Consumer finance: lucrative but risky trade.

Byline: SHABBIR KAZMI

In the rising interest rate climate, commercial banks have no incentive for venturing into consumer finance. On top of all the Government of Pakistan is not only the biggest borrower but also offers a very lucrative rate of return. Still, to satisfy the apex regulator, the State Bank of Pakistan (SBP), commercial banks keep the business within the family by extending the facility to corporates, high net-worth clients and employees of the corporate sector.

Let us, first of all, see much profit is being earned by the commercial banks. According to a report by Pakistan's leading brokerage house, Topline Securities, the profitability of listed banks increased to a record PKR126 billion, up 56%YoY for the first quarter of 2023 (1Q2023). This was primarily driven by higher Net Interest Income (NII) amid high-interest rates and strong balance sheet growth.

The NII of the sector for 1Q2023 was reported at PKR358 billion as compared to PKR220 billion for 1Q2023, up 63%YoY as average policy rates during 1Q2023 remained at 19.0% as against 9.75% for 1Q2022.

Non-interest income of the sector improved by 10% to PKR75 billion driven by FX income and fee, commission and brokerage income. The non-markup expense was up 30% to PKR200 billion due to higher administrative expenses.

On a QoQ basis, banking sector profitability was up 25% to PKR126 billion led by higher NII and lower provisions.

For 1Q2023, BankIslami (BIPL) and Soneri Bank (SNBL) reported the highest earnings growth of 244%YoY and 174%YoY respectively. Bank of Punjab (BOP) reported an earnings decline of 45%YoY followed by Summit Bank (SMBL) which reported a loss of PKR935 million.

In terms of NII growth, Standard Chartered (SCBPL), BankIslami (BIPL) and Bank Alfalah (BAFL) reported the highest growth. Bank of Punjab (BOP) posted a decline of 4%YoY in NII.

The first preference of banks is an investment in T-Bills and investment bonds. Despite being risk-free these securities offer very lucrative results. Auction is held twice a month and banks have to simply submit bids, no hustle of running after the borrower and no fear of default. It is believed that nearly 80% of deposits are deployed. The tenor ranges from three months to 12 months. Depending on the government's appetite/urgency of borrowing most of the funds are parked in 3-months papers.

Similar is the observation in Pakistan Invest Bonds (PIBs). Though the bond ranges from 3 years to 30 years banks prefer to invest...