BANKS AND ECONOMY MOVE IN TANDEM

SHABBIR H.KAZMI
Oct 26 - Nov 01, 2009

Historically performance of banking sector is linked with the economy, the robust the economy the better performer is the commercial banks. While rest of the world is going through economic down mainly due to the sub-prime issue, Pakistani banks have remained immune to the phenomenon.

However, the domestic factors i.e. lack of focus of economic managers on economy, political imbroglio, and daunting security challenges and above all the economic downturn are having its impact on the banks.

Despite enjoying an average spread of 7.5% profitability of the banks in Pakistan is on the decline due to declining credit off take and rising delinquencies. Lately, default by some groups has impaired financial health of couple of banks. The positive point is that despite the dent these banks are not likely to be in the red.

The proactive role being played by the State Bank of Pakistan has not only helped in saving the banks from untoward problems but also strengthening them.

One such move by the central bank is the announcement regarding enhancement of the forced sale value (FSV) benefit from 30% to 40% along with the inclusion of industrial properties in the definition of collateral against NPLs, which was earlier restricted to residential and commercial properties. However, the 3 years restriction for availing the said benefit with the applicability from September 30, 2009 has been maintained.

The following are the SBP circular along with the analysis of Invest Cap and their recommendations. Banks are allowed to take benefit of 40% of FSV of pledged stock and mortgaged residential, commercial and industrial properties (land and building only) held as collateral against NPLs for three years from the date of classification for calculating provisioning requirement w.e.f. 30-09-2009.

However, the central bank has maintained the 50% FSV benefit for the consumer financing along with deduction of liquid assets from NPLs for calculating provisions.

The central bank has also introduced interim instructions on classification/provisioning requirements in respect of rescheduling/restructuring of such classified loans and advances that are overdue by less than one year at the time of rescheduling/restructuring. These instructions will be applicable till June 30, 2010 and afterwards prevailing instructions on the subject will be applicable.

Upon rescheduling/restructuring of classified loans and advances, the category of classification may be upgraded by one category. Moreover, on fully meeting the terms and conditions of the rescheduling/restructuring for a continuous period of one year and cash recovery of at least 5% of the rescheduled/restructured amount from the date of rescheduling/ restructuring, loan classification may be further upgraded by one category.

Banks/DFIs may reverse the provision held over and above the required provision. However, such reversal of provisioning shall be made directly into the equity as a capital reserve and shall not be credited to Profit and Loss Account. The amount of provisioning taken to capital reserves shall not be available for payment of cash and stock dividend.

The immediate relief through the incremental 10% of FSV Faysal Bank and Bank Alfalah are likely to benefit the most. However, in terms of restructuring, banks with higher NPLs in substandard and doubtful category will benefit in lieu of upgradation of NPLs classification through restructuring.

During 1HCY09 Bank Alfalah accumulated substantial NPLs in substandard category whereas other banks depicted significant increase in the doubtful category except for HBL which showed a decline of 19%. HBL has been successful in restructuring its loan portfolio during 1HCY09. It is likely to materialize considerable benefits.

On the other hand, this assumption maybe undermined as the NPLs might have shifted from the doubtful to loss category, which is likely the case as NPLs in loss category increased.

As SBP allows up-gradation of these categories subject to the fulfillment of one year compliance to the restructuring conditions, Invest Cap analyst expect these banks to mark grater benefit in terms of restructuring and reclassification. In case of Bank of Punjab the reclassification of Harris Steel (if materialized) will provide support in lowering provisioning requirement largely.

UP COMING BANKING SECTOR RESULT

The overall macroeconomic headwinds are expected to decelerate banking sector's growth wherein higher credit risk and restricted asset growth are the primary reasons. Government's budgetary requirements and low risk appetite of the banks amid higher credit risk has made government securities as the primary revenue generating avenue under the prevailing conditions. Cumulative data of the banking sector depict restricted credit growth by 1.9% QoQ in contrast with 15.2% QoQ growth in investments. Moreover, deteriorating supply-side issue continues to hurt industrial sector growth resulting in persistent pressure on banks' asset quality. Although incremental impact of NPLs declined recently, payback capacity of borrowers remains questionable looking at fragile macro economic conditions.

