August 13, 2007	Monday	Rajab 28, 1428

Top ten banks matter most in the banking system and the combined strength of the remaining 29 is no match for them.

In 2006,all the 39 commercial banks made Rs84 billion after-tax profit. But only five large local banks had a seventy per cent share in it, the latest data released by the State Bank reveal.

State-run National Bank earned the highest after-tax profit of Rs17 billion followed by Habib Bank (Rs14.28bn), MCB Bank (Rs12.1bn), United Bank (Rs9.47bn) and Standard Chartered Bank Pakistan (Rs5.7bn).

(The amalgamation of Union Bank with Standard Chartered gave birth to a new domestic bank Standard Chartered Bank Pakistan).

The SBP statistics further show that five top banks had over 55 per cent share in total deposits of the banking system, which stood at Rs3.2 trillion.

National Bank again topped the list with Rs501.9 billion deposits followed by Habib Bank (Rs439.7bn), United Bank (Rs335bn), MCB Bank (Rs257.5bn) and Bank Alfalah (Rs239.5bn).

Habib Bank stood out as the largest lender at the end of 2006 as its total advances stood at Rs336 billion followed by National Bank (Rs316bn), United Bank (Rs247.3bn), MCB Bank (Rs198bn) and Bank Alfalah (Rs150bn).

These banks combined had a 52 per cent share in the overall advances of the banking system that totalled Rs2.389 trillion.

The reason why the banking spread is at a high level of 7.35 percentage points is that a few top banks have the capacity to set the direction of the market trends.. And knowing this they do what suits them—charge the borrowers a high interest rate and pay very little to the depositor. At the end of June 2007 average lending rate stood at 11.33 per cent but average deposit rate was at 3.98 per cent.

Banks are earning from the depositors’ money about three times what they spend on generating the deposits. Two recent examples come handy.

Between January-June 2007, Habib Bank earned gross interest income of Rs22.5 billion but its gross spending on generating this income totalled just Rs8.2 billion, according to interim financial statement of the bank.

The financial statement of United Bank shows that the bank earned gross interest income of Rs19.7 billion in the first half of 2007 but its expenses on generating this income totalled Rs7.8 billion only.

Bankers say, however, that the latest monetary tightening has limited the scope for the banks to keep the expenses on interest income as low as it has been for some years. “The trend is going to change with the latest monetary tightening,” said head of a foreign bank. “You will see that in the second half of this year, the gap between interest income and interest expenses would squeeze.”

Quoting SBP statistics he said that in the calendar year 2005 , the cost of funds for banks was 40.2 per cent of the interest income but in 2006 it rose to 49.8 per cent.

“In simpler words, we were spending Rs40.2 to earn a hundred rupees of interest income in 2005 but in 2006 we had to raise the spending to Rs49.8,” the banker said and feared that it would rise further in 2007.

But the data quoted by the banker related only to the interest earned from customers and return paid to the depositors. It did not include several other sources of interest income like banks’ lending to financial institutions, their investment in securities and in their subsidiary organizations or associates. The income earned through keeping deposits with financial institutions, securities purchased under re-sale agreements as well as discount income did not reflect in the data.

Inclusive of all this, the percentage of the interest expense of banks against their interest income is bound to have remained much lower than what SBP statistics show, explained treasurer of a local bank.

He said monetary tightening has always helped banks raise their earnings and it would continue to do so in future as well. “And that cannot happen if banks start increasing the deposit rates faster than their lending rates.” Overall after-tax profits of banks rose from Rs24.7 billion in 2003 to Rs34.7 billion in 2004 as the State Bank shunned its ultra-loose monetary policy in the second half of that year.

The gradual monetary tightening since then took up the after-tax profits of banks to Rs63.3 billion in 2005 and to Rs84.1 billion in 2006.—Mohiuddin Aazim