BANKS’ earnings mix remained more or less unchanged in calendar 2015 though key factors such as a drop in growth of bad debts, increased economic activity and rising private sector credit demand are likely to change it overtime.

But how soon a change might be visible is too early to predict. Going by the available financial results of CY15 of some major banks and after factoring in recent economic developments, it appears that changes are in the making regardless of their signal strengths.

Take, for example, the bifurcation of bank profits into interest and non-interest income. “It’s very hard to say now that any significant change has emerged in CY15,” says president of a big local bank. “But since underlying factors are changing, a change in volume and growth rates of non-interest income is bound to emerge. And, in fact, it has already started changing in individual banks but whether that is strong enough and wide enough to be a trend is difficult to predict now”.

Non-interest income of MCB Bank, for example, rose 27pc to Rs17.1bn in CY15 against 20pc increase in CY14. On the other hand, net interest income of the bank jumped 7.52pc in 2015. This is lower than the 10pc rise the bank posted in 2014. “Such variations in the banks’ earnings are common to spot every year,” according to a senior executive of another large local bank.

In the last year, banks did fairly well in containing expansion of bad loans and thus bring down their provisioning costs. And, this year, too, growth in non-performing loans is expected to remain under check thanks to stricter controls of the SBP. Chances, therefore, are that this phenomenon would solidify into a durable trend.

What else can be helpful in boosting net interest income is that unlike the last few years, banks’ lending to the private sector is growing faster than before and since the private sector loans earn a higher return for banks than their investment in the government debt papers, this too would rev up their net interest revenue. Between July 1, 2015 and February 5, 2016 banks’ net lending to the private sector soared 100pc y-o-y to Rs309.5bn, from Rs152.7bn).

And, “we expect that with some moderation in growth rate this rising trend in private sector loaning will continue throughout this year on the back of increased economic activity, expansion in large-scale manufacturing and as a spillover effect of new investment coming up in infrastructural and energy projects,” says a senior executive of state-run National Bank of Pakistan.

A double-digit growth in interest income of banks in the top five or top-10 tier has not been uncommon for some years. And in 2015, too, this remained very much in sight. UBL’s net interest income (NII) surged 23pc to Rs57.8bn and that of Askari Bank also showed 21.5pc rise.

Non-interest income of UBL showed an 11pc growth which, too, is in line with the trend being seen for quite some time. Banks’ non-interest income continue to show a lower growth than their interest income “but if economic growth target of 5pc is met and if it is sustained for next few years we hope to see faster rise in non-interest income because of higher demand for banking services including investment advisory, facilitation in inter-corporate deals, utility bills collection, brokerage fee and lockers availability etc, senior bankers say.

But one big reason for double-digit rise in net interest income of banks has been that their cost of funds remained low in 2015 due to cuts in the discount rate.

Now, as the SBP has kept its policy rate intact since mid-September 2015, and a case for monetary stability may outweigh the case for further easing this year, banks cannot count on low cost of funds alone to boost their NII, bankers say.

Analysts at Topline Securities expect that the CY15 combined profits of six leading banks — HBL, NBP, MCB Bank, UBL, ABL and Bank Alfalah — would show an average growth of 12pc despite a decline in banking spread.

Executives of these banks point out that in the first quarter of this year they will be lending aggressively to the private sector instead of the inflating of their already huge stock of PIBs. “The reason is a decline in PIBs yields is on the horizon,” says a treasurer of one of the top-five banks.

The government policy of shifting short-term debt (acquired through T-bills) to long-term debt (PIBs) is being challenged on the ground that it is tantamount to shifting internal debt servicing cost from the present to the next government. And bankers suspect that the policy can be changed for this or any other reason. In fact, yields on PIBs have already slipped a few basis points after the recent SBP decision of keeping its discount rate unchanged.

Published in Dawn, Business & Finance weekly, February 22nd, 2016