After two years'' deceleration, banking sector profits posted a big increase of 33 percent during the first half of the current calendar year 2010. According to analyst, the profit of listed banking sector reached Rs 35.512 billion in first half of current calendar year as compared to Rs 26.630 billion in corresponding period of last fiscal year, depicting an increase of Rs 8.88 billion.
Despite healthy surge in profits, the bankers see some uncertainty in future profitability as the State Bank is expecting increase in non-performing loans (NPLs) due to floods, which have caused extensive damages in agricultural and SME sectors.
"First half result of banking sector validates our thesis of lower loan losses driving profitability, along with the support of relatively stable Net Interest Income," said Mustafa Bilwani, an analyst at JS global. He said that it is an analysis of 21 out of 25 listed banks, which accounted for 93 percent of the total market capitalisation and as on March 2010. These banks accounted for 95 percent of the listed sector advances and deposits.
He said: "We believe the quantum of provisioning will continue to dictate the performance of the sector. However, we may see a negative impact in the form of rising defaults, coming in after the losses caused by mass flooding in the country". The analysis of banks'' profit showed that during the first half Net Interest Income (NII) increased by 7 percent, driven by growing earning assets, particularly investments. This growth is impressive, given the fact that average KIBOR was down 135 basis points in January-June 2010. Non-interest income registered 3 percent decline YoY, despite rising fee income and higher gain on sale of securities in most cases.
Provision for NPLs declined sharply in the period, dropping by 39 percent YoY in first half, mainly led by slower accretions, especially in second quarter. However, an overall respectable performance was dented by admin expenses, increasing by a significant 13 percent to Rs 71 billion in response to inflationary pressures.
He said that big 5 banks continued to dominate and accounted for 80 percent of the profits (excluding loss making banks) in January-June of 2010. Considerable slowdown in NPL accretions, especially in second quarter, and relatively weak credit offtake led to declining provisioning expense and, out of 21 sample banks, 19 banks witnessed a decrease in provisioning expense.
Net Interest Income (NII) grew by a notable 7 percent to Rs 120 billion, which was more than estimated given the fact that average KIBOR declined by 135bps in the period. The jump in NII, according to analysis, was primarily down to robust deposit growth culminating into an increase in earning assets in the period, particularly investments - and further aided by strong spreads.
Among the top & mid-tier banks, ABL and FABL recorded impressive double-digit growth of 22 percent and 10 percent in NII, respectively. UBL, HBL and NBP, too, registered NII growth of 6-9 percent, while MCB was among those which saw NII register a decline of 2 percent YoY.
Non-interest income dropped by 3 percent, which was not a broad based trend, but was due to substantial dips in income of ABL, UBL and RBS. Of 21, 12 banks witnessed a rise under this head, driven by higher fee income, which grew by an average 5 percent, while, as per expectation, loan losses dropped 39 percent to Rs 19 billion.