Data released by the SBP shows the net spread of each of the top five banks for January-September 2013 was lower than the corresponding figure last year. PHOTO: FILE
After a long spell of low profitability on the back of monetary easing that stifled their interest margins, banks are expected to post unimpressive scorecards for 2013 in coming weeks.
According to Elixir Securities, the banking sector’s profitability for 2013 is expected to decrease 9% on a year-on-year basis.
However, based on the results of the first nine months, the brokerage house says the impact of monetary easing has already been fully reflected in banks’ earnings. This is why banks’ bottom lines are going to improve in 2014 because the recent 100-basis-point hike in the monetary policy rate will finally prop up margins in the first six months of 2014, it says.
Last year was particularly tough for the banking sector. Data released by the State Bank of Pakistan (SBP) shows the net spread of each of the top five banks for January-September 2013 was lower than the corresponding figure for the first nine months of 2012.
Net spread of Habib Bank (HBL), which has the largest branch network in the country, was 1.5% for January-September 2013 as opposed to 2.8% for the same period in 2012. The spread decreased to 0.7% from 1.4% for National Bank (NBP) over the nine-month period. For United Bank (UBL), the decrease was from 1.8% to 1.5% while MCB Bank’s net spread shrank from 3.4% to 2.8%. Net spread of Allied Bank (ABL) fell to 1.6% from 2.5% during the same period.
Similarly, there was a decrease in earnings per share of four out of the five big banks in the first nine months of 2013 compared to the same period in 2012. The only exception was MCB Bank, whose post-tax EPS recorded a marginal increase from Rs16.3 to Rs16.9.
While net spreads and EPS of all major banks saw a decline, deposits grew considerably in the first nine months for all big banks, except NBP. SBP data shows that growth in deposits and other accounts of top banks were: UBL (10.6%), ABL (10.9%), MCB (7.1%) and HBL (3.7%).
That is the reason Elixir Securities believes earnings growth of the banking sector in 2014 will be driven by the impact of higher net interest margins on the back of an increase in the discount rate as well as recent growth in deposits.
Another reason for optimism with regard to the banking sector in 2014 is that private-sector credit stood at Rs3.2 trillion at the end of December last year, up 9.9% from the corresponding figure at the beginning of 2013-14, according to the SBP.
The increase in private-sector credit during the first six months of the current fiscal year is the fastest pace of growth recorded in the last eight years.
“Revival in credit off-take will be further margin accretive for banks,” according to Elixir Securities, which believes multiple factors will generate growth in the banking sector’s lending.
It says a cleaner loan book will lead banks to increase credit offers. In addition, the government’s focus on energy and infrastructure investments, settlement of circular debt and a number of upcoming power projects will also result in growth in lending.
Moreover, asset quality has improved across the banking sector since the beginning of 2012. The stock of overall non-performing loans has decreased 11% since December 2012 while the net infection ratio has gone down by three percentage points to 3% during 2013.
“We believe that gradual improvement in asset quality will result in slower NPL accretion going forward, which will lead to lower NPL provisioning.”
Published in The Express Tribune, February 8th, 2014.
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