Finance: Banking sector shows staggered growth

Declining interest income, outliers, dampen overall results.

KARACHI:

It is certainly not a good time for the Big Five in Pakistan’s banking sector. The five largest commercial banks with over Rs400 billion in assets representing more than 70% of the sector’s market capitalisation on the Karachi Stock Exchange posted a year-on-year decline of 12.1% in their profitability in the first six months of 2013.

According to a research note prepared by AKD Securities’ Research Analyst Raza Jafri, net interest margin (NIM) contraction led to a 7% annual decline in large banks’ net interest income (NII) while their non-interest income went up 8% year-on-year. “The effective tax rate has come in at 31.6% for the first half of 2013 as opposed to 33.3% for the comparable period in 2012,” he said.

Referring to the notable differences within the results posted by large banks for the first half of 2013, Jafri noted that MCB remained the key outperformer with a 7% increase in its after-tax profit while NBP was the biggest loser with a 30% decline in its net profit.

“In fact combined results, excluding NBP that has booked high subjective provisions pertaining to Bangladesh, paint an improved picture with a combined net profit-after-tax drop of 5% year-on-year in the first half of 2013,” he stated.

Referring to ‘one-offs’ in the result of large banks during the recent results season, Jafri pointed out the high capital gains for MCB due to the sale of its stake in Unilever Pakistan. “At the same time, ABL is an outlier with its 29% year-on-year decline in non-interest income, (which is) reflective of a shift away from money market mutual funds and towards government securities.”

According to Topline Securities Research Analyst Zeeshan Afzal, although combined earnings of Allied Bank (ABL), Habib Bank (HBL), MCB Bank, National Bank (NBP) and United Bank (UBL) declined in the first half of 2013, the situation turned favourable in the latter quarter despite low banking spreads. During the outgoing quarter, large banks’ profits increased 4% quarter-on-quarter to Rs21 billion.

Afzal said that effects of declining yields on advances and government papers and rising deposit costs have resulted in the lowest banking spreads during the last eight years. Spreads averaged 6.25% in the first six months of 2013 compared with 7.23% in the corresponding six-month period in the preceding year.

Future outlook

Topline Securities says there is a high probability that monetary tightening due to an expected hike in inflation carries the potential to revive banking spreads and profitability in the near future. “Expected economic revival may also help credit growth that will further support earnings,” it says, hinting at a faster rate of growth in large bank’s advances going forward.

While the postponement of the monetary policy announcement has clouded immediate-term outlook, AKD Securities believes that interest rates will average higher in 2014. “With asset quality seemingly under control, we tentatively eye Big-5 earnings growth of more than 15% year-on-year in 2014, which should drive the next round of share price performance,” its research note said.

Published in The Express Tribune, August 27^th 2013.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.