Apr 20 - 26, 2009

Profitability of big five banks (NBP, MCB, HBL, ABL and UBL) stood at Rs53.32 billion at end 2008 as compared to Rs54.81 billion last year, reflecting a marginal decline of 3% YoY. HBL was on the top as its earnings increased by 24% and it contributed 19% towards combined profit of five banks.

On the other hand the NBP profit decreased substantially by 19% but contributed 29% in the total profit. ABL earning increased by 2 percent and it contributed 8%. Earnings of MCB Bank improved by meager 1% but its share in total profit was as high as that of NBP. While UBL earning was sliced by 1% YoY it still formed 16% of the pie.

ABL 6.31 6.43
RBS -1.16 -0.38
AHBL 0.46 -0.38
AKBL 6.61 0.95
ATBL -0.62 -2.02
BAHL 4.62 5.07
BAFL 3.92 1.63
BOK 0.53 0.34
BIPL -0.07 -0.1
SAMBA -1.51 -0.85
FABL 4.29 2.11
HBL 10.59 13.18
HMB 4.64 5.44
JSBL 0.062 0.096
KASB 0.49 -2.42
MCB 24.3 24.47
MEBL 1.96 1.26
MYBL 0.64 -0.66
NIB -0.17 -2.63
NBP 21.22 17.23
SPCB -3.38 -2.24
SNBL 2.43 1.7
SCBL 0.71 0.16
UBL 8.31 8.24

Historically banking sector of Pakistan has been dominated by five big, mainly because of their long history. While the banks established by the private sector in nineties have largely intruded into areas once considered exclusive domains, it will yet take long time to achieve a comparable size.

One of the positive outcomes has been the revised strategy of the foreign banks. In late nineties, after the imposition of economic sanctions on Pakistan, a number of foreign banks decided to sell their Pakistan operations, as they considered Pakistan un-bankable. However, as the time changed there was also a reversal in the policy. Standard Charted Bank, having the longest history of operations as a foreign bank, became a locally listed bank and also acquired a local bank. CresBank was taken over by Samba of Saudi Arabia. Temasek of Singapore first acquired a leasing company and converted it into a commercial bank and then acquired PICIC and its subsidiary PICIC Commercial Bank, which were subsequently merged into NIB Bank.

A question often asked is why foreign investors are keen in acquiring banks in Pakistan. The simplest and copybook answer is that commercial banks in Pakistan have remained focused on their core activities. They have been following prudent approach which is often termed conservative. Above all a sound, dependable but vibrant infrastructure has been created by the apex regulator, State Bank of Pakistan. Some of the banks were critical that the central bank was following 'too cautious approach' but the time has proved that 'adventurism' followed by the American banks has proved not only fatal for them but sub-prime loan contagious disease has affected the entire world.

One of the beauties of Pakistani commercial banking system is that it has always remained focused on its core activity. However, during the last one decade due to the virtual absence of DFIs in the country, it also has to act as provider of medium term finance. A little oversight on the part of regulators has encouraged the banks to undertake leasing business directly rather than through fully owned subsidiaries. This caused serious problems for the leasing companies. It is still not too late and the central bank should take necessary steps to bound commercial banks to establish separate leasing companies.

Lately, acquisitions and mergers have changed the banking landscape. Now more than 85% assets of the sector are being managed by the private sector. Among the five big, only National Bank is operating under state control. It is not likely to be privatized but it has been listed at the local stock exchanges and its shares have been offered to general public through three tranches. Now many of the banks including Habib Bank, NIB Bank, United Bank, Bank Alfalah, MCB Bank, and Samba have foreign investment.

While some of the analysts term entry of foreign banks a good omen, others are a bit skeptical. The opponents of the government policy say that only a small amount has come as foreign investment but repatriation of profit every year will ultimately become a huge burden on country's foreign exchange reserves. Besides, selling the national assets was not a good approach; instead the government should have asked the foreign investors to create new entities.

According to State Bank of Pakistan's Quarterly Performance Review of the Banking System for the quarter ended December 31, 2008 Pakistan's banking system effectively coped with several challenges emanated from economic slowdown, both at home and abroad, due to strong resilience built over the years and effective regulatory and supervisory regime.

The overall solvency position of the banking system registered an improvement. The Capital Adequacy Ratio (CAR) under Basel-II framework, which also accounts for the operational risk charge, improved to 12.2% (being 12.6% for commercial banks) due to fresh injection of equity and satisfactory earnings. The CAR improved to 13% jointly for banks.

Banking system has shown strong resilience to unusual shocks in major risk factors. This strength of the banking system largely came from the prudent regulatory and supervisory regime, strengthening of risk management and governance standards in banks as well as the improved solvency position. However, due to constrained economic environment both at home and globally, the credit risk, earnings, and growth rates of the banking system are likely to remain under some strain in coming months.

The SBP has released a revised schedule of minimum paid-up capital. Scheduled banks now have to raise their paid-up capital to Rs10 billion by 2013, down from Rs23 billion required before. The reason behind reduced paid-up capital requirements is stated to be general global slowdown in growth and capital accumulation. However, minimum Capital Adequacy Ratio (CAR) requirement at 10% (irrespective of CAMEL-S ratings) will be maintained. In our view, more lenient paid-up capital requirements have implications from an M&A perspective, and will likely lead to calm in M&A activity. On a positive note, need to issue rights/bonus to raise paid up capital will largely be mitigated, leading to lower dilution. That said, minimum CAR at 10% will continue to dictate overall capital base and, and in turn, future growth prospects.