Investment in equities more than compensating for the decline in interest income.

Aug 18 - 24, 2003

Since September 11, 2001 interest rates are on the decline. The 6-months T-Bill rate that 8% in December has come to as low as 1.35% in the last auction. Commercial banks in Pakistan have been investing in government securities heavily, and their earnings are reliant on the interest rates. Technically the banks should have got a hit due to declining trend in interest rate. However, the half yearly results announced so far contradict the fears as some of the banks have posted incredibly attractive results.

A closer look at the results announced so far hint towards some interesting emerging trends. While the banks have been quick in reducing return on deposits, interest income has not gone down because credit offtake has been low. Capital gains have contributed significantly towards improvement in bottom line. The lower interest rates have resulted in the pickup in the credit demand for banks. However, this has also resulted in tough competition. The spreads are narrowing for almost all the banks.

PICIC COMMERCIAL BANK has witnessed phenomenal improvement in performance since it was acquired by the new management in year 2002. This is evident from the exceptional rise in the bank's profit after tax, deposits, advances and investment over the last two and half years. The recently announced results for the first half of 2003 indicates 144% increase in profit after tax as compared to the corresponding period of last year. The Board of Directors also approved payout of 15% interim dividend. Unlike others banks, earnings of bank mainly comprise of markup income. Whereas capital gains and dividend income do not contribute any significant portion to net income. The total investment portfolio comprise of various federal government securities and corporate bonds. Whereas investment in shares of listed companies comes to only one per cent of total investment in 2002. However, the total non markup income during the period under review increased by 33% mainly due to a rise in other receipts, which apart from dividend income includes reversal/provision for non-performing loans and written off bad debts.

ASKARI COMMERCIAL BANK has posted Rs 529 million profit for the first half of 2003, a growth of 57% over earning for the corresponding period of last year. The result was as per the forecast of analysts. However, the bank did not announce any interim dividend payout. The bank's ability to pass on the burden of declining interest rates to depositors has help in improving the bottom line.

FAYSAL BANK has mainly benefited from the capital gains and dividend income mainly due to huge investment in equities. The merged entity has managed to report higher profit after tax because of lower provisioning for taxation. The Board of Directors has also approved distribution of 15% interim dividend. It has earned a total of Rs 1,043 million under this head. This pushed the net income for the first half of 2003 to Rs 943 million as against an income of Rs 314 million for the corresponding period of last year. The bank's plan of floating a mutual fund and its consistent influx in housing and consumer finance coupled with focus on adding new branches have the potential to usher in long-term growth.

MUSLIM COMMERCIAL BANK is expected to announce its results on August 18, though Board meeting is scheduled to be held on August 16, 2003. Analysts forecast around Rs 1.4 billion profit after tax for the six months period. The bank has already posted Rs 744 million for the first quarter. The bank booked over one billion rupee capital gains during the first quarter and also expected to book similar gains for the second quarter. MCB is also expected to gain from higher charge on the profit and loss account for write-offs. Mitigating the write-off will also lower the effective tax rate. The bank has already paid 15% interim dividend and analysts forecast 10% second interim dividend alongwith 10% bonus share issue.


Repercussions of the 'paradigm shift' in Pakistan's economic fortunes have filtered down into the banking sector. Analysts forecast further consolidation and convergence in Pakistan's banking sector to deal with the 'commoditalization' of traditional products through expansion in the scope of services. Economies of scale will be the key, and current minimum paid-up capital requirement and synergistic convergence-fuelled consolidation are expected to be replaced by the meeting of valuation parameters of acquirers and sellers. Analysts also forecast a fast convergence of a range of services into single financial institution. According to Aqib Mehboob Elahi of AKD Securities, "We expect the death of commercial banks as we know them, and bid welcome to financial super markets."