Commercial banks in Pakistan have posted huge growth
in their profitability for the year 2002. This is contrary to earlier
expectations, as declining interest rates during the outgoing year were
supposed to adversely affect the operational performance of the banks.
In January 2002, 6-month T-bill cut-off rate and 10-year PIB stood at 8%
and 12%, respectively, as against 4.4% and 5.6% at end of December 2002.
The main reason for significant performance of banking sector was the
ability of the banks to pass on reduction in interest rates to the
depositors. Moreover, higher capital gains on investment and lesser
provisioning against NPL also supported the banking sector's bottom
There were 41 scheduled banks in Pakistan in 2002.
Earnings of 4 banks are still not available. Moreover, 4 specialized
scheduled banks are also not taken. A new player, Meezan Bank, is
excluded in order to maintain comparability. Similarly for better
comparison, Grindlays and Emirates Banks that merged last year have also
been taken in 2001 analysis. The figures for banking sector are based on
32 scheduled banks.
Net Interest Margin (NIM) of the banking sector
increased by Rs 3.9 billion or 7% to Rs 58.6 billion in 2002, as
compared to 2001. In percentage terms also NIM posted healthy growth.
This increase indicates remarkable performance on part of banks despite
declining interest rates in the economy. This also indicates banks'
ability to pass on burden of reduction in interest rates to depositors.
Mounting banking sector deposits, that grew by Rs 240 billion or 18%
according to SBP statistics, also contributed to better NIM for 2002.
The other reason for the increase in banks'
profitability is increase in non-interest income, which increased by Rs
4.3 billion (17%), in 2002, touching Rs 29.2 billion. This can be on
account of huge capital gains booked on investments during 2002. On the
other side non-interest expense did not increase significantly in 2002,
as banks have lowered their provisioning (mainly for non-performing
loans) by Rs 3.7 billion (33%) to Rs 7.8 billion in 2002 from Rs 11.3
billion in 2001. Extraordinary items especially that of United Bank
(write-off of Rs 7.2 billion) and NBP (amortization of Rs 2.7 billion)
in 2001 highly understated 2001 earnings. For better comparison these
items are excluded. Based on this, profit before tax of sampled banks
grew by 38% to reach Rs 30.3 billion in 2002.
Profit after tax (PAT) of the private banks increased
by around Rs 1.5 billion (68%) to Rs 3.7 billion for 2002 as compared to
2001. Main contribution in the increase of PAT in 2002 came from Faysal
(showing an increase of Rs 380 million), PICIC (showing an increase of
Rs 208 million) and Askari (showing an increase of Rs 137 million).
Faysal Bank's figure also includes the impact of merger. Except for the
loss making Platinum Bank (now KASB Bank), the rest of the banks posted
healthy growth in their profitability for 2002.
NIM of the private banks surged exceptionally. The
surge seems to be the result of substantial increase in deposit base of
private banks, which grew by around 24% in 2002. Non interest income of
the private banks also increased in 2002. Capital gains on investment
contributed most towards this increase. Analyzing capital gains on
investment of three major private banks namely Askari, Soneri and Union
(considered representative of private banks), it is observed that around
50% of the increase in non-interest income came from this, made possible
due to the fall in interest rates in the economy.
On the other hand, non-interest expense of the
private banks also increased thereby capping to some extent the benefits
of rising NIM and non-mark up income. This increase in expenses was
despite lower provisioning by these banks in 2002. It is believed that
this increase denotes effects of mergers and acquisitions taken place in
2002 as Union contributing around Rs 523 million towards the increase of
Rs 1.5 billion in the non-interest expense.
NCBS AND PRIVATIZED BANKS
After tax earnings of the 3 nationalized banks
(excluding ABL) grew by 83% (Rs 2 billion) to reach Rs 4.3 billion.
Habib Bank and National Bank both reported after tax earnings of over Rs
2 billion. Considering the substantial size of the deposit base of the
giants included in the nationalized banks segment, increase of Rs 1.3
billion in net interest margin of these banks seems meager. In 2002,
non-interest income of the nationalized banks surged by Rs 1.2 billion
to reach Rs 11 billion, whereas, non-interest expenses increased by only
Rs 500 million. The main contribution towards surge in the after tax
earnings of the nationalized banks came from absence of amortization
cost for voluntary separation scheme, worth Rs 2.7 billion mainly from
MCB and UBL represent de-nationalized banking sector.
In 2001, UBL recorded an extraordinary item of Rs 7.2 billion, which
resulted in a loss of Rs 6.4 billion. Hence the direct comparison of
de-nationalized banks' 2001 and 2002 earnings figures may not be
appropriate. Even after excluding the extraordinary items, profitability
of the denationalized banks grew by 3 times to reach Rs 3.2 billion for
2002. After tax earnings of MCB and UBL reached Rs 1.74 billion and Rs
1.5 billion respectively for the out going year.
Net interest margin of the denationalized banks
increased by Rs 70 million to reach Rs 15.4 billion. On one hand,
non-interest income of the denationalized banks increased by Rs 900
million and, on the other hand, non-interest expense decreased by Rs 700
Foreign banks are no exception to the trend of
growing profitability of the banking sector. In 2002, foreign banks have
posted 53% growth in their after tax earnings. Last year their
performance was also excellent as they posted a profit increase of over
60%. The following figures include figures of 13 main foreign banks (out
of 16) operated in Pakistan in 2002.
Many foreign banks headed towards consolidation last
year in line with expectations. Big players continued to shift their
focus towards local currency based banking coupled with aggressive
fee-based activities in light of the fact that party of swap dollar
funds and FCAs have virtually came to an end in Pakistan. Rising
competition from local banks forced them to introduce new products
especially in the field of consumer financing. Smaller foreign banks are
somehow trying to curtail their businesses and are seeking to sell out
their operations to local groups.
Profit after tax of the foreign banks jumped by 53%
or Rs 1.4 billion to reach Rs 4 billion for 2002. Profit before tax also
soared by 25% or Rs1.3bn to reach Rs 6.4 billion. Main contributor in
the Rs 1.4 billion increase in PAT was due to newly merged Standard
Chartered Bank. Reduction in non-interest expenses coupled with the
absence of Rs 600 million worth of integration cost in 2002 helped
Standard Chartered to post one billion rupee profit for 2002 versus Rs
400 million for 2001 for both the banks. Only one foreign bank posted
loss in 2002, while in 2001, three banks were in red.
With low interest rates prevailing in the economy,
competition is fierce for placing funds at higher rates and therefore
interest based earnings of the banks were bound to get some hit. In
2002, interest income of foreign banks decreased by Rs 8.2 billion to
reach Rs 18.5 billion. On the other hand, interest expense decreased by
Rs 8.1 billion. NIM, in absolute terms, more or less remained where it
was in 2001. However in percentage terms, NIM improved from 27% to 38%
In 2002, non-interest income of foreign banks
increased by around Rs 200 million to reach around Rs 5 billion. In
2002, the banks have booked huge capital gains on investments. In
foreign banks, Citibank stands tall in booking capital gains on
investment; gains increased by Rs 364 million as compared to meager
amount of around Rs 30 million booked in 2001.
In 2002, non-interest expense of the sampled foreign
banks decreased by around Rs 600 million mainly on account of savings
from Standard Chartered merger. Moreover, in 2002, foreign banks
registered reversal in provisioning for non-performing loans that
contributed towards lowering non-interest expenses.