Financial sector: 2013 a tough year for large banks, warns report

Expresses hope that 2014 will see lower provisioning against non-performing loans .

KARACHI:

The five largest commercial banks in Pakistan recorded a collective decline of 5.7% in profits in 2013.

According to a research report prepared by brokerage house Topline Securities, profitability of Allied Bank (ABL), Habib Bank (HBL), MCB Bank (MCB), National Bank (NBP) and United Bank (UBL) remained Rs82.2 billion last year.

Pakistan Pulse: (March-4-2014)
Big Banks: Profits down 5.7% in 2013

Regards,
Zeeshan Afzal

— Topline Securities (@toplinesec) March 4, 2014

In contrast, their profitability increased by 6% in 2012.

“Large Pakistani banks saw some pressure on their profits (in 2013) due to contracting margins and slowdown in credit growth. Falling interest rate till August 2013 and the tightening requirement of the minimum return on savings deposits affected conventional banks’ margins and, resultantly, their profits,” it said, adding that higher capital gains and non-interest income saved the overall profitability from taking a major hit.

Decline in net interest income

Decreasing returns on advances and government papers along with rising deposit costs led to a drop in banking spreads to a nine-year low in 2013. Banking spreads averaged 6.2% in 2013 as opposed to 7% in the preceding year. “As a result, net interest income of large banks declined by 4.3% in 2013 to reach Rs189.1 billion. However, some support came from 14.7% lower provisions against bad loans, 17.1% higher banking fee income, 54.7% higher gain on sale of securities and four percentage points lower effective tax rate (29%),” it said.

Rising inflation increased administrative costs by 9.3% to Rs129.8 billion in 2013.

Some respite in fourth quarter

While 2013 was largely a tough year for large banks, their performance was relatively better in the last quarter due to a 100 basis points increase in July-Dec. Net interest income of the top five banks increased by 4.3% on a quarterly basis to Rs49.3 billion in Oct-Dec while their banking fee income increased by 29.1% to Rs11.5 billion.

However, the report noted that 8.4% higher admin cost to Rs36 billion and provisions of Rs1.4 billion against diminution of the value of investments during the last quarter dented banks’ profitability a little. “Support to profits also came from reversal of tax expense by ABL, which resulted in large banks’ profitability growth of 15.2% quarter-on-quarter to Rs22 billion.

2014 outlook

While previous interest rate hikes will improve banking spreads and profitability in 2014, Topline Securities foresees the status quo as far as the discount rate in 2014 is concerned. Expected economic revival may also help credit growth that will further support earnings while banks’ recent interest in high yield, longer tenure bonds will result in relatively better return on investments, the report said.

It also expressed hope that 2014 will see lower provisioning against non-performing loans (NPLs), as they already dropped 5% to Rs553 billion in 2013.

“In 2014, profits of MCB, NBP, UBL, HBL and BAFL are likely to increase by 24% against 10% decline in 2013. However, NBP is an anomaly here due to excessive provisions in 2013,” it said.

Published in The Express Tribune, March 5^th, 2014.

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