Pakistan’s banking sector continued to post strong performance in 2015 despite tough regulatory measures introduced by the State Bank of Pakistan and the Ministry of Finance as well as falling interest rates.
Profitability of the banking sector reported growth of 14 per cent to Rs 175 billion, driven by core business (Net Interest Income up 20 per cent to Rs 445 billion) and higher capital gains (up 85 per cent to Rs 56 billion). Pre-tax profit of the sector grew by 28 per cent, however, higher effective tax rate of 40 per cent in 2015 compared to 33 per cent in 2014 contained bottom-line growth to 14 per cent.
The government introduced a one-off super tax of 4 per cent on bank’s income and flat tax of 35 per cent on all sources of bank income including capital gains and dividend income.
The Topline brokerage analysis includes all listed banks that have announced their financial results for 2015 excluding Bank of Punjab (BoP) and Bank Islami (BIPL), whose detailed accounts are not yet available. These banks represent 98 per cent of total market capitalisation of all listed banks.
The State Bank of Pakistan (SBP) and the government introduced various regulatory measures for the sector including i) introduction of a target/policy rate (50 basis points below discount rate, ii) contraction of interest rate corridor (spread between ceiling/discount rate & floor/SBP repo rate) by 50bps to 2 per cent, iii) one time super tax of 4 per cent on bank’s income for tax year 2015, and iv) flat tax of 35 per cent on all sources of bank’s income.
SBP also lowered policy rate by 350bps to 6 per cent in 2015 as against the decline of 50bps in 2014. Margins of banks are typically affected with cut in policy rate as costs of floating saving and fixed deposits normally go down, whereas, cost on non-remunerative deposits (33 per cent of total deposits) remains unaffected.
Despite these measures, banks reported strong earnings growth mainly due to major investment in high yielding long term Pakistan Investment Bonds (PIBs) and deposit growth.
Earnings of top 5 banks (in terms of deposits) grew by 9 per cent to Rs 122 billion in 2015, whereas smaller banks (all listed banks excluding Top 5) outperformed the sector as profits grew by 38 per cent to Rs 54 billion.
Within the top 5 banks, National Bank (NBP) reported highest earnings growth of 25 per cent helped by above average deposit growth (16 per cent vs. 12 per cent industry average), loan recoveries, capital gains and major investment in PIBs. Similarly within smaller banks, Samba bank (SBL) and Faysal Bank (FABL) recorded earnings growth of 90 per cent and 71 per cent respectively, driven by a sharp rise in capital gains on PIBs.
Net Interest Income (NII) of top 5 banks grew by 19 per cent to Rs 276 billion whereas smaller banks reported an increase of 22 per cent as investment in long term high yield bonds had a profound impact on smaller banks.
Along with a sharp rise in NII growth, strong increase in capital gains led to an above average bottom-line growth for smaller banks. Capital gain of smaller banks was up 110 per cent to Rs 25 billion, whereas capital gain for top 5 banks was up 70 per cent to Rs 32 billion.
Deposits of the banking sector grew by 12 per cent to Rs 9.5 trillion in 2015, which is in line with last year’s growth of 12 per cent. Top 5 banks’ deposits rose by 11 per cent, whereas deposits of smaller banks grew by 15 per cent.
Deposit mix of sector during the year improved as CASA (current account and saving account) of the sector increased to 76 per cent in 2015 from 75 per cent during the previous year.
JS Bank (JSBL) recorded highest deposit growth of 31 per cent, whereas MCB recorded lowest deposit growth of 3 per cent. JSBL continued to enjoy strong deposit growth as it has done in the last few years following rapid branch expansion. On the other hand, MCB focused on improving deposit mix which affected growth.
Advances of the sector grew by 4 per cent to Rs 4.2 trillion in 2015, lower than last year’s growth of 9 per cent. Advances growth of top 5 banks was up 2 per cent YoY, whereas growth of smaller banks stood at 8 per cent.
Within the top 5 banks, Habib Bank (HBL) and Allied Bank (ABL) reported highest credit growth of 6 per cent and 5 per cent respectively. Within smaller banks, advances growth of JS bank (JSBL) and NIB bank (NIB) stood at 35 per cent and 18 per cent respectively in 2015.
Lower working capital requirement due to fall in commodity prices and slowdown in large scale manufacturing (LSM) kept credit growth in check.
In contrast investments surged by 29 per cent to Rs 6.3 trillion driven by increased investment in government securities. As a result, investment to deposit ratio (IDR) increased to 66 per cent in 2015 as compared to 58 per cent in 2014.
Investment in PIBs increased to Rs 3.0 trillion (48 per cent of investments) in 2015 vs. Rs 2.4 trillion (50 per cent of investments) during the previous year.
Total assets of the sector grew by an impressive 17 per cent to Rs 12.7 trillion aided by strong deposit growth and repo borrowing during the year. Similarly, total equity size of the banks increased by 4 per cent to Rs 1.1 trillion.
Total branch network of the industry grew by 5 per cent taking total branches of the industry to 10,487 throughout the country.
Banks with high CAR have some cushion as they can lend aggressively in the wake of improving macros and China-Pakistan Economic Corridor (CPEC) related lending. Samba bank (SBL) enjoys the highest CAR ratio of 30 per cent, whereas Summit Bank (SMBL) remains on the borderline at around 10 per cent. Within the top 5 banks, Allied Bank (ABL) tops the list with CAR of 21 per cent.