KARACHI: Profitability of Pakistan's banking sector declined sharply during the last year owing to multiple reasons, reflecting the deteriorating economic conditions of the country.
Profits of 22 listed banks, which have so far announced their results, declined by 21 percent to Rs 50 billion in 2008 from Rs 64 billion in 2007.
The 22 banks represent 96 percent of the sector's market capitalization and constitute 82 percent of the overall industry's total assets. Three listed banks which have not announced their results yet are Bank Alfalah, Bank of Punjab and KASB.
Provisions dent the bottom line growth: Like 2007, in 2008 as well provisions against NPLs hurt the bottomline growth. The decline was further magnified by lower capital gains (Rs 2.6 billion compared with Rs 14.6 billion recorded 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 regulator had relaxed the relevant accounting treatment (IAS39), the banks booked Rs 10 billion of provisions against diminution in the value of investments - 29 times higher versus last year.
It is pertinent to mention here that SBP (as a counter cyclical move) also allowed 30 percent benefit of FSV to banks during the year. Even then provisions against non-performing loans registered a growth of 26 percent to Rs 59.5 billion from Rs 47.4 billion recorded in 2007. NPLs of commercial banks in 2008 reached Rs 284 billion from Rs 184 billion a year earlier. Administrative expenses increased by 28 percent to Rs 125 billion.
Revenue growth resilient: "Net interest income of the 22 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 was spurred by banks' lending for circular debt and commodity operations," said Muhammad Imran Khan, an analyst at First Capital Equities.
Interest expense to interest income ratio stood 4 percentage points higher at 48 percent, owing to half year impact of SBP's regulation requiring the banks to give minimum 5 percent on saving accounts deposits, he said. Non-interest income, other than capital gain, registered a growth of 35 percent supported by income from dealing in foreign currency, he added.
Profits decline for second straight year: Banking sector turned profitable in 2002. Their profits continued to rise for the next five years and peaked to Rs 84.1 ($1.1 billion) billion in 2006.
Apart from 2003 when profits were mainly generated through capital gains, the banks' net earnings growth in rest of the years was primarily driven by core business activities. In 2007, a reversal was seen with an 11 percent decline in the wake of higher provisions owing to withdrawal of forced sale value benefit.
"Profits will decline in 2009 as well, but the drop will be smaller than the one recorded in 2008," said the analyst. "Next year advances growth of banks is likely to remain low. Moreover, we also expect spread to come down in months to come."
Farhan Rizvi, an analyst at JS Research, said provisions were higher because of 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.