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Banks, especially the bigger ones are having the time of their lives. CY14 thus far has been all cheers for the banking sector, primarily driven by the governments ongoing appetite for heavy borrowing at hefty rates. While the focus remains on the PIB fiesta, on which banks have feasted merrily, the period has also seen decent uptick in advances as well.
The credit off-take during 9MCY14 has been healthier than any of the previous five years, but it went unnoticed largely due to the shift in asset portfolio from advances to investments. The consolidated top line of top five banks grew handsomely, as investments were swiftly shifted from treasury bills to longer-term term papers, offering lucrative returns - as high as 14 percent - close to what the most corporate of debts yield today.
The deposit growth remained at the lower side, but banks never tried to focus on adding more deposits. The focus was instead on improving the deposit-mix. The CASA ratio, as a result has improved significantly, bringing down the cost of deposits, which is a must in times of thin spreads.
Another feather in the cap was a remarkable turnaround of events relating to provision of NPLs. Banks have not lent aggressively and have rather focused more on lending carefully and cleaning the books. Prudent lending and aggressive provisioning in yesteryears combined to bring down the provision expense significantly, which lent an able hand to overall combined profitability. The NPLs have gradually come down and the coverage has significantly improved - all pointing towards healthier profits going forward.
Thin spreads and a likely decline in interest rates further augment the banks need to stress more on non-core income. Almost all the banks have reported healthy growth in other income, through cross-selling and treasury operations. In times of low spreads, this will keep the profits coming.
The ADRs have not changed drastically over the last year and little suggests they would alter anytime soon. Should rates come down, banks would be more than happy to book capital gains on their heavy PIB investments. The books are relatively cleaner as well, so a kick in advances cannot be ruled out.


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Big Five banks (Consolidated P&L)
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Rs (mn) 9MCY14 9MCY13 chg
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Markup earned 352,499 308,710 14%
Markup expensed 186,942 166,058 13%
Net Markup Income 165,556 142,652 16%
Provisioning/(Reversal) 4,495 13,391 -66%
Net Markup Income after provisions 161,061 129,374 24%
Non Mark-up/Interest Income 75,154 62,236 21%
Operating revenues 236,215 191,610 23%
Non Mark-up/Interest Expenses 115,900 101,784 14%
PBT 121,655 91,400 33%
Taxation 40,959 28,577 43%
PAT 80,973 62,823 29%
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Source: KSE Notice

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