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Banks make good profit as lending rates stay high

ISLAMABAD — Pakistan and foreign-based banks reported good profits this week, on the back of higher lending rates, and widening spread. As major investments have taken place over the past three years, the private sector credit take off for fixed investment has slowed down, but working capital requirements are growing.

Banks earned a 24 per cent profit, as their net interested-based income rose 31 per cent to Rs36.7 billion, during January-March, 2007. Alongside the private business and industry’s demand for working capital, consumer finance is rising— helping banks to enlarge their profitability. Besides rising lending rates and growing fee-based income, the bank profitability owes a good deal to highly depressed profit rates they pay to savers and depositors. Average profit to savers is around 3.14 per cent which is more than five per cent lower than the current inflation rate. It means depositors are suffering a negative rate of return. SBP has repeatedly asked commercial banks to raise their deposit rates to give a due share to savers and to enlarge savings, but the banks have refused to do so. The spread enjoyed by banks has over these months widened from 7.50 to 7.72 per cent.

However, there are exceptions from the profit average. United Bank, owned by Abu Dhabi Group and UK-based industrialist-investor Sir Anwar Parvez has declared a 36 per cent growth in its net profit to Rs3.08 billion for the first quarter of 2007 that closed March 31. The profit was Rs2.26 billion in the like quarter of 2006.

While the rate of growth of credit for fixed investment has slowed, consumer financing (CF) is moving up rapidly, in spite of high interest rates for this category. It rose 14.3 per cent in September, 2006. The bank current profitability is contributed, a great deal, by CF. The lending rate for CF now averages 18 per cent. Bankers said it ranges between 16 to 22 per cent for various uses, and by packages offered by different commercial banks. Despite some easing of the overall private sector credit take off, the banks’ interested-based income is rising — reflecting higher lending rates across the board, but more particularly because of income from CF.

The private sector net borrowing from banks was Rs266 billion in 10 months to April, 2007— a 12.6 per cent growth, against the whole-year target of Rs390 billion, set by State Bank of Pakistan (SBP), the central bank. The credit take off during the like 10 months of 2006 was Rs339 billion or 19.8 per cent per cent higher compared to the like period of 2005, SBP Governor Dr. Shamshad Akhtar, informed the jujst-concluded Private Sector Credit Advisory Council (PSCAC).

Dr Akhtar said, "despite ample liquidity in the system, commercial banks have not been able to expand lending due to low demand for credit from the private sector. While there us a growth in working capital finance, the demand for fixed investment credit is subdued," she informed PSCAC. The corporates, in some cases, are financing their requirements out of their retained earnings, or foreign borrowing.

Their are several reasons for a credit slowdown, besides reduced fixed investment. The banks have slowed their advances to some of the sectors in order to "reassess and develop their own capacity to lend more prudently," according to PSCAC. A good deal of bank mergers and acquisitions (M&As) which have been going on for the last two years, and are prominently during the last year, has led to reduced advances. This is because the acquired banks have slowed advances, as they are reassessing their capacities, and developing strategy to position themselves for higher profitability.

SBP also has formulated a new strategy for microfinance. Similar exercises are now in hand to develop strategies for housing, infrastructure, Islamic banking, and small & medium enterprises (SMEs), to meet their fast growing credit demand. Removal of constraints on credit for farming is also underway.

Dr Akhtar has called PSCAC, and the banking industry, to prepare to meet "challenges in lending over the next five to 10 years." She said, " a substantial growth in credit disbursement will be a challenge for the banking industry, unless the real sector problems are addressed."

SBP says the private sector credit growth for agriculture, manufacturing , transport, storage & communications is up, but it was comparative down for the country’s biggest industry—textiles. A large volume of credit has been going into electricity gas and water sectors and construction. The SBP analysis indicates, "there was a deceleration in fixed investment loans, but the working capital requirements actually accelerated."

The consumer financing is rising constantly which SPB considers to be "a positive development" as it meets consumer needs, though at a high lending rate. CF generates demand for a wide range of goods and services that fuel the economy. But, SBP and commercial banks, both, need to increase vigilance to prevent over leveraging of individual borrowers that can increase he risk of default. There is also a widening concern over banks’ high charges for various services, that are rising fast. The banks are not willing to cut them down because these charges and fees, after income from lending, are the second most important source of their high profitability.

The banks’ continued good performance has prompted Moody’ to upgrade ratings of four Pakistani banks, underscoring their financial strength. It have just announced, raising by a notch, Bank Financial Strength Rating (BFSRs) of government— owned National, Aga Khan owned-Habib, Abu-Dhabi Group-Sir Anwar Parveiz-owned United Bank, and Muslim Commercial which is owned by private Pakistanis.

National’s rating rises to D from D- with stable outlook." On its global local currency deposits it gets Baa/Prime-3 long term/short term. The rating falls in investment grade. Rating on its foreign currency deposits stays at B2/NP.

United and Habib, both, have been upgraded to D- with "stable outlook," from E+. They get Ba1/NP (long term/short term) which falls in speculative grade. Their rating on foreign currency deposits stays unchanged at B2/NP. Muslim Commercial is upgraded to D from D-. It is been assigned Baa3/Prime-3 (long term/short term) on its global local currency deposits, which falls in investment grade. At the same time, Standard and Poor’s (S&P) in its latest banking sector report have put Pakistani banks in "supportive" category. The company uses three categories for Asian banks: "interventionist", "supportive," or "support uncertain."

Even as the lending rates remain high, SPB has decided to continue with its tight monetary policy (TMP) in order to contain inflation. While, in recent months, the core inflation has risen to 8.5 per cent, food inflation has stayed still higher in he range of 12 to 14 per cent which should be a matter of concern to the government, particularly during this year of National Parliamentary elections. Rising inflation has brought strong protests from independent economists and consumer rights groups.

But, unmindful, the government has continued to peruse a high-growth policy which is largely inflationary. SBP says it will continue for the next two years. Prime Minister Shaukat Aziz, this week, applauded "the anti-inflationary policy of the central bank," which he said, "stopped the rising inflation from hitting the double-digit." He supported banks in expanding consumer finance, because it is helping expand consumer demand for everything from autos to consumer durables and housing construction. Aziz, in a meeting with bankers, asked them to finance exports, which grew at the meager rate of 3.9 per cent over the first nine months of fiscal 2007. "Our exports suffered serious blows in the last nine months. The banker should play their due role in enhancing exports," he asked them. The banking has been transformed into " a vibrant sector which is driving the economic growth." This sector "stands out among the developing countries as an example of reforms and "we are proud of our achievements in this sector."

He said," recapitalisation and restructuring of banks, coupled with a clear policy and strong role of SPB as its regulator, has created opportunities, attracted significant investment and expedited this sector’s growth." He also said, the capital markets are doing well. They should now focus on private equity and venture capital. A number of foreign stock exchanges have shown interest to enter strategic partnerships with Pakistani capital markets.

Aziz described mergers and acquisition of banks, particularly foreign bank acquisitions of Pakistani banking assets, as "quality investment in Pakistan." "More acquisitions or mergers of banking assets will be recorded in the coming months," he also said.

Dr Shamshad Akhtar, Governor, SBP says "47 per cent of Pakistani banking is now owned by foreign banks, as more acquisitions are on the way." Independent bankers and economists are critical of this trend, because Pakistan will loose much of its control over baking, and monetary policies, despite SBP’s claim to be a strong regulator.