Karachi, August 30, 2023 – Pakistan’s commercial banking sector has achieved an extraordinary three-fold increase in profitability during the second quarter of 2023.
According to experts at Topline Securities, Pakistan’s listed banks have reported record profits of Rs131 billion, marking a significant threefold year-over-year (YoY) increase. This remarkable growth can be attributed to a substantial rise in Net Interest Income (NII) driven by high-interest rates and robust balance sheet expansion. In US dollar terms, the listed banks’ profits also soared, doubling to US$459 million in 2Q2023.
READ MORE: National Bank of Pakistan Records Remarkable 122% After-Tax Profit Growth for 1HCY23
The NII for the sector surged to Rs420 billion in 2Q2023, up a staggering 73 percent YoY from Rs243 billion in the same period in 2022. This increase was primarily fueled by an average policy rate of 21 percent during 2Q2023, a substantial jump from the 13 percent recorded in the previous year. Interest income witnessed a significant 97 percent YoY increase, reaching Rs1.4 trillion, while interest expenses grew by 109 percent YoY, totaling Rs946 billion.
On the flip side, non-interest income for the sector experienced a marginal 1 percent decline to Rs86 billion in 2Q2023, primarily due to a decrease in foreign exchange (FX) income. Conversely, non-markup expenses grew by 33 percent YoY to Rs217 billion in 2Q2023, driven by higher administrative expenses in line with inflation.
READ MORE: Faysal Bank Reports Impressive Half-Year Profit Growth to Rs7.53 Billion
The sector’s cost-to-income ratio improved, declining to 43 percent in 2Q2023 from 49 percent in 2Q2022.
The provisioning charge for the sector surged by 79 percent YoY to Rs12.9 billion in 2Q2023, mainly attributed to the high-interest rate environment and the prevailing macroeconomic conditions in Pakistan.
Looking at the quarter-on-quarter performance, profitability for listed banks grew by only 4 percent in PKR terms but declined by 5 percent in US dollars. This decline can be primarily attributed to the implementation of a 10 percent super tax, which was introduced in the Federal Budget for FY24. Consequently, the effective tax rate for 2Q2023 reached 52 percent, compared to 42 percent in 1Q2023.
In the first half of 2023 (1H2023), the sector’s earnings surged twofold YoY to Rs257 billion, an impressive 42 percent YoY increase to US$944 million. This remarkable growth was spearheaded by higher NII, which increased by 68 percent YoY. Additionally, a lower effective tax rate of 48 percent in 1H2023, compared to 58 percent in 1H2022, further contributed to the robust profit growth.
READ MORE: Standard Chartered Bank Pakistan Reports Unprecedented 132% Increase in Half-Year Profit
For their analysis, experts considered all banks that announced their financial results except for Silk Bank (SILK), which had not yet released its results.
On a bank-wise basis, Meezan Bank (MEBL), National Bank (NBP), MCB Bank (MCB), Habib Bank (HBL), and United Bank (UBL) achieved the highest profits of Rs17.2 billion, Rs15.8 billion, Rs14.7 billion, Rs13.1 billion, and Rs13.1 billion, respectively, during 2Q2023. Conversely, Summit Bank (SMBL) reported a loss of Rs799 million in 2Q2023.
In terms of NII growth, Standard Chartered (SCBPL), Soneri Bank (SNBL), BankIslami (BIPL), Meezan Bank (MEBL), and Habib Metropolitan (HMB) demonstrated the highest growth rates of 158 percent YoY, 128 percent YoY, 113 percent YoY, 107 percent YoY, and 104 percent YoY, respectively.
READ MORE: BankIslami Pakistan Registers Staggering Over 250% Half-Year Profit
Looking ahead, experts anticipate further improvements in NII, given the rising policy rate, which is expected to have a positive impact on the sector’s profitability. Additionally, the possibility of further interest rate hikes due to rising inflation and a weakening PKR against the US dollar could further boost the sector’s profitability.
The Topline Banking Universe is currently trading at compelling valuations, with a 2023 estimated PE and PBV of 2.7x and 0.7x, respectively, and a remarkable Return on Equity (ROE) of 26 percent.
