Banks’ profits likely to be pulled down by falling stocks, funds

Top banks had invested Rs126b in equities, mutual funds by Sept 2017

Our Correspondent December 19, 2017

KARACHI: Top banks in Pakistan, who have invested in the stock market and mutual funds, will take a hit on their full-year earnings following a significant fall in share prices and unit values of the funds in the outgoing year 2017, according to a brokerage house report on Monday.

Pakistan Stock Exchange’s (PSX) benchmark KSE 100-share Index has dropped 20% since January 1, 2017 and 28% from its peak hit on May 24, 2017.

Top seven banks had invested around Rs126 billion in equities and mutual funds as of September 2017, which comprised around 2% of their deposits and 1% of total assets.

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“This could affect (their) 2017 earnings by around 4-5% (excluding outliers),” Topline Securities’ analyst Umair Naseer said in comments to his clients.

“Our sample is expected to show a 3% earnings decline in 2017 compared to earlier estimate of 2% earnings growth.”

The seven banks the research house focused on while preparing its report included Allied Bank Limited, Bank Alfalah, Bank AL Habib, Habib Bank, MCB Bank, National Bank of Pakistan and United Bank Limited.

“To recall, banks had booked impairment loss against oil stocks in 2015 as the exploration and production sector fell 35% due to lower oil prices,” Naseer said.

He pointed out that Pakistan’s banking sector profitability for 2017 could also be affected by the expected impairment charge against equities as per IAS39 accounting standards.

“As per IAS39 accounting standards, a financial asset is impaired or impairment losses are recognised if market value of the asset goes down significantly from its carrying value in each balance sheet,” he said.

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For its analysis, the research house has assumed the impairment charge against stocks whose market prices have dropped more than 20%.

“We are of the view that the impact could be somewhat diluted through the realisation of revaluation surplus or unrealised gains against bonds and equities,” he said. “The banking sector is anticipated to benefit from an expected rise in interest rates from 2018.”

Published in The Express Tribune, December 19th, 2017.

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