Banking sector’s earnings to improve by at least 15%

Encouraging trend witnessed in deposits and advances

The banking sector’s earnings are expected to improve by 15 to 50 per cent during the second quarter on quarterly basis, according to analysts.

The sector’s fundamentals have remained the same, however, an encouraging trend in both deposits and credit offtake has been seen in the recent data reported by the State Bank of Pakistan (SBP).

Further, net interest income growth will be flat on account of lower earning yields, according to JS Global Capital.

Traditional pick-up in advances

Advances increased by 2.3 per cent in the second quarter against a decline of 2.2 per cent for the previous quarter.

Traditional demand for commodity financing, primarily due to wheat procurement, helped advances pick up in the second quarter, said BMA Capital analyst Abdul Shakur in his research report.

In addition, sequential increase in working capital requirement from the corporate sector is also expected to add value to the loan book, Shakur added.

Banking deposits up by eight per cent
Deposits grew by a healthy eight per cent to reach Rs4.8 trillion in the second quarter after a muted growth of 2.3 per cent in the first quarter.

Moreover, deposit growth outpacing advances is further visible in investment, which is up seven per cent in the second quarter, said JS Global Capital analyst Mustafa Bilwani in his research report.

Further, investment-to-deposit ratio increased by 15 basis points to 38.2 per cent in the same period.

NII growth limited

Net Interest Income (NII) growth averaged a mere three per cent in the first quarter of the year and analysts believe this being the case in the second quarter as well.

Average spread for April to May 2010 was 7.31 per cent on a yearly basis compared with 7.51 per cent in the same period last year, which would put slight pressure on Net Interest Margins (NIMs), said Bilwani.

Taming provisions though concerns remain

Asset quality deterioration continued to haunt banking profitability since 2008, said Shakur.

Although the pace of accumulation has slowed down since then, low growth or decline in advances have taken part in escalating non-performing loan-to-loan ratio off late.

Incremental loan loss provision is recorded at Rs11 billion for the second quarter, which is significantly lower compared to Rs28 billion recorded in the first quarter, Shakur said.

This factor also strengthens expected better performance of the banking sector during the second quarter of 2010, added Shakur.

Published in The Express Tribune, July 14^th, 2010.