While banks continue to make the bulk of their profits on interest incomes, thanks in part to heavy investment in government debt papers, their non-interest income is now also growing.

Askari Bank, for example, earned Rs5.56bn in non-mark up/non-interest income during Q1FY17, up from Rs4.68bn in Q1FY16. The bank’s mark-up/interest income also rose to about Rs11.56bn from Rs10.43bn.

This is one good example of a combination of both interest and non-interest incomes contributing to a bank’s overall profitability.

The bank’s overall after-tax profit rose slightly to Rs4.187bn in Q1FY17 from Rs4.067bn in Q1FY16. “Our main source of non-interest income was in the category of fee, commission and brokerage income,” a senior executive of Askari Bank told this writer.

But bankers say that some other banks even made money under some other heads of non-interest income such as dividend income, income from dealing in foreign currencies and net gains on sales of securities.

“It’s true that interest income has long dominated banks’ profits,” concedes the head of a large local bank. “But for the past many quarters one can see a trend in the making: that non-interest income is also growing decently”

According to bankers, it all depends on the established expertise of a bank, adding that in each of these categories of non-interest income certain banks have a history of outperforming others. Citibank (Pakistan Branches), for example, earned a larger profit in dealing with foreign currencies—about Rs980m during Q1FY17 against Rs945m in Q1FY16.

Standard Chartered Bank (Pakistan) also earned half a billion rupees in dealing with foreign currencies during the first quarter of this fiscal year, up from Rs300m in the year-ago period.

Volume-wise these amounts are tiny but serve as a pointer to the fact that forex dealing, like other heads of non-interest income, is one area where certain banks show growth in earning whereas other banks are known for their ability to earn decent fees and commissions.

“It’s true that interest income has long dominated banks’ profits,” concedes the head of a large local bank. “But for the past many quarters one can see a trend in the making: that non-interest income is also growing decently.”

Since the federal government continued to borrow heavily from banks to keep its borrowing from the central bank under check, interest income of banks, particularly large banks, remained high. But due to declining yields of debt papers not many of them posted a big growth on net returns.

The decline in the yields, despite the government’s high demand for bank funds, can be explained by a seasonal dip in private sector lending in the first quarter and high levels of banks’ liquidity.

Habib Bank, one of the top five banks, known in the banking circles as a big lender to the government, rather saw a minimal decline in its investment income (the bulk of it assumingly related to investment in government debt papers), insiders say.

What is encouraging to note is that the bank’s earnings on private sector loaning rose to about Rs36.8bn in Q1FY17 from around Rs34.7bn in Q1FY16.

MCB Bank, another major bank, saw an outright decline in its net interest income that fell to Rs10.319bn in Q1FY17 from Rs12.074bn in Q1FY16. However, what enabled it to post a higher overall after-tax profit was a surge in its non-interest income.

Its non-interest income shot up to Rs5.8bn in Q1FY17, up from slightly more than Rs3.5bn in Q1FY16 and after-tax profit inched up to Rs6.715bn from Rs6.674bn.

“Our private sector lending has been quite robust,” boasts a senior executive of HBL adding that as a policy matter, his bank is pushing up the share of earnings from private sector loans in the mix of interest income.

And, that is where all leading banks will have to go from now onwards, says a former central banker. “Even if the government’s borrowing from banks remain high for say a few years from now, earnings on private sector loans will have to be prioritised because in the long run only private sector loans can be priced high enough through value-added banking services and through exploring the under-served and new, emerging businesses.”

One noticeable development during July-September 2016 performance of banks is that whereas some leading banks (that have so far published their financial results) have earned enough profits during the quarter, the growth rate of profitability is low.

Bank Al-Habib, for example, earned a big after-tax profit of Rs5.426bn but compared with the bank’s profit in the first quarter of the last fiscal year (Rs5.302bn), there is just a nominal increase. Similarly, Meezan Bank’s after-tax profit of around Rs1.429bn in Q1FY17 is only slightly higher than its Rs1.273bn profit earned in Q1FY16.

Reasons could vary for lower growth in profits but bankers don’t think that all banks’ cumulative profit during the previous quarter would show any big rise over their profits in the same period of 2015.

For this passive assumption, they cite such reasons as a fall in the yield on government debt papers, larger negative lending by the private sector and an increase in expenses on net non-interest earnings.

Published in Dawn, Business & Finance weekly, November 7th, 2016