Small banks - big profits

Small Pakistani commercial banks posted a stellar performance in 1HCY12, reversing the misfortunes of the same period last year. What was a net loss of over Rs1.4 billion for the small banks in 1HCY11, turned into a net profit of just a tad under the same amount in 1HCY12. Much like the larger and mid-sized banks, a sharp decline in provisioning charges and massive surge in non-mark-up income, contributed significantly to the bottom line. But quite unlike the rest of the industry, the top line growth was phenomenal as well. Strong growth earning assets helped the mark-up income of the small banks surge by 20 percent, compared to the same period last year. The total assets grew by 12 percent over December 2011, with investments growing at a rapid pace of 26 percent, versus a meagre five percent growth in advances. It seems that the small banks are no exception to the general industry trend of shying away from advances and lending to the government - as the government papers continue to provide risk free returns amidst testing economic times. The small banks gross spread ratio improved from 23.1 percent in 1HCY11 to 30 percent in 1HCY12, a healthy development, against the industry trend of falling spreads. The deposit growth at 17 percent over December 2011 depicts the small banks strong marketing efforts and network expansion. The net mark-up income resultantly, surged by a healthy 56 percent year-on-year, seeding the seeds for a strong top line growth. Having made aggressive provisions on advances much earlier than the larger banks, the decline in provisioning for smaller banks yielded higher post provision mark-up income for small banks. The other income from brokerage, commission and investments offered further support to the bottom line as the other income recorded a stellar growth of 81 percent year-on-year, nearing the NII of 1HCY11. But administrative expenses remained on the higher side, growing by 12 percent year-on-year, showcasing the inability of small banks to cut administrative costs as aggressively as the larger counterparts.

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Small banks
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(Rs mn)                    1HCY12    1HCY11    chg
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Mark-up Earned            17,278    14,444     20%
Mark-up Expensed         (12,080)  (11,103)     9%
Net Markup Income          5,198     3,341     56%
Provisioning                 159      (417)
Net Mark-up income
 after provision           5,357     2,924     83%
Other  income              3,117     1,719     81%
Operating revenues         8,315     5,060     64%
Other  expenses           (6,361)   (5,659)    12%
Profit before taxation     2,114    (1,016)
Profit after taxation      1,346    (1,440)
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Source: Companies Accounts