Profit of the country's banking sector remained flat at Rs 47.8 billion during the first quarter of current fiscal year (1Q2016). Profitability of the sector has been contained due to what analyst Umair Naseer at Topline Research said lower capital gains, restricted Net Interest Income (NII) growth and uptick in non-interest expense during the quarter under review.
Topline's sample for the analysis includes all listed banks that have announced their financial results for 1Q2016 so far excluding BankIslami and Bank of Punjab. "The sample under our analysis represents 98 percent of banking sectors market capitalisation," he said. In 1Q2016, the banks realised Rs 13.3 billion capital gains, down from Rs 16.7 billion in the same period last year.
"This decline is due to high base effect as banks booked huge gains in 1Q2016 against long term Pakistan Investment Bonds (PIB) to benefit from declining interest rates," said Umair. Consequently, he said, non-interest income was down three percent YoY to Rs 48 billion during the quarter under review. NII growth of banks in 1Q2016 stood at two percent YoY as against an increase of 30 percent YoY in the same period last year mainly due to cut in policy rate by 350 basis points to six percent during 2015.
"Due to a declining interest rates scenario in Pakistan, margins of banks are negatively affected as cost on floating saving and fixed deposits normally go down, whereas non-remunerative deposits (33 percent of total deposits) remain unaffected." The banks' non-interest expense surged nine percent to Rs 78 billion led by higher admin expense. Higher non-interest expense coupled with lower capital gains and restricted NII growth kept bottom-line in check. Total provisioning expense of the sector declined by 71 percent to Rs 2.9 billion as banks witnessed recovery in non-performing loans. Lower provisioning expense provided some relief to the profitability as pre-provisions and capital gains profitability was down 3 percent YoY.
Top seven banks, Allied Bank, Bank Alfalah, Bank Al-Habib, Habib Bank, MCB Bank, National Bank and United bank, reported a two percent YoY decrease in their earnings in 1Q2016. This, Umair said, was mainly due to sharp fall in capital gain for HBL. Interestingly, smaller banks (listed banks excluding top seven banks) outperformed top banks as their earnings grew by nine percent to Rs 11.4 billion, mainly driven by a more pronounced dip in provisioning expense.
ADVANCES GROWTH PICKING UP Advances in April 2016 increased 11 percent YoY to Rs 4.9 trillion, an eight-year high, led by multi-year low interest rate and China-Pakistan Economic Corridor (CPEC) related financing. In 2016TD, advances growth stood at four percent versus zero percent growth during the same period last year. As per the latest available data, consumer financing is also up 10 percent YoY to Rs 294 billion mainly driven by car financing. In a low interest rate environment and with major PIB maturities approaching in 2016, overall advances growth especially in high yielding segments would provide some support to earnings of the sector, said the analyst.