First-half earnings: Resilient small banks spring surprise, beat Big Five

Profits rise 10% despite low credit growth, falling margins.

KARACHI:

The banking sector’s Big Five may have got hammered in the first half of 2013 with a 12% collective decline in profits, but small banks have performed surprisingly well in spite of an overall decline in their net interest income over the same period.

A sample of 20 listed banks recorded a collective decrease of 6% in their profits in the first half of 2013, according to a research note issued by Topline Securities, a Karachi-based brokerage house.

However, excluding the Big Five, profits of small banks increased 10% over the six-month period, which shows their resilience in the face of low credit growth in the economy and falling margins caused by declining yields on government securities.

According to Topline Securities analyst Zeeshan Afzal, declining returns on advances and government papers – coupled with rising deposit costs due to imposition of 6% minimum deposit rate on savings deposits – have led to a 98-basis-point drop in the banking sector’s spreads to 6.25% in the first half of 2013.

“As a result, net interest income of our selected 20 banks has declined by 5% year-on-year to Rs141.4 billion in the first half of 2013. However, on the positive side, a 14% decline in provisions to Rs9.9 billion and 7% improvement in non-interest income to Rs63.6 billion mitigated much of the negativity,” he said.

Quarterly profits up 14%

While earnings decreased in the first half of 2013 if compared with the first six months of 2012, tables seem to have turned for the banking sector in the second quarter of 2013.

For example, on a quarter-on-quarter basis, profits of banks rose 14% to Rs29.8 billion. A small (3.8%) improvement in net interest income to Rs72 billion in the second quarter proved to be a stimulus while quarter-on-quarter non-interest income advanced 20.4% to Rs33.8 billion, Afzal said.

Decline in provisions

The increase in small banks’ earnings is mainly on the back of 43% annual reduction in provisions to Rs2.6 billion after adjusting Standard Chartered Pakistan’s major provisions reversal of Rs1.1 billion in the second quarter.

In addition, their non-interest income went up 8% to Rs25 billion in the first six months of 2013. “Similarly, on a quarter-on-quarter basis, profits of these banks also improved 45% to Rs8.8 billion in the second quarter of 2013,” Afzal said.

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

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