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COMMERCIAL banks profits are leaping forward making them the most attractive sector for foreign and domestic investment.The banks are continuing their profit spree for the last five years, on the back of growing credit off take, rising interest rates, widening spread, and increased service charges and fees while the profit distributed to depositors stays low.
All the listed commercial banks put up a strong growth of profit in six months to June 30-the first half of calendar 2007. This is in spite of the fact that credit off- take during the same period was somewhat low compared to what last year. The overall profit of banks listed on the bourse, that make 90 per cent of the sector, rose to Rs49.7 billion a 42 per cent increase. But, it included one-time profit of Rs10.5 billion of Habib Bank. The profit in the like half year of 2006 was 33 per cent.
The Big Five Banks performed still better during the half year to June 30. Their after tax profit (ATP) rose 54 per cent to Rs35.8 billion-up from Rs23.3 billion in the like period of calendar 2006. The Big Five, deposit-wise include: National Bank of Pakistan (NBP), Habib Bank Ltd. (HBL), United Bank Ltd. (UBL), MCB Bank Ltd. (MCB), and Bank Al-Falah Ltd.(BAFL). Al-Falah, incorporated in Pakistan in 1997, is owned by Abu Dhabi Group, while the same Group in association with Sir Anwar of UK, manages and partly owns UBL.
Performance
Despite the high banking performance, the industry analysts notice a slowdown in growth of credit, indicating a declining absorption capacity of the economy to utilise the available liquidity. The GDP growth stays at 7.0 per cent, but a spurt can expand its capacity to absorb more credit, and push banking growth and profitability further. It will also be helped when the domestic political scene stabilises after the Presidential and national elections that are due shortly. The results of the first half year of 2007 indicate the overall net interest income of all banks listed on the bourse rose to Rs88.5 billion, up from Rs73.3 billion in the like half year of 2006 a 20 per cent growth. The net interest income growth faced a slowdown as a result of high base effect. However, the low growth of credit also turned out to be a significant factor. The credit growth during the period was 3.0 per cent. It could have been more because the banks‚ liquidity was high. But, the State Bank of Pakistan (SBP), the central bank, is following a tight money policy (TMP) for more than two years, to counter rising inflation. TMP is also restraining credit expansion.
Non-interest income (NII) is playing a significant part in profit growth. NII rose 32 per cent to Rs31.2 billion, but if the HBL's one-time income of Rs10.5 billion is added to it, the total NII of all banks rises to Rs41.7 billion. The banks earned Rs. 16.8 billion from commission, fees, and brokerage that means a 27 per cent increase. The increase is attributed to capital gains, fees and dividend income. The capital gains increased 74 per cent to Rs4.3 billion. The dividend income rose 19 per cent. Fees rose 26 per cent to Rs15 billion.
Profitability
The high profitability, in good part, is due to the big spread which now averages 7.39 the highest in the region. SBP has been asking commercial banks to increase the present average rate of profit of 3.5 to savers, in order to encourage savings, but banks have ignored it for more than a year. The savers are getting a negative return because the current high inflations rate is close to 8.0 per cent. Low payout of profit to savers is discouraging savings that continue to the lowest in the region.
While the traditional commercial banking is in a boom-mode, particularly for the last five years, Islamic banks, still in the embryonic stage, are also coming up. Dr. Shamshad Akhtar, Governor, SBP, however, says the future expansion in banking will be Islamic banks and small and medium enterprise (SME) banks.
As of now Pakistan has 39 commercial banks, of which four are Islamic banks. Some traditional commercial banks have Islamic windows that are doing good business, compared to purely Islamic banks.
The Islamic banks, all Gulf-based, together have deposits of Rs53.8 billion, of which Meezan Bank alone has Rs 34 billion deposits. Al Baraka Bank has Rs13.8 billion, Dubai Islamic Bank Rs4.3 billion, and Bank Islami Rs1.7 billion deposits. The collective assets of the four are 1.8 per cent of the overall banking sector. Their collective advances are Rs40.7 billion or 1.7 per cent of the industry, and collective deposits are 1.7 per cent of the banking sector.
Meezan Bank's profit-before-tax was Rs 780 million and Al-Baraka's Rs170 million. Dubai Islamic Bank, however, reported a loss of Rs633 million and Bank Islami a loss of Rs34 million.
The Big-5 Banks have just announced healthy results for the half-year ended June 30. NBP earnings rose to Rs9 billion from Rs8 billion in the like half year of 2006, showing a 12.4 per cent Year-on-Year. The earnings growth of HBL was 223 per cent, MCB's 33.4 per cent, UBL's 20 per cent, and BAFL's 37 per cent growth in half year to June 30, compared the like period of 2006.
Industry
The banking industry is set to grow further as more branches are opened in the vast un-served countryside. SBP, this week, amended its Bank Branch Licensing policy to help expand banking services to the countryside, where nearly 67 per cent people live. SBP said at least 20 per cent of the new branches planned to be opened by banks under Annual Branch Expansion Plan will be established in rural and underserved areas. These areas are defined as small towns and include those Tehsil‚ headquartres where no branch of any bank exists. But, banks will also be allowed to open new countryside branches over and above the 20 per cent limit.
Foreign investors interest in mergers and acquisitions (M&As) continues, as illustrated by this week's merger of ABN Amro Bank and Pakistan's privately-owned Prime Commercial Bank. ABN Amro purchased Prime Bank 100 per cent. The new entity is known as ABN Amro Bank (Pakistan) Limited, effective September 1. Prime is the third large bank sold to an international banks. It follows Union Bank's 100 per cent purchase by Standard Chartered Bank and PICIC Commercial Bank (PCB) by Singapore-based NIB Bank. NIB purchased 56 per cent shares of PCB's Holding Company PICIC for $ 372 million.
Over the weekend, a big European banking group, Deutsche Investitions-und Entwicklungsgesellschaft mbH (DEG) purchased 24.9 per cent shares of Pakistan's Atlas Bank Ltd. Atlas has 20 branches, a Rs3.0 billion equity and balance sheet footing of Rs20 billion plus.
Key driver
Morgan Stanley in a report this week, rated Pakistani banks as "attractive." It described the banking sector as a key driver of force to give a hand to economic development and support the capital markets reform, with 80 per cent of the banks in private hands. The banks enjoy very wide margins, second only to Indonesia in the broader region at 6.40 per cent. "The well placed full suit banks, with far reaching deposit franchises earn net interest margins of between 7 and 8 per cent. This makes a strong banking platform. There are very wide spreads on micro and consumer lending.
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