The profitability of banking sector grew by 19 percent during July-September (3rd quarter 2015) to Rs 46.6 billion driven by 19 percent growth in Net Interest Income (NII).
Amongst top banks, Bank Alfalah (BAFL), Habib Bank (HBL) and United Bank (UBL) enjoyed the highest profitability growth of 67 percent, 38 percent and 19 percent, respectively.
All listed banks that have announced financial results for third quarter 2015 so far excluding Bank Islami (BIPL) have not announced financial results. Net interest income of the sector grew by 19 percent to Rs 112.8 billion which was supported by major investment in high-yielding long-term Pakistan Investment Bonds (PIBs) by banks which constitutes around 34 percent of deposits in third quarter 2015 vs 25 percent in third quarter 2014. This coupled with volumetric growth in other assets supported NII of the sector despite falling interest rates.
In a declining interest rates scenario in Pakistan, margins of banks are typically affected as cost on floating saving and fixed deposit normally go down, whereas, non-remunerative deposits (33 percent of total deposits) remain unaffected. However, investment in long-term PIBs has provided shield against falling interest rates.
To recall, the State Bank of Pakistan (SBP) has cut discount rate by 300bps in 2015 to date on account of falling inflation. Within big banks, NII of Allied Bank (UBL) was up by 35 percent followed by United Bank (UBL) and National Bank (NBP), up by 25 percent and 18 percent, respectively.
Non-interest income of banks also surged by 20 percent YoY to Rs 45.2 billion mainly led by capital gains on bonds and stocks, which is up 83 percent to Rs 13.9 billion.
Topline analyst Omair attributes this surge in capital gains to higher gains booked by Habib Bank (HBL) against Pakistan Investment Bonds (PIBs). HBL booked capital gains of Rs 5.5 billion in third quarter 2015 as against Rs 93 million in the same period last year.
Due to improved non-interest income, non-interest to total income ratio improved to 29 percent in July-Sept 2015 vs 28 percent in July-Sept 2014. Provisioning expense was up by 144 percent to Rs 7 billion led by higher provisioning charged by Bank of Khyber (BoK) and UBL during the quarter.
UBL booked Rs 539 million in third quarter 2015 (reversal of Rs48 million in third quarter 2014), whereas BoK booked Rs 956 million in third quarter 2015 (Rs 154 million in 3Q2014).
PROFITS UP 13 PERCENT QOQ:
On quarterly basis, profitability of banks grew by 13 percent QoQ to Rs 46.6 billion due to lower effective tax rate during the quarter. The central banks had imposed a one-off super tax of 4 percent on bank’s income which resulted in higher effective tax rate during second quarter 2015. Effective tax rate in third quarter 2015 slowed down to 35 percent vs 52 percent in second quarter 2015.
Pre-tax profits were down by 15 percent QoQ mainly due to lower non-interest income, down 26 percent QoQ. NII was down by 3 percent to Rs 112.8 billion due to loan re-pricing following interest rate cut.
NINE MONTH PROFITS UP 20 PERCENT:
Profitability during nine-month 2015 grew by 20 percent despite falling interest rate and increased taxation on the sector. Strong growth in NII (up 24 percent to Rs 337 billion) and capital gains (up 139 percent to Rs 54 billion) aided earnings growth of the sector.
The analysts said the banking sector will continue to improve owing to improving macros (estimated FY16-18 average GDP growth of 5.5 percent), expected increase in credit growth to 11 percent in 2015-17 (last 3-year average growth of 8 percent), strong Capital Adequacy Ratio (CAR) of 16 percent vs 10 percent requirement, strong investments in PIB (34 percent of deposits) and increasing non-interest income to total ratio.
