The cumulative profit of 22 listed commercial banks have declined by 21 percent to Rs 50.3 billion in the year 2008 as compared to Rs 63.6 billion earned in the same period in 2007, mainly due to higher provisions for non-performing loans (NPLs) and impairment loss, analysts said.
"The decline in earning of banks was driven primarily by heavy provisioning for NPLs and impairment loss carried out during 2008," Farhan Rizvi, an analyst at JS Global Capital said. Total provisions for NPLs surged to Rs 53 billion in 2008 as against Rs 42 billion in 2007, an astounding growth of 27 percent largely due to slowdown in economic growth.
Moreover, stock market crash in the second half of 2008 resulted in bank recognising impairment loss of Rs 12 billion as against only Rs 287 million recognised in 2007.
While profits remained subdued due to high provisions, net interest income (NII) and non-interest income continued to post decent growth rising by 19 percent and 11 percent respectively. High spreads of 7.29 percent in 2008 and strong advances growth of 19 percent supported the net interest income, while non-interest income increased by 11 percent at the back of surge in exchange gain as rupee remained volatile against the dollar, he added.
Resultantly income from forex dealing rose by 84 percent to Rs 17.4 billion, while increased trade activity helped fee income to increase 17 percent to Rs 36 billion. Similarly, dividend income posted a robust growth of 58 percent to Rs 11.6 billion during the period.
Muhammad Imran Khan, head of research at First Capital Equities said that a brief history of the banks profitability reveals that the sector went profitable in 2002 and thereon a consistent growth trend was witnessed till 2006 - the peak of the sector with profits of Rs 84.1 billion. Apart from 2003, where profits mainly generated from capital gains, the banks net earnings growth in remaining years were primarily supported by its core business activities. In 2007, this growth trend was reversed and an annual decline of 11 percent was observed primarily in the wake of higher provisions recorded due to withdrawal of FSV benefit. Now, in 2008, the cumulative profitability of the sample banks once again declined massively by 21 percent to Rs 50 billion versus Rs 64 billion, previously.
Like 2007, this time also provisions against NPLs hurt the bottom line growth of the bank. The decline was further magnified due to the lower capital gains of Rs 2.6 billion in 2008 versus Rs 14.6 billion observed in 2007 and loss on account of impairment of equity reflected under the head of provision for diminution in the value of investments. Even though the apex authority has relaxed the concerned accounting treatment (IAS39), the banks booked Rs 10 billion of provisions against diminution in the value of investments - 29x higher versus last year.
Moreover, it is pertinent to mention that, SBP (as a counter cyclical move) also allowed 30 percent benefit of FSV to the banks during the year. Despite that, provision against NPLs registered a growth of 26 percent to Rs 59.5 billion as against Rs 47.4 billion recorded in 2007. Interestingly, NPLs of the commercial banks in 2008 have reached to Rs 284 billion versus Rs 184 billion a year earlier. Furthermore, administrative expense also increased by 28 percent to Rs 125 billion.
He said that the net interest income (NII) of the listed banks increased by 19 percent to Rs 206.6 billion, attributable to stable spreads observed during the year along with a 17 percent growth in advances that mainly spurred by the banks lending for circular debt and commodity operation. Whereas, interest expense to interest income ratio stood 4pps higher at 48 percent, owing to half year impact of SBPs regulation requiring the banks to give minimum 5 percent on saving accounts deposits. Non interest income, other than capital gain, registered a growth of 35 percent largely supported by income from dealing in foreign currency.
Amongst 25 listed banks at the Karachi Stock Exchange, 22 banks were taken in this report. The Bank of Punjab, Bank Al Falah and KASB Bank were excluded, as they are yet to announce their 2008 results. As of September 2008, the sample banks represent more than 96 percent of the sectors market capitalisation and 87 percent of the total listed sectors deposits and assets.