The commercial banks are pocketing huge sums at the expense of provisioning on advances that shrank massively by more than 80 percent during the first quarter of the current fiscal year. During the quarter in review, 1Q2012, the five big banks, including the National Bank of Pakistan, Habib Bank Limited, United Bank Limited, MCB Bank and the Allied Bank Limited, posted an impressive earnings growth of 21 percent. These banks contribute over 55 percent share of the total banking sector deposits and represent approximately 70 percent of the listed banks market capitalization. “The major reason behind growth in earnings is sharp decline in provisions, especially on advances,” viewed Farhan Mahmood of Topline Research The said quarter saw these five banks’ provisioning totaling at Rs 1.4 billion as against Rs 7.8 billion they did during the corresponding quarter last year.
This shows a decline of 83 percent. The analysts believe that aggressive provisioning and restricted lending opted by the risk-averse commercial banks during FY11 led to significant decline in the banks’ provisioning on advances. Besides the above attributable factors, they said, an improvement in the repayment capacity of the bank borrowers after a sharp decline in the interest rate also led to decline in the provisions. “Impairment reversals of around Rs 2 billion in few banks like the ABL and NBP also reduced overall provisions in the said quarter,” said Farhan. However, the analyst recalled, unlike last year where the Net Interest Income (NII) remained the major earnings driver for the banks, this time growth in earnings mainly arise from sharp decline in provisions. Unlike FY11 where NII remained major growth story for the banks, sharp decline in interest rate reduced the banks’ margins on earnings assets particularly on risk-free government securities that contribute around 85 percent of total investment of the commercial banks.
