October 26, 2003	Sunday	Sha’aban 29, 1424

KARACHI Oct 25: Banks have managed dramatic improvement in their profits despite excess liquidity and falling interest rate environment.

Up by approximately 90 per cent in the first half of 2003 compared to the corresponding period of 2002, the profits after tax have come significantly from non-markup earnings and at depositors’ expense. Revenue from lending has not grown as fast.

Net mark-up incomes, that come from bank’s core business of lending, grew by 20 per cent and non-markup incomes soared by 102 per cent, indicating the direction set by the financial reforms and low credit demand for new investment. The returns have come from investments in shares, T-bills, PIBs and service charges, currency transactions, etc., rather than from financing of the real economy.

In case of five out of 13 banks whose performance for January-June 2003 has been reviewed by financial analysts at the Taurus Securities, non-markup earnings have exceeded the net mark-up income.

The non-markup incomes of these five banks against mark-up incomes (in bracket) are as follows: Faysal Bank Rs1219m (525m); Union Bank Rs851m (687m); PICIC Commercial Bank Rs565m (412m); Saudi-Pak Bank Rs493m (173m); and Meezan Bank Rs96m (95m).

This is explained by a dramatic rise in capital gains on investments and higher dividend incomes.

The capital gains were recorded primarily on T-bills and PIBs, which had appreciated in value, given the falling interest rates. Analysts, however, do not see these investments as a sustainable source of continued earnings growth, as any increase in interest rates in future would lead to larger capital losses for the banks.

Banks are also major players in the stock exchange and have contributed to buoyancy of the market. The increased investment in shares and higher dividend yields have also added substantially to the non-interest incomes. Dividend income is taxed for banks at five per cent.

While the lending rates have fallen, the banks have avoided squeeze on earnings so far largely because deposit rates have been brought down sufficiently to maintain spreads at depositors’ expense, says the Taurus Securities report.

Quoting SBP data, financial analysts point out that between January 2002 and August 2003, the deposits in scheduled banks grew by Rs409 billion or by 31 per cent. In the same period advances increased only by Rs55 billion or six per cent.

Burdened with high liquidity, banks raised their investment in government securities by 138 per cent since January 2002.

On the bank’s core business, the Taurus Securities report says: “Consumer lending has grown and is more profitable than corporate lending but the market remains very small. For bigger banks such as NBP and MCB, consumer loans represent less than five per cent of lending portfolio.”

So far, consumer lending is focused on car finance and personal loans. Home loan market is limited because of legal difficulties that can make property an unreliable form of collateral. The off-setting of tax liabilities by interest payments makes home loans more attractive for borrowers but it does not address the lenders’ concerns.

Banks are increasing their fees on services as well as introducing new fee-based services to support earnings independently of interest rates. Over the time, this trend would be strengthened as consumer and investment banking generate more fee incomes.

A key issue for the banks is the excess liquidity that may further bring down the lending rates. While the blue chip companies are borrowing, in some cases at rates as low as two per cent, small clients are offered rates ranging from seven to 12 per cent. Taurus Securities analysts believe that this differential is likely to narrow as lending rates continue to fall under pressure from small and medium size clients.