KARACHI, March 20: Profits kept coming into banking sector in 2005 as all the listed banks’ profits grew by 99 per cent in 2005. But for the first time their profits mainly rose because of higher banking spread, which means higher lending rate and lower return on deposits.

The listed banks at Karachi Stocks Exchange, which represent 75 per cent of all banking sector, earned a profit after tax of Rs47.5 billion in the year ending December 2005. However, banks did not share these profits with their depositors who are the real stakeholders of the banking sector.

National Bank of Pakistan earned highest profit of Rs12.710 billion, a growth of 104 per cent, and its earning per share (EPS) was also the highest at 21.5 per cent.

The collective reports of listed banks also showed that the banking spread increased by 200 basis points to 6.3 per cent. In the last quarter of 2005 the spread further increased to 7 per cent.

Banks find it difficult to digest this reality that they were not sharing the profits with the depositors on whose money they were prospering. Banks said the banking spread might remain stagnant or reduce slightly next year as the returns on fresh deposits had gone up.

Banks were offering profits in double digit on fresh deposits but still the average return was too small while the lending rate had gone up much higher despite tight monetary policy being pursued by the State Bank.

“It is the consumer financing which yielded high profits to the banks as its share has gone up significantly,” said Imran Khan, a researcher at Jahangir Siddiqui brokerage house.

Banks are eager to expand their consumer financing base as the lending rates are much higher than the corporate sector lending. The average lending rate on consumer financing is above 16 per cent.

“The share of consumer financing is still low as it was around 12.8 per cent during the 9 months of the year 2005, however, it would grow further in 2006,” said Imran.

The last quarter of 2005 witnessed further increase in the banking spread as it reached 7 per cent. Analysts and some bankers believed that the banking spread might remain at the same level.

“If the prevailing tight monetary policy continues for the whole year which means stable interest rate, the banking spread would not slip and the trend of high profits for banks will remain intact,” said S.S. Iqbal, a banker.

The benchmark six-month treasury bills saw an increase of 440 basis points during 2005 and the analysts believed that there was no room for further increase in the rate especially under the tight monetary policy.

“Despite high interest rates the prospects of further growth in the consumer financing looks bright and the banks have rightly targeted the sector,” said Iqbal.

Consumer financing has not only brought fortunes for the banking sector but it also helped the government to achieve its economic growth. The higher consumption of consumer items heated up the economy which helped achieved in attaining higher growth rates.

Other banks which earned higher profits were MCB with Rs8.922 billion (EPS 20.92pc), UBL with Rs5.949 billion (EPS 11.48pc), Faysal Bank with Rs3.069 billion (EPS 8.33pc) and Allied Bank with Rs3.033 billion (EPS 6.89pc).

The demand of liquidity had already created an imbalance between deposits and advances, but the race for more profits compelled the banks to lend more resulting in undesirable monetary growth.