KARACHI: The profits of banking sector have declined by 7 percent to Rs149 billion in 2018 as compared with around Rs160 billion in the preceding year, according to analysis of Topline Research issued on Tuesday.
The analysts said that for 2018, despite 10 percent YoY increase in Net Interest Income (NII), profits were down 7 percent YoY (ex-HBL penalty) due to 1.8x higher provision charge, 64 percent lower capital gains and 14 percent higher administrative expenses.
They expect net interest income to expand further due to the lagged impact of policy rate hikes. The analysts anticipate State Bank of Pakistan (SBP) to increase interest rates by further 75 basis points to 11 percent by December 2019.
However, during 4Q2018, Pakistan Banking Sector profitability rose to Rs38.3 billion, up by 6 percent YoY. The increase in profitability is primarily owed to 16 percent YoY increase in net interest income as well as 7 percent increase in non-interest income.
The analysts have taken results of all listed banks that have announced 4Q2018 financial results.
Moreover, for 4Q2018 reversals in pension charge and Workers Welfare Fund (WWF) amounting to Rs4.2 billion and Rs6.7 billion, respectively, also supported the bottom-line we believe.
Net Interest Income (NII) of the banks improved by 16 percent YoY to Rs135 billion in 4Q2018 as a result of a cumulative 425 basis points hike in policy rate during 2018.
Similarly, on a sequential basis, NII is up 10 percent as the lagged impact of asset re-pricing kicked in.
To note, SBP has raised policy rate by 425 basis points in 2018, with 150 basis points coming in 4Q2018.
Comparing the big-5 (MCB, HBL, UBL, ABL, NBP; profits down 24 percent YoY) versus the rest under our coverage (MEBL, BAHL, BAFL, AKBL), the analysts see that mid tier banks have outperformed their larger peers due to better sensitivity to interest rates as well as absence of significant provision charge during the outgoing quarter.
Profits of Mid-tier banks are up 32 percent YoY (they excluded BOP from mid tier numbers due to substantial one off provisioning in 4Q2017).
Despite 16 percent YoY growth in net interest income, profitability growth was contained to 6 percent YoY primarily due to high provision charge specifically by the large banks including HBL, UBL and NBP.
Cumulatively, total provision charge by the said three banks for 4Q2018 was Rs15.7 billion (around 73 percent of total provision by the sector), with NBP, UBL and HBL charging Rs6.8 billion, Rs5.6 billion and R3.3 billion, respectively.
Overall, the sector booked provision charge of Rs21.5 billion compared to Rs13.3 billion in the same period last year.
To note, BOP booked significant provision charge of Rs12.7 billion during 4Q2017 compared to reversal of Rs137 million in 4Q2018.
NBP booked significant provision charges on its loan portfolio, specifically with regards to its exposure to Omni group, the analysts believe. Similarly, majority of UBLs charge was related to NPLs (Rs5.0 billion) mostly from its international loan book and most of HBLs booked charge was also on account of NPLs (Rs2.3 billion).
Despite lower capital gains and dividend income, Non-interest income of the banks rose by 7 percent YoY mainly due to 17 percent higher fee income and 86 percent higher income from dealing in foreign currencies.
They attribute higher non-interest income to rapidly growing loan book, higher trade volumes as well as rupee depreciation.
Admin expenses grew by 20 percent YoY while non-interest expense rose by 14 percent YoY. The growth in non-interest income was contained due to reversal in provision for Workers Welfare Fund (WWF) by select banks (Rs6.7 billion in total).
Cost to income of the sector increased by 3.1ppts YoY to 64.2 percent in 4Q2018.