Despite rising interest rate, most banks continue to prosper

Data shows sector benefitting due to ‘balance sheet growth, asset quality’.


Our Correspondent December 05, 2013
The latest data shows most banks continuing to prosper notwithstanding the central bank’s initiatives to curtail their margins in a rising interest rate environment. PHOTO: FILE

KARACHI:


Casting aside all doubts about shrinking interest margins resulting in decreased profitability, Pakistan’s banking sector seems all set to benefit from a rising net interest income, declining non-performing loans and sound capital adequacy ratios.


Several analysts believed that the decision of the State Bank of Pakistan (SBP) on September 27 to link commercial banks’ minimum deposit rate with the prevailing repo rate would shrink their interest margins, thus hurting their bottom lines.

However, the latest data shows most banks continuing to prosper notwithstanding the central bank’s initiatives to curtail their margins in a rising interest rate environment.



According to AKD Securities Head of Research Raza Jafri, the listed banking sector has gained 42% since the beginning of 2013 – broadly on a par with the KSE-100 Index – because tighter regulatory directives on interest rate margins have been ‘countered by strong balance sheet growth’ and an improvement in asset quality. “We believe similar themes will persist over the next year,” Jafri said.

United Bank

According to Elixir Securities research analyst Ujala Adnan, her brokerage house expects the UBL stock will trade at Rs160 a share in June 2014 because of its recent non-performing loans reversals and the expectations of a slightly higher net interest margin.

Its closing rate on the Karachi bourse on December 4 was Rs130.72 a share.

UBL’s net interest margin for the third quarter of the current year was 5.1%, which is up 20 basis points on a quarterly basis, despite low interest rates and higher effective savings rate. Adnan says the increase was mainly due to the 30 bps quarter-on-quarter reduction in the cost of funds owing to a higher exposure to foreign exchange deposits, which constitute roughly 28% of the bank’s total deposits.



Bank Alfalah

Elixir Securities estimates that the stock price of the country’s sixth largest bank will reach Rs38 per share in June 2014. Its share price was Rs25.09 at the end of trading on December 4, which means the stock’s value can potentially increase by more than 50% in the next seven months.

Bank Alfalah’s Islamic deposits constitute 16% of its balance sheet, which provide a cushion against rising cost of funds because Islamic savings deposits are not subject to an interest rate floor.

Habib Bank

The most profitable bank in Pakistan is undertaking cost-cutting initiatives in order to curtail its cost of funds, Adnan said. The bank has improved its net interest margin to 3.4%, up 40 bps from the last quarter mainly because of higher proportion of current and savings deposits in its total deposits, she added.

Elixir Securities expects the HBL stock to trade at Rs190 per share in June 2014 as opposed to Rs162.31 a share at the end of trading on December 4. This translates into a potential upside of 17%. “We expect HBL’s net interest margin to improve further going forward,” she added.

Published in The Express Tribune, December 6th, 2013.

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COMMENTS (1)

liketovoicemyview | 10 years ago | Reply

1) banks have performed well so far this year due to low interest rates and almost zero loan growth (meaning no loan provisioning) during the first half of the year. The impact of curbing bank margins on saving account will show from next year, specially smaller banks will face the brunt, who already have their average deposit rates at extremely high rates.

2), there is no surprise that banks will continue to do well, as in an economy where M2 growth is more then 15% with 0 loan growth, it is obvious that deposits for the banking sector will continue to increase, hence though the spread has been curbed, the profitability will grow through volume

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