Big banks do well

The financial results for the big 5 banks (HBL, NBP, UBL, MCB & ABL) tell one thing. Banking profitability is very much intact, despite all the adversities of the pandemic. The after-tax profits on a cumulative basis grew by a massive 53 percent, despite the provisioning expenses skyrocketing during the period, due to Covid-19.

The big-five cumulatively lent lesser to the private sector than they did in the same period last year, and also over December 2019. The advances portfolio dropped by 6 percent over December 2019, depicting the slowdown in economic activities which was also aggravated by the coronavirus. But not lending more does not mean, not earning more, as evident by a strong topline growth.

The earning assets increased considerably over December 2019, with investments in government securities once again taking the lead. The investment portfolio of the big-five jumped 13 percent over December 2019, taking the IDR to 65 percent, up by 3 percentage points over December 2019. The ADR meanwhile has fallen to a multiyear low of 40 percent, down from 46 percent in December 2019.

With the changing interest rate realities, most banks reprofiled the investment portfolio, and the long-term PIBs were the favored parking lot, moving gradually away from treasury bills, and making some gains on realization. On the liabilities front, the growth remained steady without being exemplary, much in line with the macroeconomic realities of the country.

The big banks boast of considerably higher CASA ratio than the smaller counterparts, and are always better positioned to register strong NIMs, even in tough times. The period, especially the second quarter was tough in terms of contribution from non-funded income, largely due to the pandemic, as business activities reduced to result in lower fee and commission income, and companies held back dividends in anticipation of the worst. That said, the non-markup income still went up by double digits, which was mostly a result of banks timing the sale of securities rather well.

The expenses have been kept well in check, as heavy technology investments in yesteryears have started reaping fruits. Almost all big banks reported considerable improvement in cost to income ratio, which was critical in the wake of rising provision charges. Banks have faced pressure from NPLs in the second quarter leading to slight uptick in infection ratio, which is adequately provided for.

With economic conditions looking up as the outbreak loses steam, banks may now be enticed to lend more than the first half of 2020. The soundness indicators are all in good shape, and continuation of strong profitability looks the likeliest way big banks will go in the second half.