The profit of top five banks has increased by 21 percent to Rs 23.8 billion in the first quarter of 2012 as compared to Rs 19.7 billion earned in the same quarter last year, analysts said. "The major reason behind growth in earnings is sharp decline in provisions, especially on advances", Farhan Mahmood, senior analyst at Topline Securities said.
During the first quarter of 2012, total provisioning of five big banks stood at Rs 1.4 billion compared to Rs 7.8 billion last year, down significantly by 83 percent, he added. Aggressive provisioning and restricted lending opted by the banks during last year led to significant decline in provisioning on advances, he said.
Besides these two factors, improving paying capacity of borrowers after decline in interest rate also led to decline in provisions, he added. He said the earnings growth remained impressive at 21 percent, however, unlike last year where NII (Net Interest Income) remained the major earnings driver for the banks, this time growth in earnings mainly arise from sharp decline in provisions.
Moreover, impairment reversals of around Rs 2 billion in few banks (ABL and NBP) also reduced overall provisions in the first quarter of 2012. This analysis is based on five large banks (based on bank deposits and branches) including NBP, HBL, UBL, MCB and ABL which contribute more than 55 percent share of the total banking sector deposits and represent approximately 70 percent of the listed banks market capitalisation.
Unlike last year where NII remained major growth story for banks, sharp decline in interest rate has reduced banks margins on earnings assets particularly on government securities which contribute around 85 percent of total investment of commercial banks. "Where average six-month KIBOR remained lower by 182bps, average yield on government securities (PIBs, TBill) fell by around 140-175bps and this led to two percent decline in NII during the first quarter of 2012", he said.
On the flip side, with overall improvement in trade activities and better payouts by listed companies, non interest income of big banks which contributed 15 percent of the total income grew by impressive 30 percent on year-on-year basis. "Though we expect core banks profitability to remain affected due to decline in interest rate compared to last year and recent increase in deposit rate on PLS accounts, however, lower provisioning on advances and better non interest income (capital gain on stock market, higher dividends and better fee income) would drive earnings of banks in 2012", Farhan said.