Banks make better profits

Published September 1, 2014

TAKING advantage of some economic and industrial progress, banks are making profits. They are also making qualitatively better profits, as their margin earnings are more diversified, accompanied by reduced provisioning against bad loans, which are on decline.

In six months of 2014 (1HCY14), most banks consolidated their interest earning gains, which came after revival of the private sector’s credit demand in the prior six months. Similarly, they made good money by investing in government papers — despite dwindling sales of short-term papers — by bulk buying long-term papers at low prices (thereby getting higher yields).

The combined profits of the top five banks rose 25pc to Rs51.03bn in 1HCY14, from Rs40.84bn a year-ago. Their total provisioning fell by 73pc during this period, and non-funded income showed a handsome 20pc yearly growth.

Between January and June 2014, banks’ net lending to private sector businesses was just around Rs26bn due to seasonal demand. But bankers point out that the bulk of interest income during this period originated from loans of Rs273bn made in the preceding six months.


Bankers caution that the profitability trend for the rest of the year would depend on the fate of mega infrastructure projects and private sector credit demand, given the current political turmoil


While banks’ net investment in government debt papers totaled just Rs47bn in the period, what fattened their bottom line was interest earned on a massive Rs567bn net investment made during July-December 2013.

Apart from this routinely lagged accrual of interest income, high non-interest incomes also boosted banks’ profits.

Non-interest incomes increased as expansion in internal trade, growth in consumer spending, revival of construction activities and initiation of big-ticket public sector projects opened up opportunities for investment advisory, real estate valuation, inland money transfers and paid paperwork of all kinds. Trading in stocks and foreign exchange transactions also added to banks’ profitability, both via interest and non-interest incomes.

In 2014, banks also neutralised the effect of higher minimum deposit rates by tenure-and-size juggling. And their provisioning costs declined due to improvement in on-schedule loan payments. These cost reductions boosted their net incomes as well.

A close scrutiny of the accounts of these banks reveals that despite a 15-basis point reduction in net banking spreads, their net interest income grew 15pc because they earned more through investment in long-term Pakistan Investment Bonds during this period.

The government’s strategy to replace part of its short-term borrowing from banks with long-term borrowing had led to larger offerings of PIBs, with better yields. This policy benefited all those banks, including the top five, which had investable funds available.

Bank Al-Falah saw a big 59pc year-on-year rise in profits between April-June. But the fact that the state-run National Bank of Pakistan reported a massive 63pc y-o-y increase in its pre-tax profit shows that the top banks are taking advantage of their size and branch network in meeting the private sector’s credit demand and also channeling the bulk of liquidity into government papers.

Higher bank profits also continue to enrich shareholders, as, generally, they have gotten decent dividends. Meezan Bank, for example, offered 15pc dividend to shareholders after witnessing a 17pc YoY increase in its profits during 1HCY14.

Bankers say two things will impact decisively on the current profiting trend in the third and fourth quarter of this year. “The first is whether private sector credit demand is here to stay or whether it will weaken because of the political turmoil that is taking its toll on the economy,” says the head of a local private bank.

“The second, and more important, is what would be the fate of the public sector mega infrastructure projects of the water and power sector. These projects mean lots of activity for the banking sector, ranging from consortium lending to investment advisory to foreign exchange transactions to local contractors’ borrowing appetite.”

The pace of deposit mobilisation will also have a telling impact on banks’ ability to lend to the private sector, even if the strong demand remains in place. “Banks wouldn’t have gone for generous private sector lending had the government not contained its bank borrowing and had they not been sitting on piles of employable funds,” says the treasurer of a large local bank.

But he points out that as deposit growth has decelerated from14.2pc in FY13 to 10.4pc in FY14, liquidity considerations will be a more decisive factor now in private sector lending, especially by large local banks, and particularly at a time when the growth in fixed deposits has been negligible.

“Another thing which banks will have to examine is whether their policy of investing too much in PIBs is sustainable, and can their ‘held for trading’ portfolio of securities support them in managing liquidity issues as they arise.”

Published in Dawn, Economic & Business, September 1st, 2014

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