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Many a critic would tell you banks in Pakistan are engaged in lazy banking and not doing their core job of financial intermediation and lending. But you would have none of it, if you are invested in any of the top five Pakistani banks, for they have just had a stellar year in terms of profitability, and that is what matters for most shareholders - core banking or otherwise.
The big five banks managed a more than decent double digit growth in deposits in CY14 and comfortably parked most of it in the lucrative government securities. The asset composition has been in favour of investments for quite some time and the IDR further improved to 58 percent from 54 percent a year ago. But, it was the tilt towards the more lucrative PIBs within the investments that made the biggest difference.
Most banks, especially the big ones, shifted the investment portfolio heavily towards PIBs, which at times yielded returns as high as the most corporate rates. You would not need a second invitation to pounce on the opportunity offering such rates, with sovereign risk, virtually risk-free. Even as the interest rates slid towards the end of CY14, most banks were merrily investing in government securities.
Private sector advances as a result, failed to increase at the same rate. Top five banks cumulative ADR virtually remained stagnant at 45 percent for CY14. Most bankers would cite energy crisis, law and order and hosts of other reasons for their reluctance to lend - but lets agree the presence of a willing sovereign borrower offering high yields remained the core reason.
That said, most top banks focused on reducing cost of funds in times of thin spread. Cross selling effort continued to offer an able hand in terms of non mark-up income. Gross spreads also improved slightly, as the efforts to improve deposit composition yielded good results. The loan books too are relatively cleaner and NPLs are on the mend.
CY15 could still be tricky. The temptation to stick to the current asset composition would still be there but that would mean much thinner top lines. Aggressive lending to private and consumer segment may well be the obvious choice, but don be so sure yet. The multiyear complacency will not be shrugged off in a go. The non mark-up income too would be under pressure as commodity prices have receded substantially of late. From what it appears, repeating CY14 seems highly unlikely even for the mightiest of banks.


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BIG FIVE BANKS (CONSOLIDATED P&L)
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Rs (mn) CY14 CY13 chg
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Markup earned 483,269 415,916 16%
Markup expensed 250,303 222,083 13%
Net Markup Income 232,966 193,833 20%
Provisioning/(Reversal) 12,292 20,291 -39%
Net Markup Income after provisions 220,674 173,542 27%
Non Mark-up / Interest Income 103,205 85,736 20%
Operating revenues 323,879 259,278 25%
Non Mark-up / Interest Expenses 158,802 141,200 12%
PBT 167,054 119,990 39%
Taxation 55,161 35,192 57%
PAT 111,892 84,798 32%
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Source: KSE Notice
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