Profitability of banking sector grew by 16 per cent or Rs 22.1 billion in calendar year 2015 to Rs 164.2 billion driven by strong growth in net interest income (NII) and capital gains.
After the announcement to deduct withholding tax of 0.3 per cent from the accounts of non-tax fillers, the fixed deposits of all the listed and non listed banks normally went down in July-December 2015 throughout the country, the analysts of different brokerage houses said.
Profit before tax (PBT) of the banking sector grew by 29 per cent to Rs 278 billion in 2015. However, due to increased taxation measures by the government in fiscal year 2015-16 budget, the PAT of the banking sector grew by 16 per cent.
Top six banks including Habib Bank (HBL), National Bank (NBP), United Bank (UBL), MCB Bank (MCB), Allied Bank (ABL), and Bank Alfalah (BAFL) reported earnings growth of 10 per cent in full calendar year 2015. However, National Bank of Pakistan (NBP) posted an abnormal increase of 24 per cent.
Bank Islami (BIPL), Bank of Khyber (BoK), Bank of Punjab (BoP), Standard Chartered Bank (SCBPL) and Summit Bank (SMBL) earning report has yet to come but their profits are estimated around 8 per cent in 2015.
The sample represents 92 per cent of the total banking sector market capitalisation and 89 per cent market share of entire banking sector. Out of this total increase of Rs 22.1 billion in profits, close to 65 per cent of the increase is coming from core operations where 35 per cent increase is due to rise in capital gains. Excluding capital gains, profits were up 8 per cent YoY in 2015.
Mid tier banks (excluding top six banks) reported earnings growth of 45 per cent (Rs 11 billion) to Rs 35.3 billion in 2015 mainly due to higher capital gains booked by these banks. Excluding capital gains, their earnings were up 29 per cent.
Net interest income (NII) of the sector surged by 21 per cent to Rs 414.3 billion assisted by major investment in long-term high yielding Pakistan investment bonds (PIBs) and volumetric deposit growth.
The Pakistan investment bonds (PIB) as percentage of deposits grew to 36 per cent in 2015 versus 28 per cent in 2014. Deposits of the sector also grew by 12 per cent to Rs 9.3 trillion further supporting topline of the banks, 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 goes down, whereas, non-remunerative deposits (34 per cent of total deposits) remain unaffected. The analyst of Topline Securities said that investment in long-term PIBs had provided shield against falling interest rates in 2015. The SBP (central bank of Pakistan) has cut policy rate by 350bps in 2015 on account of falling inflation, he said.
Due to sharp fall in interest rates and major investment in PIBs, banks also realised hefty capital gains on its bonds and equity portfolio. Banks booked Rs 52 billion against sale of bonds and equities during 2015 as compared to Rs 28 billion in the same period last year. Non-interest income as a result increased by 20 per cent to Rs 178 billion.
Total provisioning expense in 2015 increased by 47 per cent to Rs 32.5 billion as banks booked higher provisioning against non-performing loans and provision against equity investments following fall in oil and banking stocks. Provision against equity was in line with IAS39 standard of international financial reporting standards (IFRS).
The analyst said that banks were also offering attractive dividend yields of 8 per cent higher than the prevailing 6-month T-Bill rate of 6.2 per cent. The analyst reiterated that investment thesis was based on factors including improving macros (estimated 2016-18 average GDP growth of over 5 per cent), expected increase in credit growth to 11 per cent in 2016-18, and Strong Capital Adequacy Ratio (CAR) of 16 per cent versus 10 per cent requirement.
Big maturities of PIB during 2016 will somewhat be compensated by volumetric deposit growth by 12 per cent or Rs 982 billion and rising focus on non-interest income.
Analyst Umair Naseer said HBL, UBL and MCB would be strong in the banking sector due to compelling valuations. Habib Bank Limited (HBL) is expected to be in limelight as it will be a major beneficiary of CPEC projects.