Banks were supposed to have it tough for much of CY17. And they have had it that way. Interest rates were down significantly, spreads went low, and non mark-up income avenues were not as lucrative. That the top five banks still managed to post a top line growth, however modest it was, is indicative of the ever expanding balance sheet.
The combined top line of the big five banks remained flat during 9MCY17 year-on-year, despite a sizeable double digit asset growth. The growth in earning assets continued to remain tilted in favour of investments. But on the positive side, advances too, grew considerably by 12 percent over December 2016. The ADR as a result, improved slightly from 41 percent in December 2016 to 43 percent as at September end 2017.
Low yields on earning assets ensured limited top line growth. The spreads continued to fall further, as most big banks had almost reached optimal deposit mix, and the pressure on spreads had to come at some point. The cost of deposits for the big five increased considerably during the period. The efforts on the liability side continue to be focused on adding the right kind of deposit, with an eye to continuously improve CASA. But for most banks, CASA is already on the higher side, which will eventually compel banks to look for more avenues to boost income, should spreads continue to be depressed.
A massive change was witnessed in the provisioning expense for the period. Most banks had done the hard years to clean the loan books, be more prudent and shown increased recovery efficiency. The matter of HBL’s settlement cost for its New York branch episode also makes the picture look bleaker than it is.
Another feather in the cap was a remarkable turnaround of events relating to NPLs. Banks have not lent aggressively and have rather focused more on lending carefully and cleaning the books. The NPLs have gradually come down and the coverage has significantly improved. The NPLs have remained on the lower side, with an infection ration in single digits, and adequately provided for.
Most banks have expressed a desire to be more open to private sector lending going forward, as genuine demand is expected to pick up, as CPEC heats up. There is not much juice to be extracted from the PIBs and treasury bills, both in terms of capital gains and earning yields. Banks’ books are clean enough to enable them venture more aggressively into advances. Interest rates are showing all signs of having bottomed out. And big banks surely cannot wait to have more breathing space in terms of yields on earning assets.
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