Banks’ profits surge 23 percent in Q1

KARACHI: Listed banks saw net profit increase 23 percent year-on-year to Rs48.2 billion in the first quarter of 2020 owing to growth in net and non-interest incomes during the period, a brokerage reported on Thursday.

Banking sector recorded profit of Rs39.1 billion in the corresponding period a year earlier. Net interest income rose 18 percent and non-interest income increased 14 percent. The growth was driven by higher investment income.

“Over the past six months, banks have gradually built their investment books, initially on T-bills, however as view was shifted towards declining interest rates at the behest of COVID-19, the bank’s aggressively bought PIBs (Pakistan investment bonds),” Fawad Basir, analyst at Topline Research said in a report reviewing income of 17 banks – out of a total 20 banks listed on the Pakistan Stock Exchange.

The margins of banks are typically affected with falling rates as floating saving and fixed deposits normally go down, whereas, remunerative deposits remained unaffected.

Banks’ net interest margins would come under pressure sooner as they have not managed to invest in fixed coupon high-yielding long tenor as compared to last time with falling interest rates. “We expect banks to post earnings decline of 8 percent in 2020,” Basir said. “Despite the measures taken by the State Bank of Pakistan, provisions will increase based on the stricken economic activity at the moment.”

SBP relaxed capital requirement for banks in view of 525 basis points reduction in interest rate amid lockdown related to coronavirus.

The analyst said the increase in net and non-interest income was offset by 5.5x increase in provisions and 16 percent higher operating costs.

Profits before tax remained largely stagnant. The effective tax rate clocked in within its normal range at 41 percent in 1Q2020. However, the effective tax rate last year was abnormally high at 50 percent because of retrospective recognition of super tax relating to tax year 2017.

Top banks with the highest growth in net interest income are Meezan Bank (66pc), Bank Islami (47pc) and Faysal Bank (32pc).

With fee income largely the same as last year and foreign exchange income dropping due to adverse rupee movements, the banks booked capital gains, primarily on fixed income instruments, to cushion their profitability growths.

Cumulative absolute increase in net and non-interest income were Rs26 and Rs6 billion, respectively, whereas provisions and operating costs were higher by Rs16 and Rs14 billion, respectively. In absolute terms, the highest quarterly profit was earned by MCB (Rs6.6bln), followed by Meezan Bank (Rs4.9bln) and UBL (Rs4.9bln). In terms of highest increase in profits before tax, the highest increase was recorded by Bank of Khyber (156pc), Bank Islami (77pc), Meezan Bank (47pc), Standard Chartered (30pc), Samba Bank (24pc) and MCB (23pc). The highest contraction in profits before tax was recorded by Soneri Bank (40pc), Bank Alfalah (21pc), NBP (20pc), UBL (16pc) and HBL (15pc).