Can state bank of Pakistan contain erosion in profitability of banks?

Byline: Shabbir Kazmi

Commercial banks are the core providers of liquidity to the private sector and the biggest investors in government securities (Treasury Bills, Pakistan Investment Bonds and Sovereign Sukuk). These are also the biggest investors in the shares of public limited companies (through investment portfolio and fully owned asset management companies). For considerably long time experts have been saying that banks have to redefine their business model. A review of the third quarter of CY18 performance of banks is likely to prompt the investors to reduce their exposures in banks. Two out of big five banks were imposed huge penalties in the United States and whatever happened at BankIslami Pakistan demands that the central bank must improve its monitoring and controlling mechanisms.

A quick review of third quarter performance of banks tells us a rather depressing story. Despite the two recent hikes in the interest rates, profitability of Pakistan's banking sector declined to Rs31.6 billion, down by 27% YoY adjusted for penalty on Pakistan's one of the oldest and largest commercial bank, Habib Bank Limited (HBL). The decline in sector profits can be attributed to Rs6.8 billion aggregate provisions, lower non-interest income and higher non-interest expense during the outgoing quarter. This analysis is based on the details of the listed banks that have announced 3Q2018 financial results.

Therefore, the first point to be analyzed is the massive provisioning by the banking sector. Collectively banks made significantly higher provisions during the quarter, amounting to Rs 6.8billion as compared to Rs 2.1 billion provision reversal in the same period last year. Bulk of these provisions was made by the big banks with UBL (Rs3.1 billion), NBP (Rs2.0 billion) and HBL (Rs1.7 billion. NBP made significant provisions on its loan portfolio while HBL booked charge for impairment in investments. Simultaneously, UBLs provision charge originated from both its international loan book as well as impairment of equities. Within the listed banks, the big five (HBL, UBL, MCB, NBP, ABL) posted a 48% YoY decline in earnings (normalized for HBL penalty). A against this mid-tier banks (BAHL, BAFL, MEBL) continued with growth momentum and reported profitability growth of 17% YoY.

Net Interest Income (NII) of the banks improved by 9% YoY to Rs 122 billion for 3Q2018, led by higher interest rates and better deposit mix. However, on a sequential basis, NII...