The cash strapped government’s continued heavy reliance on the banking system for budgetary support and risk-averse behavior on the part of commercial banks to invest in the heavily-weighted sovereign guarantees has accrued ‘impressive’ dividends for the banks during July-September FY11.
According to an industry research, during first quarter of FY11 the banking sector marked an ‘impressive’ 19 percent growth led primarily by the banks’ earnings on account of interest. Research conducted by Topline Securities reveals that the banks’ interest profits had ballooned to Rs 90.288 billion courtesy of, according to analysts, heavy government’s dependence on banking system to cater its budgetary needs.
“Thanks to higher return on advances, (the) overall net interest income (NII) (of the banks) grew by 17 percent,” said Farhan Mahmood, an analyst at Topline Securities. The banks’ interest earnings were Rs 78.423 billion during 1QFY10. According to State Bank of Pakistan, during the period ranging from July 1 to April 16 the scheduled banks’ lending to the risk-free government sector aggregated to over Rs 307.27 billion, marking an increase of 64 percent or Rs 119.648 billion when compared with Rs 187.626 billion of last corresponding period.
On the other hand, the period under review saw the banks’ credit to, what the analysts call it, the growth-oriented private sector amounting to only Rs 187.088 billion. According to analysts, large banks continued to adopt a risk-averse approach by parking their funds into less risky government securities that with 29 percent year-on-year growth contributed to higher NII. Analysts anticipate that though growth in bank advances would remain lower due to the prevailing higher interest rate scenario and the consequent lower appetite for bank credits, better spreads would keep the banks’ interest incomes on the higher side.
Giving his future outlook, Farhan said the still rampant non-performing loans (NPLs) and continuous growth in operating costs would slightly dilute the banks’ topline growth. “Our analysis is based on five large banks, including National Bank of Pakistan (NBP), Habib Bank Limited (HBL), United Bank Limited (UBL), MCB Bank and Allied Bank Limited (ABL), which contribute more than 57 percent share of the total banking sector deposits and represent approximately 80 percent of the market capitalization,” Farhan said.
The analyst said while the cost of funds remained stationary on the lower side, the banks’ core operations remained impressive on the back of an increase in the average six-months KIBOR by 168 basis points. Similarly, the research shows that, the improving trade activities provided a stimulus to the non-interest incomes, constituting 13 percent of the total income, of the big banks with a 10 percent annual growth. The research report depicts that during 1QFY11 the banks’ non-markup earnings stood at Rs 13.22 billion against Rs 11.988 billion of last year.
The said period witnessed operating costs of the banks surging by 16 percent or around Rs 4.0 billion to Rs 25.23 billion against last year’s Rs 21.78 billion. “While operating cost rose by 16 percent, the overall net provisioning remained flat despite devastating floods and high interest rate scenario,” the analyst observed. ABL, the analyst said, posted the highest earnings growth of 41 percent amongst the five leading banks.
“This was followed by HBL’s 31 percent, MCB Bank’s 21 percent and UBL’s 18 percent. While profits of the NBP remained flat,” he said. While the country’s commercial banks seem to have widely welcomed the government’s pro-borrowing stance, economic observers, including the State Bank, have repeatedly warned against the crowding out of the private sector, to which the banks are reluctant to lend owing apparently on the basis of the global economic downturn.
