business growth, volumes rose, industrial output looked up, and the companies listed on the bourses paid out healthier dividends. It translated into a larger Non Interest Income. In the case of the big banks, it contributed 15 per cent of the total income, and rose 30 per cent on an annual basis, bank reports indicate. The bank profitability, however, can decline if there is a significant reduction in the interest rate. The SBP has recently asked the banks to pay out a minimum of six per cent profit on savings accounts called Profit and Loss Sharing Savings, under the Islamic mode. The rate was five per cent so for. What is the overall banking profit projection? The bank earnings will rise in full 2012 on the back of smaller provisioning for bad loans, larger Non Interest Income on the back of better capital gains on business at bourses, rising dividends and increasing banking fees.

Views expressed by the author are his own and do not reflect the newspaper’s policy

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