Advances growth of the banking system jumped by 20 percent YoY in FY08 to date fuelled by the borrowing from agriculture and power sectors while overall deposits to the banks fell to Rs 3.67 trillion compared to Rs 3.77 trillion, decreasing by approximately 2.7 percent during the period under review.
BANKING INDUSTRY IN Q3FY08Of the 23 commercial banks, the earnings for the three quarters of FY08 have been 4% less as compared to the same period last year and the profits of these banks declined by Rs 2.3 billion to Rs 55.3 billion as against Rs 57.6 billion in FY07. The domestic banks disbursed Rs 128 billion from July 1 to November 08, 2008 against Rs 72.8 billion disbursed during the same period last year.
The banking sector's spread continues its rising trend after witnessing a dip to the level of 6.78% in June 2008 that was being taken as an after effect of minimum profit payment of 5% on saving accounts. In the month of September 2008, spread of the banking sector recorded at 7.49%, cumulating an average three months (3Q08) spread of 7.3%. Interestingly, September 2008 banking sector spread is at two-year high level. Furthermore, it is the 3rd highest banking sector spread observed during the last 5 years.
Currently the banks are facing multiple challenges including restricted liquidity, higher NPLs, strong competition and above all, slow economic growth of the country. The liquidity crunch aggravated due to the economic imbalances like increasing trade deficit, declining foreign reserves, low foreign inflows and capital flight. The lack of investor confidence has led to flight of approximately $10 billion in the past months.
Due to slow foreign inflows and rising expenses, the borrowing by the government for budgetary support, from SBP has reached Rs 226 billion, a rise of about 2000 percent (from Rs 10.951 billion on July 1 to October 18) during the current fiscal. The government borrowing for budgetary support from banking sector has gone up by 352 percent to Rs 461.280 billion during the fiscal year 2008.
Moreover, the rumour that government freezing the foreign currency accounts and bank lockers fuelled the capital flight further and increased the dollar demand. Advances to deposit ratio of 76.5 percent showed an increase of 20 percent from June 08 and have also resulted in an even tighter liquidity position for the banks.
To ease liquidity crisis, prevailing in the banking sector, SBP has decreased Cash Reserve Requirement ratio, which banks keep with the State Bank as reserve money, on all deposits of up to 1 year maturity twice; reduced by 2% with immediate effect and further by another 1%.
Other reasons also played their part in restricting the liquidity in the system such as the revision of rates on National Savings Schemes. On many schemes of national savings rate of profit was increased by 1% to 2%, which led to withdrawal of funds from commercial banks who were giving lowest possible returns. Accordingly the National Savings experienced an inflow of Rs 60 billion in the last two months.
This had pushed banks to raise deposit rates as high as 12-14% for a year's term deposit and up to 18% on a longer term deposits thus adding a part to the cost of funds. Due to tightening of monetary policy the interest rates soared affecting the debt servicing ability of the borrowers including the major customers such as textile and individual consumers leading to major write-offs and high provisioning against loans.
Commercial banks in their half-yearly reports have shown an addition of Rs 26 billion as NPLs pushing the banking sector's total NPLs to Rs 194 billion. As a matter of fact more than 80% of the bank's lending are based on KIBOR. This benchmark rate has been rising for the past few months and is likely stay on a steep rise thus it further confirms NPLs growth in future.
============================
Q1 Q2 Q3
============================
2007 90% 97% 134%
2008 59% 37% 99%
============================
In the nine months ending September 2008 the bank realized profit after tax of Rs 1.794 billion which is 22% less than previous years profits Rs 3.707 billion was earned from Net Interest income which is 17.5% more than same period previous year. The income increase was possible due to a less than proportionate increase in expenses to match the revenues. Therefore the total net interest income was high by Rs 552 million.
And the other half of the income was contributed by non-interest income of Rs 1.960 billion which was in fact 8% less than previous year's non-interest income. The interest income was high due to higher volume of financing and investments in government securities. Cost of funds to bank or the mark-up expense has been for many reasons. The first and foremost reason has been the increase in the minimum deposit rates to 5% by the State Bank of Pakistan (regulator).
