Small Banks' Financial Performance 1HCY11

In an industry, where big banks are standing strong and sturdy and many more potential large banks are eager to join the big league; it is the smaller banks that have to step up their game in the face of fierce competition. Under these circumstances, the improvement in the bottom-line performance of small banks, though petite, deserves appreciation.
The group comprises of the following six banks: Bank Islami Pakistan (BIPL), Samba Bank (SBL), Silk Bank (SILK), JS Bank (JSBL), Bank of Khyber (BOK) and KASB.
Net profits Five out of the six small commercial banks - BIPL, SBL, SILK, JSBL and BOK - managed to record positive bottom-lines, in 1HCY11, but huge losses incurred by KASB pushed the group's collective bottom-line down in the negative territory.
Barring KASB, which recorded losses worth Rs2.17 billion, the other five small banks cumulatively churned out a profit of Rs890 million in 1HY11. During the same period, the group of five large banks and nine mid-sized banks earned hefty profits of around Rs40 billion and Rs9 billion, respectively, in 1HCY11.
Yet this result represents significant improvement in performance since four banks; BIPL, JSBL, SBL and KASB had recorded losses during the corresponding period, last year.
These six banks had cumulatively recorded a net loss of Rs3.7 billion and Rs9.4 billion in CY10 and CY09, respectively. Therefore, it is apparent that the small banks are on a path of gradual improvement.
Mark-up revenues Expansion in earning assets drove mark-up revenues upward, as the combined top-line improved to Rs15.5 billion in 1HCY11, marking a year-on-year jump of 28 percent. The mark-up revenues of BOK recorded the highest growth, year-on-year, up 70 percent to Rs3 billion in 1HCY11. While on the other end of the spectrum, KASB's mark-up revenues fell by 16 percent, year-on-year, to Rs2.2 billion in 1HCY11.
Following the industry-wide trend, the accumulated investments reached Rs108 billion at the end of June, 2011, up 28 percent compared to Rs84 billion at the end of December, 2010. However, at the same time, the industry's investment base (all commercial banks) increased by 21 percent to Rs2,529 billion.
Although, the industry's (all commercial banks) cumulative advances fell by 1 percent during the first six months of CY11; bucking the industry-wide trend, the smaller players managed to stay active on the financing front taking their combined advances up by 6 percent during the first six months of CY11 to Rs143 billion as of June 30, 2011.
Simultaneously, the small banks' aggregated advances to deposit ratio (ADR) stood at 57 percent as of June 30, 2011; a notch above the average ratio of 55 percent for all commercial banks. SBL holds the highest ADR, at 89 percent, followed by SILK at, 74 percent.
Mark-up expenses In consideration of growth in liabilities, the mark-up expenses of the group increased by 16 percent, year-on-year to Rs11 billion in 1HCY11. Marketing efforts have borne fruit for the small banks in the form of 14.7 percent growth in deposit base during the first six months of this calendar year, to Rs250 billion. JSBL stayed the most aggressive in deposit accumulation, with around 26 percent growth in deposits during the first six months of CY11.
However, over the same time, the deposit base of all commercial banks jumped by 9 percent. At this level, the deposit base of the group of small banks accounts for nearly 4.5 percent of the total deposit base of all commercial banks.Among the group, JSBL enjoys the highest CASA ratio, at 58 percent as of June 30, 2011, while KASB faces the lowest, at 47 percent. The group's CASA ratio stood at 50 percent as of June 30, 2011.
Net interest income The aggregated net interest income improved by 70 percent, year-on-year, to Rs4.5 billion in 1HCY11. KASB realized net interest losses, while all remaining banks registered growth in net interest income. The combined gross spread ratio improved to 29 percent in 1HCY11, from 22 percent in 1HCY10. Still, smaller banks' core income pales in comparison to large and midsized banks. This can be gauged from the fact that the gross spread ratio of five big banks and nine mid-sized banks stayed at 56 percent and 39 percent, respectively, in 1HCY11.
Non-mark-up income and expenses JSBL and SBL witnessed year-on-year growth in non-mark-up income in 1HCY11, but overall the investment banking activities of smaller banks remained gloomy, with their aggregated non mark-up income down by 37 percent, year-on-year, to Rs1.2 billion in 1HCY11.
In light of inflationary pressures, the group's administrative expenses jumped by 17 percent in 1HCY11. While on the front of cost-efficiency, JSBL enjoys the lowest administrative expenses per branch, while Samba faces the highest; among this group.
Asset quality The smaller banks managed to fetter growth in non-performing loans, given that the toxic loans grew by just around 5 percent during the first-half to Rs32 by end-June, 2011. This is in stark contrast to the five largest banks that saw their NPLs mushrooming by 14 percent, over the same period.
However, the group's average infection ratio stood at 20 percent on June 30, 2011, versus 13 percent for the nine mid-sized banks and 13.2 percent for the five large banks. KASB is wrangling with the highest infection ratio, at 35 percent as of 30 June, 2011, while BIPL has the lowest, at 5 percent.
Given the relatively large proportion of the country's population which remains untapped by the banking sector, small banks can grow manifold by picking the right niches. However given that many mid-sized banks are breaking their backs to capture a larger market share, it is quite likely that some of the small banks may soon fall prey to acquisitions by larger players.