Profit making was tough last year for the banking sector. Interestingly, 2018 also saw banks do some real banking. Little wonder why most banks shy away from lending aggressively – or just lending. The story of top five commercial banks in CY18 shows it was difficult growing profits, despite (or because?) the interest rates went considerably higher during the year.
The accumulated growth in top line was healthy, in double digits, thanks mainly to increase in average interest rates. The asset size of the big five banks also grew at a decent pace of 8 percent over December end 2017, crossing Rs10 trillion. The asset buildup took a different course – for the better – as advances contributed entirely to the growth in asset base.
The cumulative ADR soared to 49 percent – having stayed in the low to mid 40s for quite some time, as advances grew by 20 percent over December 2017, at Rs3.68 trillion. On the other hand, the investment portfolio declined in absolute terms by 3 percent over December 2017 to Rs4.98 trillion. Within investments, the focus was shifted across the industry, from long term PIBs to short term treasury bills – given the interest rate scenario.
On the liabilities front, deposits grew steadily at 10 percent over December 2017, to have reached Rs7.5 trillion. Most big banks have managed to improve the deposit mix towards higher accumulation of current account and non remonstrative deposits, increasing the CASA mix further – evident from modest increase in cost of incremental deposits.
The decline in capital gains and dividend income resulted in a year-on-year reduction in non mark-up income. That said, increased contribution from currency gains and fee, commission income almost balanced out the slowdown on other two key fronts.
The major blow was dealt by manifolds increase in provisioning charges for the year – which soared by ten times year-on-year. The provisioning charges were well spread across advances and investments – with the likes of UBL and NBP contributing the highest. The infection ratio only slightly inched up, without being threatening – and continues to be adequately provided for.
The slowdown in economic activity could lead to lower advances demand in CY19. Banks would love to lend in such a scenario, especially when the market is anticipating the interest rates may further be increased from the current levels. Strictly in terms of profitability, the analyst community expects NIMs to expand due to lagged impact of policy rate hike, and lower provision charges.
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