Average 20% YoY growth in net interest income (NII) for most of the banks is primarily based on their significantly higher exposures in investments and sustaining margins. Although, banks are lowering their cost of funds with accumulation of low cost deposits, attraction for longer term deposits due to exemption form CRR and minimum 5% rate for saving accounts would continue to exert pressure on cost of funds for banks. However, analysts expect the impact of last year's deposit mobilization at significantly higher rates would subside gradually as most of the deposits have up to one year maturity. Despite relatively declining interest rate some of the banks have emerged successful in improving net interest margin (NIM) which would be the major driving factor for their growth.

BAD DEBT PROVISIONING

Credit risk remains the major factor affecting profitability of the banks. Provisioning against bad debt is likely to increase. However, going forward benefit of incremental 10% of the FSV along with inclusion of industrial property in its scope would have positive impact in this regard.

SAMPLE RESULTS

NIB Bank (NIB) has announced its 9MCY09 result. On an unconsolidated basis, NIB has posted profit after tax of Rs795 million (EPS: Rs0.20) in 9MCY09 as against profit of Rs287 million (EPS: Rs0.07) in 9MCY08, an increase of 176%YoY. On a consolidated basis, NIB has posted profit after tax of Rs1.61 billion (EPS: Rs0.40) in 9MCY09, twice as high as unconsolidated earnings last year due to share of profit from associated companies (two of the largest private sector asset management companies in Pakistan).

On a sequential basis, 3QCY09 net profit (unconsolidated) registered at Rs215 million (EPS: Rs0.05) is up 20%QoQ. Following net provisioning reversals of Rs500 million in 1HCY09, NIB has booked loan loss provisions of Rs317 million in 3QCY09. Instead, as anticipated, earnings have been boosted by hefty capital gains in 3QCY09 (Rs321 million in 3Q against Rs94 million in 2Q). It does not appear that any FSV-related reversals have been booked in the third quarter

MCB Bank (MCB) has announced its 9MCY09 result. On an unconsolidated basis, MCB has posted profit after tax of Rs11.81 billion (EPS: Rs17.08) in 9MCY09 against profit of Rs11.62 billion (EPS: Rs16.82) in 9MCY08, marginal growth of 2%YoY. The result was inline with market expectations. MCB has posted net profit of Rs4.05 billion (EPS: Rs5.86) in 3QCY09, up 3%YoY and 12%QoQ. Sequential improvement in earnings is largely due to lower provisions. Total provisions (including impairment) have registered at Rs1.13 billion in 3QCY09, down 48%QoQ. Alongside the result, MCB has announced dividend of Rs2.5/share, bringing total dividend in nine months to Rs7.5/share.

OUTLOOK

Earnings of commercial banks are likely to remain under pressure unless economic revival becomes credible. Banks seem to suffer from a paradox if they offer high return to depositors. Cost of funds is bound to rise. They have to offer return higher than the rate of inflation. One of the options is that they contain administrative expenses and also the provisions. However, provisioning cannot be contained unless economy improves.

BARCLAYS BUSINESS INSTALLMENT LOANS

Barclays Bank Pakistan launched the Business Installment Loans Facility today in Karachi, Lahore and Islamabad / Rawalpindi. This new initiative from Barclays targets the Small and Medium Enterprise (SME) sector in Pakistan and is one of the largest the Small and Medium Enterprise (SME) sector in Pakistan and is one of the largest unsecured finance plans in the country. Barclays Business Installment Loan plan can provide financing of up to Rs. 2 million without the requirement of any collateral and can be paid back in equal monthly installments over a period of 5 years.

Khawaja Asif, Director Consumer Banking, Barclays said, "We are pleased that Barclays is playing its part in the development of the SME sector in this country and through this facility we hope that we will be able to encourage and support the budding entrepreneurs."

Barclays has always been a customer centric bank and is committed to contributing towards the economic growth of Pakistan. The SME sector for any country is considered as the back bone of the economy and growth of this sector has a multiplier effect on the country's progress.

With the launch of this exciting new product, Barclays aims to further consolidate its position as one of the leading retail banks in Pakistan.

Barclays is a major global financial services provider engaged in retail and commercial banking, credit cards, investment banking, wealth management and investment management services, with an extensive international presence in Europe, the USA, Africa and Asia.

With over 300 years of history and expertise in banking, Barclays operates in over 50 countries and employs over 140,000 people.

Barclays Bank Pakistan, part of the global Barclays Group, is offering retail banking commercial banking and wealth management products and services.

Employing more than 500 people, Barclays in Pakistan serves more than 18000 customers and clients across the country through a network of 32 ATMs, 14 branches in 4 urban and 2 rural centres.