Traditional banking doesn’t bring profits - treasury managers do

Major banks’ share of income from treasury dwarfs all other segments’ income

KARACHI:

In a recent town hall meeting attended by thousands of staff members, the CEO of one of the country’s largest private banks singled out one employee for his “outstanding” contribution towards the bank’s earnings in 2015.

Amidst loud applause, the CEO introduced the bank’s head of the treasury to the rank and file, saying the man with a handful of team members had generated more than half of the bank’s income last year.



In simple words, it means that about a dozen employees helped the bank earn more money than the rest of 10,000-strong staff in 2015.

The figure attributed to the treasury department as its share in the overall profit earned in a year is not an arbitrary number guessed by an outside analyst. Every bank in Pakistan is required to give a breakdown of its profit to let the regulator - and the public at large - know about the exact contribution of key business segments towards its annual earnings.

Some banks give a breakdown of their pre-tax profits while others prefer to release segment-wise details of their after-tax profits. In any case, the breakdown of banking income in percentage terms should give us a fair idea about how a particular bank is making money for its shareholders.

So what does the treasury do for generating such outlandishly disproportionate profits for its bank? The treasury is the desk that trades in stocks, fixed income instruments - like treasury bills and Pakistan Investment Bonds - foreign exchange and derivative products to hedge against market risks.

In contrast, the retail banking wing carries out the age-old business of consumer lending and deposits. The commercial banking division handles project/trade financing and provides businesses with working capital. Similarly, banks facilitate mergers and acquisitions through their corporate finance departments and help companies raise new debt and equity.



Simply put, the treasury does everything that falls outside the ambit of traditional banking. After all, banking has historically been about two things: taking deposits and paying interest while extending credit and receiving interest.

According to the latest annual accounts of the five largest private-sector banks, the share of the treasury in their overall income evidently dwarfs the contribution by their retail, commercial and corporate finance segments.

The breakdown

Habib Bank (HBL), which was the most profitable financial institution last year, earned as much as 46% of its pre-tax profit from treasury operations. In contrast, its retail banking wing contributed a little less than 30% in its pre-tax profit of Rs57.4 billion.

As for United Bank (UBL), almost 62% of its income-before-tax of Rs42.1 billion originated from the treasury last year. Its retail banking and commercial banking wings contributed 19% and 17%, respectively.

Exceptionally high contribution of the treasury in the earnings of a bank does not necessarily mean it brings the bank the highest revenues too. In the case of UBL, for instance, revenues generated by retail banking (Rs33.9 billion) were greater than those brought in by the treasury (Rs27.6 billion) last year. But the gap in their respective contribution towards the bank’s bottom line is explained by the difference in expenses that each segment bore in 2015.



A bricks-and mortar network across the country employing more than 14,000 employees for retail clients obviously costs a lot more than paying a roomful of treasury managers. Expenses constituted just 6% of the total income generated by UBL’s treasury last year as opposed to 76% for the retail banking segment.

The treasury earned MCB Bank Rs19.4 billion in 2015, which is almost 46% of its pre-tax profit for 2015. The income of its retail banking segment constituted 39% of the bank’s pre-tax profit in 2015.

The (pre-tax) bottom line of Bank Alfalah had the heaviest tilt towards treasury income. As much as Rs8.7 billion or 69% of the profit-before-tax of Rs12.6 billion originated from its treasury desk last year. In contrast, the share of the retail banking division of Bank Alfalah in its pre-tax profit clocked up at 23%.

With Rs10.2 billion, the treasury of Allied Bank had a share of 68% in the bank’s after-tax profit of Rs15.1 billion last year. In contrast, its retail banking division contributed just about 18% in the bank’s bottom line for 2015.

Published in The Express Tribune, March 12^th, 2016.

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