In addition to shrinking spreads, banks’ earnings growth has come under pressure for many other reasons. PHOTO: FILE
The latest cut in the policy rate announced by the central bank last Saturday is going to have a negative impact on banks’ profitability, analysts say.
The net interest margins (NIMs) of banks typically shrink in the wake of declining interest rates. The SBP has reduced the policy rate, which serves as the benchmark interest rate in the economy, by as much as 4.5% to 6% since November 2014.
According to AKD Securities, the latest cut in the policy rate will reduce the earnings estimates of the largest six banks - Habib Bank (HBL), National Bank (NBP), United Bank (UBL), MCB Bank, Allied Bank (ABL) and Bank Alfalah - by an average of 1.8% and 3.1% for 2015 and 2016, respectively.
The banking sector spread, which is the difference between average lending and deposit rates, has been shrinking in the wake of consecutive interest rate cuts since the end of 2014. It remained 5.47% in July, down from 5.79% in the preceding month.
The average spread for 2015 (until July) stands at 5.72% versus 6.08% recorded in the corresponding period of last year. Cumulatively, lending and deposit rates have shrunk by 150 and 96 basis points, respectively, since the start of 2015.
AKD Securities said the monetary easing cycle is expected to end in the first half of 2016 with a likely improvement in loan growth on the back of China-Pakistan Economic Corridor projects. “We believe banks have the capacity to compensate for tighter NIMs by booking capital gains and pushing (for) loan growth.”
According to Shajar Capital investment analyst Hamza Kamal, the banking sector has Rs219 billion in unrealised gains on investments. “With the monetary easing cycle bottomed out for now, we may witness huge amounts of gains appearing on the profit-and-loass statements in the second half of 2015,” Kamal said, adding that it will reverse the declining trend in the yields of government securities and increase their attractiveness.
In addition to shrinking spreads, banks’ earnings growth has come under pressure for many other reasons as well. The government recently introduced major changes in tax rates on banks’ income through the federal budget. The imposition of a one-off ‘super tax’ - applicable at 4% of the net income recorded in 2014 - resulted in all banks booking a higher tax charge in the second quarter of 2015.
Similarly, banks would pay taxes at different rates, ranging between 10% and 25%, depending on the source of income, such as dividends and income from mutual funds. However, the government imposed a uniform tax rate of 35% on all sources of banking incomes, which dented the bottom lines of banks in the first half of 2015.
Banks’ effective tax rate during the second quarter of 2015 remained 54% versus 35% recorded in the same three-month period of 2014.
Published in The Express Tribune, September 15th, 2015.
Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.
COMMENTS (3)
Comments are moderated and generally will be posted if they are on-topic and not abusive.
For more information, please see our Comments FAQ