Banks earn record Rs85 billion

FX business, amid rupee value free fall, drove revenue growth

KARACHI:

The commercial banks of Pakistan have earned a record high net profit of Rs85 billion in the quarter ended September 30, 2022. The freefall in the value of the rupee against the US dollar has remained a major driver of growth in bank earnings.

Bank profits doubled to Rs85 billion in the quarter under review, as compared to the previous quarter (Apr-June) of 2022. On a year-on-year basis, the profit has increased 26% in these three months, as compared to the same period last year.

In a tweet published online, Alpha Beta Core (ABC) CEO, Khurram Schehzad observed, “The foreign exchange (rupee-dollar exchange rate) income growth for these banks ranged between 50%-550% on a year-on-year basis with the US dollar going up by 46% from Rs157 in June 2021 to Rs229 by June 2022.”

“Banking and forex are the best businesses to have in Pakistan,” he added.

Earlier, Finance Minister Ishaq Dar had alleged that eight banks had manipulated the rupee-dollar exchange rate to gain higher profits. Reports indicate that the central bank is still probing these allegations.

Ismail Iqbal Securities (IIS) Research Analyst, Shameer Alam Zaidi noted that “Healthy fees and FX (foreign exchange) income have been the major revenue drivers for banks.”

The breakdown of the data suggests that the income from the FX business of these banks increased by almost 168% to Rs35 billion in the third quarter (Jul-Sep) of 2022, compared to Rs13 billion in the same quarter of last year.

Their FX income stood slightly higher at Rs36 billion in the previous quarter (Apr-June) of 2022, according to the data compiled by IIS.

The brokerage house has compiled data of top 16 banks listed at the Pakistan Stock Exchange (PSX).

“The prevailing, aggressive, benchmark interest rate of 15% played a key role in taking the net profit of these banks to a record high in the quarter under review. To recall, the central bank had cumulatively increased its benchmark interest rate by 800 basis points in the 11-month period (September 2021 to July 2022) to 15%,” explained Zaidi.

“The aggressive hike in the key policy rate was aimed at cooling down aggregate demand in the overheated economy. The measure, therefore, indirectly helped banks end the quarter with high profit margins,” he said.

“The higher interest rates have also helped boost NII (net interest income,” he explained.

“The NII of the 16 banks increased by 17% on a quarterly basis due to the lagged impact of asset repricing. Profit, for the said banks, soared to a new high in the third quarter (Jul-Sep) of 2022, despite the imposition of new taxes on profit-before-tax,” Zaidi added.

“The high interest rate scenario has, however, increased the number of non-performing loans (NPLs). While bad loans still remain below an alarming level, the number is feared to rise amid the continued economic slowdown,” he warned.

While provisions (non-performing loans and bad loans) have increased, Zaidi was of the opinion that “Banks have so far remained largely unscathed from Covid-19 and the interest rate shock.”

“The provisions increased sharply by 135% on a quarterly basis to Rs15 billion. The only spoiler has been the change in tax regime, which led to an effective tax rate of 52% versus 41% in the same period last year,” he stated.

The IIS analyst said although a majority of the assets and deposits have been repriced, the brokerage house still expects that net interest income will improve further as asset repricing from the hike of 125 basis points in July is yet to kick in.

“The provisions might see some uptick as the impact of the economic slowdown will be more evident in the coming quarters, while provisions on sovereign bonds might also increase for some banks if Pakistan’s Eurobond prices do not recover in the ongoing quarter,” he predicted.

Deposit growth is expected to be mute in the December 2022 quarter as banks try to achieve advance to deposit ratio (ADR) targets.

The growth in bank deposits came in at 15% year-on-year, while ADR improved to 48.6%, as compared to 47.7% in June and 46.9% in the same period last year.

Published in The Express Tribune, November 3^rd, 2022.

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