THE banking sector’s performance has remained strong in the first nine months of calendar year 2014, with after-tax profits of the 22 listed commercial banks registering a 39.2pc year-on-year growth.

Since these 22 banks represent 97pc of the industry’s total market capitalization, and since the list includes all important banking companies, their results give a real clue into the sector’s working.

One important development is that while the profits of the top five banks — ABL, HBL, MCB, NBP and UBL — rose 31pc year-on-year (YoY), their share in the industry’s total profits fell to 71.3pc from 76pc a year-ago, as profits of medium-sized banks grew higher, according to a report by Azee Securities.

After struggling with some problems in the wake of the global financial crisis of 2007-8, banks are seemingly back on the right track: they are making larger profits, expanding their branch networks and lending more to the private sector.

However, their over-investment in government debt papers continues, reducing their advances-to-deposit ratio (ADR) — a key measure of financial intermediation. Banks’ ADR has gradually declined from 67.9pc at end-2009 to 47.7pc by June 30.

‘The banking industry generally does not bother to reset its profitability mix’

The industry’s yearly after-tax profit remained above the Rs100bn-mark for the third consecutive year in 2013, a big improvement over the average annual profit of Rs54bn during CY08-CY10. And in the first half of 2014 (1HCY14), banks’ cumulative after-tax profit stood at Rs74bn.

Their combined net interest income after provisions totaled Rs180bn, while their overall pre-tax profit rose to Rs112bn.

A senior banker explained that “since most banks focus on earning interest income, and that too through higher investment in government debt papers, none of them can prioritise enhancing non-interest income in isolation because it would lag behind the others, at least for the first few years, in terms of overall profit-making. That is why the banking industry generally does not bother to reset its profitability mix.”

A more notable development has been that regardless of the volumetric rise in the government’s bank borrowing through T-bills and Pakistan Investment Bonds, which is still going on, the growth rate of banks’ net investment has been on a downward trend for some years.

The growth in the industry’s net investment — the bulk of them being in T-bills and PIBs, with a lesser share of stocks and non-banking financial institutions — was a staggering 41.6pc in CY11. But it fell to 31.4pc in CY12, and to just 7.5pc in CY13.

“Even if banks’ overall net investment in CY14 rises to double digits, it won’t go up as high as it did in CY11 or CY12. This is because the private sector’s lending growth has been showing some consistency, and indications are that overall government borrowing from banks would also remain weaker this year than it was during CY13.” A major cause for this is improved tax collection.

From the central bank’s point of view, what is important is that even if banks’ lending to the private sector in FY14 stays consistent with that of FY13, their advances-to-deposit ratio, currently below 50pc, may not rise substantially in the next few years.

Factors like economic expansion, taxation and documentation drives and one-time or continuous forex inflows boost banks’ deposit base virtually automatically. In contrast, their advances grow when they lend more to the private and public sectors, central bankers say.

This partly explains why banks don’t often come up with innovative and lucrative deposit-raising schemes.

Banks also need to strictly watch out for potential mismatches — between tenures of deposits and advances, costs of assets and liabilities, and maturity-wise distributions of deposits, investment and advances. One or several mismatches can aggravate their liquidity profiles, creating even more serious problems, warn analysts.

As for banks’ ability to earn interest income in CY14, the rise in PIB yields (till September), stable T-bill returns and a marginal change in interest rate spreads will all help them.

Published in Dawn, Economic & Business, November 17th, 2014