BANKS’ profits grew in CY14 as their lending to the government continued unabated, non-performing loans did not proliferate much, and credit disbursement to private sector businesses picked up.

The upswing in credit to private sector businesses (PSBs) and enough lending to the government via investment in debt securities fortified banks’ net interest incomes, which helped them post a big 46pc increase in after-tax profits. Non-interest incomes also made their contribution to the profitability.

Senior bankers say as the government tried to replace part of its short-term domestic debts with long-term debts, and as average yields on Pakistan Investment Bonds (PIBs) were kept high to obtain this objective, banks exploited the situation to boost earnings. Their investment in PIBs pushed up interest income.

Non-interest incomes also grew on account of fee and commission earnings through advisory, custodian and project-appraisal services and through more profitable forex dealings. Higher lending to PSBs and strong activity in stocks and real estate, along with transactions in customers’ foreign currency accounts and increased interbank FCY dealings improved earnings from non-core services, senior bankers say.

In CY14, the growth of bad loans decelerated and cash recoveries and regularisation of non-performing assets increased, resulting in lower provisioning requirements and lowering of the cost of interest income.

Apart from growth in core incomes, the industry’s profits were also driven by higher private sector lending and strong activity in stocks and real estate, along with transactions in customers’ foreign currency accounts and increased interbank FCY dealings

An uptick in banks’ loaning to PSBs — Rs233bn in CY14 against Rs133bn in CY13 — had a positive impact on banks’ balance sheets, with interest rates stable almost throughout the year. The central bank cut its key policy rate by 50bps just once in CY14, and that too towards the end of the year, on November 17.

According to the SBP’s figures, banks cumulatively made Rs163bn in after-tax profit in CY14, up from Rs112bn in CY13 on the back of a hefty 23.3pc yearly growth in net investment and 9.9pc increase in net loans.

But the advances-to-deposit ratio of all banks combined remained unchanged at the previous year’s 48.2pc, as banks’ deposits grew more slowly (11pc against 14pc in CY13), offsetting a faster rise in net lending (9.9pc against 8pc in CY13).

Another major development in CY14 was the fall in provisioning against bad loans (down to Rs25bn from Rs40bn in CY13), which reduced banks’ cost of net interest income. Meanwhile, banks’ dividend income recorded a modest decline of Rs0.5bn in the corresponding period.

The after-tax profit of the state-run National Bank of Pakistan tripled to Rs16bn from Rs5.3bn, as its net interest income rose past Rs35.8bn against Rs19.7bn and net non-interest income soared to Rs23.bn from Rs7bn.

A decline in NBP’s net provisioning against non-performing loans to Rs11bn in CY14 from over Rs17bn in CY13 was reflected in its net interest income.

The four other major banks — Allied Bank, Habib Bank, MCB Bank and United Bank — also reported higher profits.

The five big banks, as a whole, earned Rs111.3bn in profit in the year, up 30pc from Rs84.7bn in CY13. Their cumulative net interest income jumped to Rs233bn from Rs193bn.

Their net interest income shot up as they not only invested heavily in high-yield long-term PIBs, but also enhanced their lending to PSBs. During CY14, the average yield on three-year PIBs rose to 11.8pc from 9.9pc in CY13.

The profit and loss accounts of other banks, by and large, depicted a similar trend, with earnings mainly driven by high net interest incomes, credit distribution to PSBs and increased fee-based incomes.

Going forward, two things are worth noticing. So far this year, banks’ lending to PSBs has faltered, partly due to due to faster credit retirement by businesses, and also owing to a drop in average yields on PIBs.

If PIB yields continue to fall in response to monetary easing, and if lending to PSBs remains weak amid a slowdown in large-scale manufacturing growth, then banks’ ability to enhance their profits this year would be compromised, senior bankers say.

But much depends on the government’s overall appetite for bank funds, which, they say, is likely to drop. Growth in tax revenue collection has been below target, and the government also looks eager to borrow more amid the declining interest rate environment to replace part of its previously accumulated expensive debts.

Published in Dawn, Economic & Business, March 9th, 2015

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