Karachi, July 17, 2023 – According to industry analysts, Pakistani banks are poised to achieve substantial profits in the first half of the year ending June 30, 2023, primarily driven by higher interest rates.
Arif Habib Limited, a leading financial services firm, reports that the banking sector has outperformed the KSE100 index, with a 2.03% excess return (total return 1.15%) during the same period.
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The banking sector is expected to experience a significant year-on-year earnings increase in the second quarter, thanks to higher Net Interest Margins (NIMs) resulting from policy rate hikes and robust growth in their balance sheets. Banks anticipate improved net interests and markups through higher yields on investments, particularly from floater bonds and T-bills, as well as higher yields on advances, taking advantage of the record high yields and KIBOR.
However, it is worth noting that the increase in the super tax rate in the FY24 budget, rising from 4% to 10%, will have a negative impact of approximately 11% on the overall profitability of Arif Habib Limited’s banking universe. As a result, banks are expected to experience a quarter-on-quarter decline in earnings.
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As of June 2023, the banking industry’s advances increased by 3.1% quarter-on-quarter, which is lower than the deposit growth of 8.2% quarter-on-quarter, resulting in an overall Advances-to-Deposit Ratio (ADR) of 47.8% for the sector. The Investment to Deposit Ratio (IDR) remained at 81.9% as of June 2023, as banks focused on secure returns through government papers.
The average lending rate during the period saw a slight increase to 19.4% by May 2023, marking a 693 basis points year-on-year increase. Looking ahead, banks are expected to continue investing in high-yielding bonds while maintaining a cautious lending approach to support asset yields.
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Furthermore, banks may experience a slight increase in foreign exchange income due to currency volatility, with the average for the second quarter of the year standing at -0.77%.
Operating expenses (OPEX) are anticipated to remain high due to increased inflationary pressures, with the average Consumer Price Index (CPI) for the second quarter of the year at 34.6%, compared to 31.5% in the previous quarter.
For the first half of the year ending June 2023, Arif Habib Limited’s banking universe is expected to report a significant 81% year-on-year jump in overall profitability. MCB Bank is likely to exhibit the highest earnings growth, with an estimated increase of 128% year-on-year, followed by Allied Bank Limited (ABL) at 122% year-on-year, and Habib Bank Limited (HBL) at 118% year-on-year.
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Overall, the Pakistani banking sector is poised to reap the benefits of higher interest rates, leading to increased profitability in the first half of 2023.
