What if the assets base did not grow much? What if the interest rates were down from a year ago? Having muscle matters. And the leading commercial banks showed just that in 2020. The big five commercial banks combined to rake in a phenomenal 46 percent year-on-year growth in after-tax profits. You would be over the moon for this sort of profit growth in normal times. In times as tough and uncertain as these, you have made a killing, if you are a big bank.
The balance sheets of all five banks are not out yet, but a sizeable chunk is out there and that shows the asset base has only expanded by a miniscule 2.5-3 percent over December 2019. No marks for guessing what constituted the bulk of earning assets. In the Covid-ridden environment, there was not much to expect from banks to lend to private sector in big numbers. There was a genuine dip in credit demand, which just made the job of the banks that much easier. The job? Shying away from lending.
Why worry when there are government securities to park your excess liquidity. The investment base is believed to have expanded by around 20 percent over December 2019 for the big five banks to over Rs6 trillion – an increase of nearly Rs1 trillion over December 2019. The cumulative advances on the other hand are in line for a circa 5 percent dip over December 2019.
The evolving interest rate dynamics during the year also reflected in how the investment portfolios kept changing throughout. Consistent duration management, and tenor reprofiling shaped up the markup earned – the bulk of which was contributed by the investments. The ADR once again dipped under 40 percent. Not that the big 5 really ever threatened to run away with a high ADR – but this is a multiyear low.
The NIMs went considerably higher as the banks’ focus on low-cost current and saving deposits went on undeterred. The deposit base continued to grow in double digits, and the improvement in CASA was across the board, which is very well reflected in much improved NIMs.
The non-core income grew modestly, for good reasons too, as restricted activity particularly in the first half meant reduced fee income, and dividend income was also hard to come by in the pandemic. That was more than offset in most cases by banks registering substantial increase in gain on sale of securities, and that trend could continue for another quarter or two. The exemplary control on administrative expenses stood out, leading to much improved cost to income ratio.
There was understandably some pressure on provisioning charges as banks made room for aggressive provisioning. The NPLs rose slightly, but the coverage ratio stands adequate, and there is no near-term pressure on the asset quality of all private leading banks. As Pakistan’s economy shows signs of uptick, big banks may well start to lend more, across diversified sectors. Not that, they are not doing just well, without it too.