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Banks in Pakistan outperform all financial sectors

Results: The profitability of the banking business is rising sharply with record credit off take by the private sector, despite rising lending rates and a bigger spread.

Looking at the sharp rise in bank profits, depositors also are demanding an improvement in deposit rates or profits. This demand is also supported by Dr. Ms. Shamshad Akhtar, the new Governor of the State Bank of Pakistan (SBP), the central bank.

She says, "there is the need for delivering some benefits to depositors in the wake of rising lending rates, and high spreads, the banks are currently enjoying."

SBP says, the average spread of banks widened by 214 basis points in ten months to October, 2005. This was the key factor in boosting net interest income (NII).

Bank profits have risen sharply over the last three years. Fiscal 2004 saw record profits. Profits were up a massive 105 percent in nine months to September, 2005. The boost in the banks’ market capitalisation was 200 per cent.

These numbers put banks at top of the financial sector outperforming the economy. The GDP growth in the fiscal to June, 2005 was 8.4 per cent. GDP is projected to move in a 6.5 to 7.0 band in the current 2006 fiscal to close June 30.

As the economy stays on a high growth trajectory and generated larger incomes and profits for a number of sectors, it led to a rise in deposits, and enhanced the banking system capacity to lend a record volume.

The private sector credit off take in the first half of fiscal 2006 —July-December, 2005 — was Rs. 297.6 bn, up from Rs. 284b in the like period of 2004. The SBP private sector credit off take projection for the whole of fiscal 2006 was Rs. 330b. But, in the light of the actual volume of credit in the first half, it is bound to be overshot by a big margin.

This is why banks are expecting still higher profits in 2006, and beyond.

The average weighted lending rate of all banks is now 10.31 per cent—and rising. Some banks are even charging up to 11 per cent from blue chip corporates, 13 to 14 per cent from other borrowers, 14 per cent on auto leasing and 18 per cent on housing loans.

Bank profits were 87 per cent in 2003, compared to 2002. These were 23 per cent in 2004, compared to 2003 which, itself was a high profit year. A reduced rise in profit in 2004 was because banks did not enjoy extraordinarily high capital gains on their bond portfolio which was the case in 2003.

Between 2002 and 2004 the banks recorded an average annual increase of 19 per cent in the credit they advanced. But, surpassing even this high growth in advances, lending rose 28.5 per cent in the year to December 2005—-a record credit off take by private business that pushed bank profits up.

The current weighted deposit rate or profit to depositors is around 3.0-3.20 percent. The depositors demand for higher return is based on the fact that at the present rate, they get a negative return due to rising inflation, which is 8.5 per cent, and also moving up. Some senior economists put it in 9.0 to 9.50 range.

The rising bank liquidity, their capacity to lend record volumes, and invest more, during 2002-2004, was spurred by larger deposits, that rose 23.1 per cent in the year to December, 2005 alone. The continued low deposit rates, are also pushing depositors, to other high yield, high dividend fields. Although the numbers are still not quantified, a large amount of money is going into real estate for the last three years. It has pushed up not only the property value, including that of land lots, for housing and commercial space, but also has sharply raised rents for the benefit of investors. The high real estate profitability is also attracting a number of foreign investors, including those from Dubai, U.A.E. and Saudi Arabia. The people with cash, instead of placing deposits with banks, also have gone into large scale buying of stocks and shares. This rising demand, while new floatation of companies and shares stays insignificant, has created a demand-supply gap, pushing prices of share prices constantly up.

The country’s principal bourse — Karachi Stock Exchange (KSE) index of 100 key shares rose high this week, and crossed to a record plus 10,913.78 over the weekend.

What is spurring bank profits? Salman Jaffrey a banking industry analyst at Jahangir Siddiqui Capital Markets Ltd. (JSCML), says, "In 2005, the main reason for the abnormal growth in banks’ bottom line is the rising spread. Weighted average banking spread during the first 10 months of 2005 was 6.12 per cent. In the last two years, it moved in a band of 4.5 per cent."

Capital market analysts project excellent performance of banks to continue in 2006. Banks will, once again, outperform Karachi Stock Exchange KSE-100 share index, according to our expectations," says Muhammad Imran Khan, an analyst also with JSCML. Rising lending rates on a record credit off take by private business took place as the banks had a good liquidity, while the real interest rates stayed negative due to rising inflation.

It meant cheap credit for the private business, that in turn helped GDP growth of 8.4. per cent. Most of the government’s economic policies continue to be growth-centric, and there are no signs of a change on this score, although rising inflation which may rise further to 9.5 per cent by June 30 this year ought to be worrisome for Prime Minister Shaukat Aziz who himself is an internationally reputed banker. With all numbers for banks moving up, analysts project a 36 per cent growth in full calendar year 2005, and an average spread of 7.0 per cent, when all bank results are unveiled. It will propel profits in 2006 on the same track.