Despite falling margins, United Bank’s profits grow

Bank manages to cut provisions, boost non-core income to stay in profitability .

KARACHI:

Amid falling top-line due to squeezing margins, United Bank registers a profit growth of 2% in the first quarter of fiscal 2013.

Only a few banks in the country can manage such a feat as any bank’s core income is in the form of interest it earns, and since the State Bank of Pakistan had been hell bent on cutting benchmark interest rates to force banks to lend to the private sector rather than almost risk-free lending to the government, Pakistan’s banking sector is stuck between a rock and a hard place.

According to a notice sent to the Karachi Stock Exchange, UBL reported a consolidated profit of Rs4.95 billion for the January to March quarter, up 2% compared to Rs4.87 billion in the comparable period of last year. The bank also announced an interim cash payout of Rs2 per share for the period.

A significant portion of UBL’s increased profits, however, came from the fact that – like much of the rest of the banking sector – its provisioning for bad loans came down as it continued shifting more and more of its lending portfolio into government securities. That shift towards sovereign bonds dragged down the bank’s net interest income – the difference between the interest rate it charges its borrowers and the interest rate it pays out to depositors – by about 7% to Rs9.14 billion for the quarterly period.

According to a research note by JS Global Capital, banking spreads declined to a average at 6.22% in the quarterly period compared to 7.32% in first quarter of 2012.

Additionally, increase in minimum deposit rates to 6% back in April 2012 also played its due role.

UBL’s non-core income – earnings from fees, dividends and investment – grew 26% to Rs4.8 billion in the quarter, whereas its expenses grew 10% to Rs6.79 billion with a major part played by growth in administrative expenses, which dampened the bank’s profits. Moreover, share of profit from associates halved to Rs294 million.

Nonetheless, the combination of the bank’s declining provisioning expenses, and higher non-interest income (dividend income plus capital gains), resulted in profit increase for the bank.

Published in The Express Tribune, April 24^th, 2013.

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