As odds turn unfavorable for the country’s banking sector, top five local banks have reported an erosion of 15.6 percent year-on-year (YoY) and 1.5 percent Quarter-on-Quarter (QoQ) earnings in 1Q2013.
Continuous monetary easing and requirement of minimum six percent return on saving deposits has affected banking spreads and thus their profits in last quarter. “Our sample includes large commercial banks operating in Pakistan having an extensive branch network,” said the analysts at Topline Research. These banks include ABL, HBL, MCB Bank, NBP and UBL that cover 72 percent of the country’s banking market capitalisation and 57 percent of industry deposit base.
In 1Q2013, these big banks reported after tax profit of Rs20.2 billion versus Rs 23.9 billion in 1Q2012 and Rs 20.5 billion in 4Q2012. “Going forward, we expect pressures to persist on banking profitability on implementation of 6 percent profit on saving deposit on average balances from 2Q2013,” said the analysts.
They though attributed low probability of substantial rate reversal this year but any hike in interest rate, amid an IMF programme, carried potential to revive banking spread and profitability.
The effects of declining yields on government papers and rising deposits cost had resulted in decline in banking spreads. Lowest since June 2005, the banking spreads averaged 6.21 percent in 1Q2013 versus 7.32 percent in 1Q2012 and 6.66 percent in 4Q2012. Resultantly, the net interest income (NII) of top five banks declined by 8.4 percent YoY and 8.7 percent QoQ to reach Rs 45.1 billion in 1Q2013. “Compared to the same quarter last year, rising provisions and higher non-markup expense also dampened the profitability,” said the Topline analysts.
In 1Q2013, the provisioning rose by 60 percent to Rs 2.1 billion, whereas non-markup expenses are up 8 percent to Rs 30.3 billion. However, some support came from five percent increase in non-markup income to Rs17.2 billion in 1Q2013.
On a sequential basis, 16.4 percent decline in non-markup income was the other major culprit behind reduced profitability besides lower NII. However, the impact was partially diluted by 64 percent lower provisions and 12.4 percent reduction in non-markup expenses. Though cumulative profits of these banks fell marginally from Dec quarter, interestingly, the MCB and the ABL reported increase of 35 percent and 25 percent, respectively, in their bottom line. “We attribute provisions reversals and controlled non-markup expense to the growth,” the analysts said.