Jan 23 - 29, 20

The banking sector widely known as the money making machine in the market gave another strong performance, as MCB Bank profits grew 24 per cent, UBL 34 per cent and Bank Alfalah bottom-line doubled.

MCB Bank profits firmed to Rs15.53 billion in the first nine months of 2011 as interest income rose by almost Rs9 billion. The board of directors also announced a dividend of Rs3 per share, taking the total payout to Rs9 per share in 2011. Net interest income rose 23 per cent to Rs49.6 billion during January to September on the back of higher KIBOR and rising yields on government papers. The result is slightly lower than market expectation as analyst expected net profit to stand around the Rs16 billion mark.

As per data, UBL profits surged 34 per cent to Rs10.6 billion on the back of strong growth of net interest income.

Net interest income rose 17 per cent to Rs30 billion during January to September 2011 compared with Rs25.6 billion in the same period last year. In line with the industry practice, UBL has also maintained a strategic shift towards Investment to Deposit Ratio, rose to 45pct in June 2011 compared with 34pct last year.

Bank AlFalah net profit swelled 100pct to Rs3 billion in the first nine months of 2011 compared with Rs1.5 billion in the same period last year.

Financial experts told PAGE that banking sector - a highly regulated industry - has witnessed a rapid progress in recent years and has been characterized by an increasing sophisticated provision of banking services. However, a large portion of the 180 million population of Pakistan is still un-banked or underserved by the formal financial system, which is attributable to, among others, low penetration of the banking system particularly in rural/semi rural areas and general dislike for interest income (un-Islamic banking system).

A study on access to finance estimated that only around 20pct of the population in Pakistan is banked and has access to the formal financial system. Thus, a huge un-tapped market is available for financial services.

Today, one of the biggest challenges for banks in Pakistan is increase in non-performing loans (NPLs) and low private sector credit demand as high lending rates and weak economy is adversely affecting the borrowers' payment capacity.

As per data, banking sector showed a significant performance in the first quarter (Q1) of the current calendar year as earnings of the listed banks rose by a 26 percent year-on-year (YoY). Q1 2011 remained impressive for the listed banking sector as the results portrayed an encouraging trend of growing funded and non-funded income, likely to continue in Q2 as both interbank lending rate and trade and remittance business remain on the higher side, Mustafa Bilwani, analyst at JS Research said. However, loan losses linger as a concern, with many of the banks reporting a jump in the Q1 expense. In contrast to the impressive results, the sector has underperformed the index by 3.1 percent in Q1 and 1.2 percent in the Q2 so far. An important takeaway from the results included marked improvement amid mid cap banks results (BAFL, AKBL, BAHL, MEBL), which led to the big-5's share in profit to drop 5.7ppt to 77.4 percent. Higher average 6M KIBOR (+140bps YoY) leading to strong spreads (7.56 percent in 1Q, 27bps YoY) remained the prime driver for rising interest income, which was augmented by 20 percent YoY to Rs 73.6 billion.

NPL pressure has somewhat re-emerged since Q3 of last year, with the effect evident in the provision expense in Q1 2011 - up 21 percent YoY to Rs 13 billion. Of the 21 banks, 13 reported a rise in loan losses

The SME sector is another under-served area. Presently, only 0.2 million SMEs have access to bank financing out of 3.1 million SMEs across the country. The low presence of banking services in SMEs is attributable to the high-risk perception about SMEs, over conservatism of banks in underwriting the risks in serving the non-traditional sectors like SMEs and agriculture.

On the contrary, banks place their surplus funds in risk free government securities. Similarly, housing finance is another attractive avenue. Despite a deficit of more than six million housing units in the country - that is increasing due to supply shortage - the housing finance market is largely under developed; mortgage loans are approximately one percent of GDP, which suggests that a huge un-tapped market awaits banks to exploit.

Consumer banking: A large portion of 170 million people in Pakistan are potential consumer loan customers. However, banks need to developing sound lending strategies to manage their risk. Islamic banking, and generally Islamic financial services are a growing phenomenally, which came into existence to meet the needs of the devout Muslims around the world, who have the main wish to observe the Quran and Sunnah.

Microfinance is another sector, which provides a lot of opportunities. Commercial banks and other financial institutes may have an opportunity to invest there funds in this sector.