There is no denying to the fact that commercial banks in Pakistan have been posting substantial profit when the interest rates were high. However, with the commencement of decline in interest rate banks’ profit is likely to come under pressure. Along with this banks are also anticipated to witness erosion in deposits as the depositors will switchover their investment in other high yielding options.
In the high interest environment banks were investing colossal amounts in risk-free government securities. The added advantage was no fear of non-performing loans and no need for provisioning for delinquent loans. The first and hard below will be significant reduction in interest income. However, some of the analysts don’t subscribe to this rationale. They say, “Foreign investors in T-Bills are seasonal birds. With the reduction in interest rate they have already started liquidating their holdings and soon they will fly away”.
Having a conviction that government securities will continue to remain the largest investment of banks, some analysts say, “As long as the government remains the biggest borrower, banks will continue to reap benefit. To facilitate lending to other sectors, the State Bank of Pakistan has to impose a maximum limit of investment in government securities. Also to contain inflation money supply has to be reduced by encouraging people to avoid cash transactions”.
Since the government has declared warehousing an industry, State Bank of Pakistan has to convince banks to lend money for the construction of ‘commercial warehouses’. One of the analysts says, “I sure neither the government nor the central bank is aware of the colossal losses being incurred by the country, farmers and consumers due to the absence of modern warehousing facilities”. He re iterated that nearly 20% of food grains and 40% of fruits and vegetables go stale before reaching the market. If these wastages are contained size of the GDP will be increased, exports will be enhanced and above all the country will be able to earn more foreign exchange by exporting exportable surplus.”
Out of nearly two dozen banks I have picked up two randomly to reinforce my point.
Following are the takeaways from the briefing from the analyst briefing National Bank of Pakistan (NBP) to discuss the 1HCY24 results and future prospects:
In the pension case, the management disclosed that, following the dismissal of the NBP review petition, the pension liability has now attained finality. In compliance with the judgment, the bank has made payments to the majority of petitioners and non-petitioners and booked an impact of PKR49 billion in its financials. There is a pending litigation also related to the pension matter. The management is confident of a favorable verdict.
The Bank reported income growth of 5.1%YoY driven by: 1) an increase in interest-bearing assets, 2) improvement in the yield on investments, 3) a higher yield on advances and 4) substantial capital gains.
The bank’s operating cost increased by 11.8%YoY due to inflationary pressures and increased spending on IT infrastructure. Accordingly, the bank’s cost to income ratio for the period stood at 50.7% as against 47.8% in 1HCY23.
Bank spent PKR3.7 billion in 1HCY24, bringing the total to PKR21.8 billion since 2020 on building IT infrastructure related to the core banking application, digital offering, cybersecurity and IT equipment.
During 1HCY24, the bank’s non-performing loans decreased by 1.1% to PKR218.5 billion. The gross NPL ratio remains high as the bank carries a significant amount of legacy NPLs.
The bank’s advances decreased by 6% from December 2023, resulting in an ADR of 38.3% in 1HCY24. The bank targets to push ADR in the range of 40-50% to reduce the impact of additional tax.
Investment book of the bank increased by 7% in 1HCY24, with majority of the incremental deployment in T-bills. The bank’s portfolio consist of PKR980 billion in T-Bills, PKR3.1 trillion in PIBs, and PKR109 billion in equities. Moreover, 80% of the PIB’s portfolio consists of floaters, and T-bill forms 24% of the total investment book. The bank received dividends of PKR3.0 billion and booked capital gains of PKR4.6 billion on its equity portfolio.
NBP added PKR429 billion in deposits in 1HCY24, with 77% of these being current deposits, resulting in a CASA mix of 80% in 1HCY24 against 79% as of December 2023. Notably, the bank’s total current account deposits reached PKR2.3 trillion or 56.1% of the total deposits as of June 2024.
The cost to deposit ratio clocked in at 14.0% for 1HCY24 as compared to 11.8% in 1HCY23 due to the higher policy rate.
As a “Domestically Systematically Important Bank”, the bank is required to maintain adequate buffers over regulatory requirements.
The bank’s Tier-1 and Tier-2 capital decreased by 3.1% and 4.3%, respectively, in 1HCY24 compared to Dec’23 due to adjustment in equity following implementation of IFRS-9. Consequently, the CAR and tier-1 CAR reduced to 24.7% and 18.6%.
The bank is expected to record a capital gain of PKR5.7 billion in 3QCY24 from the sale of its 45% stake in UNBL-UK.
Bank’s digital self-serve channels have experienced substantial growth of 88%YoY, with over 364 million transactions processed and a throughput of PKR5.4 billion.
For dividend declaration, bank have to take prior approval of Federal cabinet and SBP due to applicability of Bank Nationalization Act 1974.
Meezan Bank (MEBL) announced its 2QCY24 result posting unconsolidated profit after tax of PKR26.6 billion (EPS: PKR14.9) largely in line with market expectations. Quarterly results were accompanied by a cash dividend of PKR7/share, taking 1HCY24 payout to PkR14/share as compared to PKR7.0/share for the same period last year.
Net Spread Earned for the quarter was recorded at PKR70.3 billion, higher by 4%QoQ and 42%YoY. NIMs for the quarter are estimated to have reduced to 10.38%.
In terms of other income, bank witnessed a QoQ dip of 16%, mainly driven by a 12%QoQ fall in Fee and commission income generated during the period. Further, bank’s FX income was reported at PKR102mn during the period, down 79%QoQ.
Some respite for the quarter came in the form of provisioning reversal of PKR935 million.
Bank’s cost-to-income ratio was reported at 29% for 2QCY24. Notably, non-markup expenses for the quarter were recorded at PKR22.1 billion, up 4%QoQ and 35%YoY basis.
Effective taxes for the quarter came to 51%. Analysts anticipate the applicability of ADR-based taxes on the investment book to be reflected during the final quarter.