Banking sector’s profitability set to radically recover in 2019

KARACHI: Banking sector’s profitability is expected to surge more than 60 percent to Rs136.036 billion in the upcoming year as spell of increases in interest rates has reversed the contraction cycle of net interest margin, a brokerage analyst said on Tuesday.

“Banking profitability is set to recover strongly in 2019 on the back of NIM (net interest margin) expansion coupled with growing balance sheets, generally healthy asset books and low base effect from earnings decline in 2018,” analyst Faizan Ahmed at Optimus Capital Management said in a banking sector’s outlook report.

The report analysed financials and presented outlook of all the large listed banks, including United Bank, Meezan Bank, Habib Bank, Bank Al Habib, Faysal Bank, Habib Metropolitan Bank, Bank Alfalah and MCB Bank.

Banking sector’s profitability in recent years has been constrained by a series of one-offs and regulatory changes, including past pension costs, super and banking transaction taxes, deposit insurance, overseas penalties and provisions in addition to the dampening effects of narrowing spreads. In 2018, the eight banks earned Rs83.913 billion

“Recent 150bps (basis points) hike by the SBP (State Bank of Pakistan), stalled IMF (International Monetary Fund) program negotiations and lack of clarity on external funding has made us more hawkish on further tightening,” Ahmed said. “We now expect SBP to raise policy rate by another 50bps in January 2019.”

The central bank brought the interest rate up to 10 percent in the latest monetary policy announcement in November.

The analyst further said growth in net interest income is likely to more than offset a significant increase in credit charges. “Free from MPR (minimum profit rate) constraints, the Islamic banks are likely to enjoy higher spread expansion and hence deliver stronger earnings performance.”

Ahmed said tighter monetary policy will outweigh the dampening effects of fiscal austerity for the banking sector with the government aiming to restore macroeconomic stability.

“We expect monetary expansion to not only slowdown but undergo a compositional shift,” he added. “Given low private credit/GDP (16 percent), low banking advance to deposit ratio (53 percent) and strong corporate balance sheets, we expect the private sector to pick up the slack as public sector takes the backseat.”

The analyst said stiffer regulatory environment is likely to continue to drive banking sector consolidation.

The number of conventional banks decreased 13 percent to 29 in the five years. “On the positive side, increased documentation of economy could help reduce the country’s excessively high cash/deposit ratio of 34 percent, thereby helping deposits grow faster than M2.”

Ahmed said the size seems to have worked against the banks as mid-tier banks have far outperformed the Big-5 (with UBL and HBL falling to multiyear lows) and KSE-100, while overall banking sector has underperformed the market over the past 12 months.