DECLINING PROFIT OF BANKS
RISING INTEREST RATES TURNING LOANS DELINQUENT
SHABBIR H. KAZMI
May 26 - June 01, 2008
Twenty four banks listed at the Karachi Stock Exchange have announced the first quarter financial results shown decline of 18% YoY in profit after tax. During January-March 2008, the combined profit after tax of these banks decreased to Rs 19.5 billion compared to Rs 23.7 billion for the same period last year. The results include bank listed during 2007 i.e. Habib Bank, Arif Habib Bank and JS Bank. The main reason for decline in profitability is mounting provisions due to withdrawal of the benefit of FSV which has been effective from December 2007 and shrinking interest rate spreads.
NIB posted highest growth in 1Q-CY08 profits as its profit after tax increased to Rs 161 million compared to Rs 15 million during the same quarter last year. NIB is followed by JS Bank, Arif Habib Bank and KASB Bank.
NBP's contribution is the largest contribution towards combined PAT of the sector is NBP that contributed 23% towards sector's combined profits and its profit after tax stood at Rs 4.5 billion followed by MCB ( Rs 4.1 billion) and UBL (Rs 2.9 billion).
Provisions against NPLs caused major decline as the combined provisions against non performing loans increased by more than 6 times to Rs 13.2 billion during the quarter as against Rs 2.0 billion previously and are the main reason for such a heavy decline in banking sector's profitability. The withdrawal of the benefit of forced sales value (FSV) of collateral held by the banks against loans became effective from December 2007
The major hit was taken by the Bank of Punjab as its provisions increased to Rs 5.2 billion from Rs 0.048 billion previously. Due to these provisions, the bank incurred loss after tax at Rs 3.0 billion. Askari Bank was also amongst those banks that had hardest hit on their profitability. Its provisions increased to Rs 826 million followed by UBL whose provisions increased to Rs 865 million against Rs 145 million during the same quarter last year.
The 4 out of 24 listed banks posted loss after tax for the quarter. Total loss of these banks stood at Rs 3.2 billion for the quarter.
Atlas Bank posted loss after tax at Rs 55 million. The bank posted net interest/mark up income after provisions to the tune of Rs 133 million. Non interest expenses of ATBL exceeded the total revenue by 38% which is the main reason for posting such a huge loss.
Crescent Commercial Bank posted loss after tax at Rs 53 million. The net interest income after provisions increased to Rs 200 million for the quarter.
BankIslami incurred Rs 29 million loss after tax versus loss at Rs 19 million last year. Non interest expenses exceed the total revenue of the bank whereas the bank performed well as far as core income is concerned.
BALANCE SHEET GROWTH
The data released by SBP shows that deposits have increased by 1.8% to Rs 3.63 trillion during the 1st quarter of 2008. Gross Advances increased to Rs 2.81 trillion. The growth in deposits in CY07 was mainly due to M2 which has show a growth 19.32% during FY07. ADR of the banking sector has increased to 78% in March 2008 as compared to 74% in December 2007 and 77% at the end of December 2006. Increase in ADR is due to higher growth in advances despite monetary tightening and slower growth total deposits.
According to SBP, net interest spreads of the banking sector in March 2008 increased to 7.09% from 7.14% in December 2007. Decline in spreads is the result of increase in cost of deposits which also restricted the growth in net interest income. Meager growth in advances due to tight monetary policy laid by SBP also resulted in decline in net interest margin. However, on month-on-month basis spreads increased by 3 basis points to 7.09% in March from 7.06% in February 2008.
The average cost to income ratio of all the listed banks has increased by 5 percentage points to 45% in 1Q-CY08 which stood at 39% in 1Q-CY07. This shows that admin cost of banks have increased more than the increase in total revenue. It is believed that the increase in admin cost is the result of increase in number of branches as most of the banks are passing through expansionary phase to mobilize deposits.
The data from SBP shows that advances to deposits ratio (ADR) of the all the commercial banks has increased to 78% in March 2008 which stood at 72% at the end of December 2007. The increase in ADR is the result of slow growth in deposits compared to higher growth in advances. Deposits have shown growth of 1.8% whereas advances grew by 6.1% during the period January to March 2008.
Investment to deposits ratio on the other hand has declined to 31% in March 2008 versus 34% as on December 2007 from 25% in December 31, 2006. Investments of the banking sector have declined by 8.6% to Rs1.1 trillion as at March 31, 2008 from Rs1.2 trillion as at December 31, 2007. This also shows that funds mobilized by bank in the form of deposits have found its way toward advances as banks invested excess money in fixed income instruments in order to get higher returns in the wake of declining banking spreads. This argument is further supported by the fact that banks started to earn more from investments and as a result the non interest income has shown a healthy growth in CY07.
NPL TO GROSS LOANS
As per SBP data the ratio of Gross Non-performing loans (NPLs) to Gross loans stood at 8.1% as on December 31, 2007 versus 7.6% on December 20, 2006. As a result of latest regulation imposed by SBP withdrawing the benefit of FSV, the banking sector's provisions against non performing loans may further increase.
One wonders whether the recent announcement regarding shift in Monetary Policy stance is aimed at containing inflation in the country or boosting profitability of the banks. It is also being doubted that fixing a minimum rate of return of 5% on deposits can help in mopping up money because it is certainly a negative return keeping in view the inflation rate.