The country's commercial banking sector was the most profit earning sector for the year 2005 among 34 listed sectors at KSE. The net earnings of the sector's institutions climbed by almost 99 percent during the period.
Listed banks' profitability grew by 99 percent and reached Rs 47.5 billion in the year 2005. The momentum of banks' profitability growth, which started in 2003, is continuing in 2006 as well.
Currently, out of 38 commercial banks in the country, 21 are listed. "Our 1Q 2006 result analysis is based on 20 listed banks as the result of Saudi Pak Commercial Bank is not yet available," said a report of Jahangir Siddiuqi Capital Markets, prepared by Mohammad Imran.
The 20 listed banks' profitability in 1Q 2006 went up by 58 percent, to Rs 14 billion, mainly on the back of improving margins spread between lending and borrowing rate. It will be of interest that in 1Q 2005 the growth in listed banks' profits was 106 percent.
Of the Rs 14 billion earnings, NBP topped the list with Rs 3.6 billion, followed by MCB with Rs 3 billion, and United Bank Rs 2.2 billion. Out of 20 banks, 5 banks--Askari, Faysal, Bank Alfalah, NIB and Bank of Khyber--posted decline in profits during 1Q2006, and only one bank, that is, Crescent Commercial, incurred losses in this time period.
Contrary to common perception, where local investors multiply quarterly earnings by four to estimate full year's profits, banks normally earn less in the initial months of the year. "By historically analysing the 1Q profitability of the banking sector we found out that in 2004 listed banks earnings were 18 percent of full year, and in 2005 19 percent. This is due to the reason that the banks' lending and deposit activities are sluggish in 1Q of calendar year."
Major contributor in the earning growth of the bank was the improving net interest income (NII) of the bank in the outgoing quarter. The growth in NII was due to the rising yield on earning assets. During 1Q2006, banks' advances increased by 2.1 percent or Rs 19 billion only as compared to the advances' growth of 6 percent or Rs 98 billion in the corresponding period of last year. This less growth in advances was, however, compensated by the rising spread of the sector. The average spread of the sector for 1Q2006 was recorded at 7.32 percent, which was 223 basis points higher than the average spread of 1Q2005.
An interesting observation in the 1Q2006 results was that the major earnings growth was witnessed in large commercial banks. Four large listed banks (except Bank Alfalah), in terms of deposits, that includes NBP, UBL MCB and ABL posted a growth of over 100 percent. In the opinion of JS, these large banks have advantage of their lower cost of deposits as compared to other banks in the industry. Excluding these large banks, the profitability growth of other banks was 13 percent in 1Q2006.
"From last couple of years, JS Research is bullish on the banking sector. We maintain our 'Overweight' call for banking sector with the assumption that the earnings momentum of the bank will continue in the years to come. In the year 2006, based on JS universe, we expect the earnings of the banks to grow by 45 percent. Currently banking sector is trading at 2006E and 2007F PE of 9.5x and 7.8x respectively with Price to Book Value (PBV) of 2.3x and 1.8x. Expected ROE for 2006 is 24 percent and 23 percent for 2007."