Secondly, there was an increased competition for deposits from savings schemes, which were giving better rates. This turned out into drainage of huge sums of money from banking system. Generally speaking, the banks have been alleged for the cartel like behavior and were exploiting customers so this move had its toll on the banking policies and eventually on the profits.
In the case of Faysal Bank, the absolute cost of deposits has not gone up as there was a drain of remunerative deposits (deposits on which banks pay interests). Net income after provisions has fallen by 9% owing to 700% increase in provisions. Previously there was a reversal of provision but due to regulations of SBP (aims to strengthen banks to credit vulnerabilities) there was a 700% increase in provisions amounting to Rs 903.596 million.
The non-markup income showed a decline in this period of 8%. Major impact was seen in returns from securities trade, and revaluation of investments. The dividend income remained unchanged in despite of changes in economic situation. There was a loss from securities trade as in this period as the stock markets suffered severely due to international market influences and domestic poor economic situation.
On the other hand, a nominal increase of 13% was seen in fee and commission activities, which can be attributed to increase in transactions volume. To match these non-mark-up revenues the expenses rose by 10% mainly due administrative charges which were high because of inflationary pressures and also because of opening of new branches in the second half of the year (June 2008 onwards).
Putting all the blocks together we see that profit before tax was 22% less than previous year's profits. The earnings per share were Rs 3.38 as compared to Rs 4.36 in previous year's nine months. On the balance sheet front the earning assets showed a disappointing trend with investments and lending to financial institutions falling and a very nominal increase in advances. Lendings to financial institutions fell by a significant 62%. Lendings to financial institutes includes repurchase agreements (Market T-Bills and Pakistan Investment Bonds).
Investments include Market T-bills and PIBs held to maturity, again a major fall of Rs 3.2 billion in Market t-bills. All in all the investments fell by quarter ie 25% as compared to pervious year's nine months. A small increase of 3% was observed as all categories of advances saw a decline with an exception of loans, credits and running finances which experienced a growth of 13.57% thus nullifying the effect of other decreases in advances.
No- performing loans form an important part of the advances and have to be critical discussed. In these nine months, NPLs grew by 38% which highest as compared to averages of top five banks, NPLs posses a threat to the profitability in future. Initially the benefit of Forced Sale Value (FSV) was removed resulting in increasing the cost of advances to the banks.
But recently the banks are relieved as they are now allowed a cushion of 30% FSV. Another important component, deposits, has reduced by 9% in this year mainly in remunerative accounts (Fixed deposits, savings deposits and margin accounts). As quoted in the financial statement the reduction in deposits in due to the banks strategy of reducing its reliance on institutional deposits and diversify into others sectors.
============================================================================
FINANCIAL HIGHLIGHTS - FAYSAL BANK Rs '000
============================================================================
9M FY '08 9M FY '07 Chg (Rs) Chg (%)
----------------------------------------------------------------------------
Interest earned 9,635,439 8,662,135 973,304 11%
Interest expensed 5,927,710 5,506,941 420,769 8%
Net interest income 3,707,729 3,155,194 552,535 18%
Provision against NPLs 1,041,794 -173,062 1,214,856 -702%
Total Provisions 903,596 60,200 843,396 1401%
Net interest income
after provisio 2,804,133 3,094,994 -290,861 -9%
Total non-interest income 1,960,530 2,140,567 -180,037 -8%
Total non-interest expenses 2,338,362 2,133,800 204,562 10%
PBT 2,430,512 3,107,668 -677,156 -22%
Taxation 636,172 794,363 -158,191 -20%
PAT 1,794,340 2,313,305 -518,965 -22%
Basic/Diluted EPS 3.38 4.36 -1.0 -22%
----------------------------------------------------------------------------
9M FY '08 Dec '07 Chg (Rs) Chg (%)
----------------------------------------------------------------------------
Deposits 92,327,158 101,879,244 -9,552,086 -9%
Advances 90,341,492 87,346,401 2,995,091 3%
Investments 23,589,051 31,463,993 -7,874,942 -25%
ADR 0.98 0.86 - -
NPLs 6,572,000 4,753,000 1,819,000 38%
NPLs/Advances 7.27% 5.44% - -
============================================================================