Big banks make bigger profits

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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