Banks are not too big to fail as core earnings expected to drop

Brokerage firms maintain bearish view on the fortunes of the banking sector.

KARACHI: Earnings of at least four out of the six largest commercial banks of Pakistan are expected to decline for the first half of 2013, with the drop in after-tax profits estimated to be in the range of 8%-12%, banking sector analysts said on Monday.

With a majority of large banks expected to post their financial results thi week and in the coming week, different brokerage houses sent out separate research notes to their clients suggesting a drop of 12%, 12%, 8% and 11% in the profits of National Bank of Pakistan (NBP), Habib Bank (HBL), MCB Bank and Bank Alfalah, respectively.

HBL, which remained the largest Pakistani bank in 2012 in terms of assets as well as earnings, is likely to post a net profit of Rs11.7 billion in January-June 2013, which is down 12% compared to the corresponding six-month period of 2012, according to Raza Jafri of AKD Securities. The sharp decline in earnings seems to be a result of the falling net interest income of HBL, which is expected to decline 9% year-on-year while its non-interest income is likely to remain flat.

However, Jafri added that the second quarter’s after-tax profit is expected to be up 4% on a quarterly basis on the back of lower provisions and a lower effective tax rate. There was 5% increase in total provisions of the bank on a year-on-year basis while the effective tax rate for HBL declined from 38.1% in January-June 2012 to 33.9% in the comparable period of 2013.

As for MCB Bank, its profit for the first half of 2013 is expected to be Rs10 billion, down 8% on a yearly basis, according to Elixir Securities’ Ujala Adnan. “MCB’s net interest margin (NIM) will shrink by 70 basis points on a quarterly basis during the second quarter of 2013 as a result of another 50 basis points cut in the discount rate,” she said, adding that the revised methodology of minimum savings rate calculation on average monthly balances also played its role. “This would push the net interest income down by 2% year-on-year.”

The sixth largest bank in terms of total assets – Bank Alfalah – is expected to post a profit of Rs2 billion for the first half of 2013, down 11% from Rs2.3 billion it earned in the corresponding six-month period in 2012. According to Global Securities’ Umair Naseer, the bank’s net interest income is expected to decline 7% on a year-on-year basis in the second quarter of 2013, dragging the bank’s earnings down. “However, on a quarter-on-quarter basis, the bank’s net interest income is estimated to increase by 9% led by a sharp anticipated increase in interest earning assets of the bank,” Naseer added.

With expectations of an interest rate hike in the upcoming monetary policy, banks are likely to remain in the limelight. “We recommend investors to seize this opportunity and buy banking scripts on dips,” he said while arguing for a bullish outlook on banking sector stocks despite their low earnings for the January-June 2013 period.

The second largest bank in terms of total assets, NBP, is expected to post a net profit of Rs8.2 billion for the first half of 2013, which is 12% less than what it earned in the corresponding period  in 2012, according to a separate research note by AKD Securities on Monday. The decline in NBP’s earnings should largely be attributed to a 14% year-on-year decrease in the bank’s net interest income due to a tighter net interest margin.

However, the profit for the bank in the second quarter of 2013 is expected to be Rs4.3 billion, up 14% on a quarter-on-quarter basis because of the volume-driven higher net interest income, lower provisions and higher ‘other income’. During Januray-June 2013, NBP is expected to record a 30% year-on-year reduction in total provisions besides a 19% annual increase in its non-interest income.

Published in The Express Tribune, August 13^th, 2013.

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