Profitable sector: Banks’ earnings: something to look forward to

Growth expected to continue in 2015, analyst says.


Our Correspondent January 05, 2015
14% to 15%, is the expected growth in industry deposits in 2015-18. STOCK IMAGE

KARACHI: Banking spreads may be shrinking in a decreasing interest rate environment, but earnings of the banking sector seem to be on the rise nonetheless.

According to Elixir Securities, banks’ earnings for the last quarter of 2014 are expected to post growth of 25% on a year-on-year basis because of a notable increase in non-interest income coupled with a slowdown in the provisioning for non-performing loans.



Commercial banks have already earned a net profit of Rs115.4 billion in January-September, which is higher than their combined net profits of Rs112.4 billion for the entire 2013. The trend is expected to continue in 2015 with earnings growth expected to hover around 16% regardless of a drastic cut in the policy rate, according to BMA Capital Management analysts Jehanzeb Zafar and Iqbal Dinani.

Based on their performance in the first three quarters of the last calendar year, the analysts expect growth in banks’ earnings will clock up at 20% for 2014. They expect another cut of 150 basis points in the key interest rate in 2015 after the State Bank of Pakistan (SBP) reduced it by 50 basis points to 9.5% in November.

“Although this may potentially dent the investors’ sentiment in the short term, the massive accumulation of Pakistan Investment Bonds (PIBs) in 2014 has helped banks lock in higher yields, which will continue to support net interest margins (NIMs) in the near term,” they said in a note issued to clients on Monday.

Banks tend to lock in their investments in long-term government papers when they expect a downward revision of the discount rate. They have accumulated PIBs at an average yield of 12.6%, as their portfolios increased by Rs1.8 trillion to Rs2.5 trillion by November.

The banking sector’s investments in the PIBs are so heavy that they have resulted in a shortage of liquidity, prompting the central bank to inject Rs2.1 trillion into the banking system through six open market operations in December.

Besides increased interest income helping banks’ bottom line grow, stock analysts believe banks’ assets will continue their upward trend in 2015. Banking assets have been increasing at an annualised rate of 13% for the last four years. The rise in assets was accompanied with an average annual increase of 15% in banks’ deposit base, which was mainly a consequence of growing monetary base, the analysts noted.

Broad money, which is also known as M2 and includes currency and deposits, grew at an average rate of 14.2% in the last four years.



“Going forward, we assume industry deposits will grow by 14%-15% in 2015-2018,” they said, adding that banks’ assets-to-deposit ratio will start rising 2016 onwards due to a revival in credit demand following the resolution of energy and security crises.

In short, investors should stop worrying about a declining discount rate and remain invested in the banking sector for the foreseeable future. Top banking picks include National Bank, United Bank and Bank Al Habib for their slowdown in provisioning, rising revenues and improving net interest income, respectively.

Published in The Express Tribune, January 6th,  2015.

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COMMENTS (2)

Ferhaj | 9 years ago | Reply

NBP will be amongst the top banks coz Bangladesh's provisioning has been done by cent percent... n political influence towards substandard loaning has been diffused upto some extent... soon NBP will recover will greater pace...

kamal | 9 years ago | Reply

NBP cannot be a top pick as they have dented themselves with high npl and Bangladesh Operations. UBL, Bank Al Habib and Bank Al Falah are the top pick for 2015,

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