Banks profit hits Rs231bln despite soft policy rate

KARACHI: PSX-listed banks posted a 33 percent growth in profitability to Rs231 billion during the last year as growth in net interest income offset the impact of lower policy rates, according to brokerage analyses.

This was driven by earlier re-pricing of liabilities compared to assets amidst declining interest rates coupled with higher than expected deposit growth of 22 percent and consequently net interest income (NII) increased 25 percent to Rs769 billion, Topline Research said in a report of 17 banks out of 20 listed on the Pakistan Stock Exchange.

“Non-funded income (NFI) grew 16 percent to Rs224 billion led by capital gains on government papers due to cut in interest rates. These were enough to subdue 173 percent increase in provisioning (up by Rs72 billion to reach Rs113 billion), which were largely precautionary due to COVID-19, even if banks felt their respective loan books were not under particular duress.”

The central bank sharply reduced interest rates by 650 basis points to 7 percent during last year in a bid to buoy the lockdown-ravaged economy. Arif Habib Limited said profitability of the banking sector with higher profit volume in the corporate sector increased due to acceleration in NII and phenomenal capital gains of 14 times.

“On a sequential basis, the banking sector witnessed attrition in earnings during 4QCY20 with profit declining 30 percent quarter on quarter, majorly attributable to a 7 percent decline in NII and significantly lower capital gains,” it said. “Lag between asset and liability re-pricing provided a major boost to NIMs [net interest margins] initially. However during 3QCY20 and 4QCY20, NIMs started facing attrition with asset re-pricing kicking in following rate cuts, suppressing mark-up income, as there was re-pricing particularly of the banks’ investment books.” Provisioning of the banking sector posted a mammoth 158 percent increase during CY20. However, it declined 7 percent in 4QCY20 over the preceding quarter.

“Banks have booked heavy general provisioning this year to build buffers against any possible NPL [non-performing loans] accretion due to the economic hiatus post outbreak of the pandemic,” Arif Habib Limited said.

The State Bank of Pakistan provided a one-year moratorium on principal repayments as part of its relief measures to support the economy. Provisioning of the sector came down sequentially as most banks had adequately beefed up their coverage ratios in 3QCY20.

Notable profitability trends during CY20 were recorded by HBL, a massive 101 percent jump followed by National Bank of Pakistan (84 percent) and Habib Metropolitan Bank (81 percent). Other impressive earnings during the same period were from Bank Al-Habib (60 percent), Askari Bank (54 percent) and Meezan Bank (44 percent).