Top 6 banks maintain their profitability in 2015

Pakistan's top six banks maintained their profitability in the closing year of 2015 despite of heavy taxation measure which apparently their margins but these companies have a safe business strategy to invest in government papers for retaining their profits which is estimated to grow by 12 percent as compared to 2015.

According to estimated that six banks, which includes Habib Bank (HBL), National Bank (NBP), United Bank (UBL), MCB Bank (MCB), Allied Bank (ABL) and Bank Alfalah (BAFL), are expected to report record profits of Rs130 billion in 2015, up 12% YoY.

These banks represent 63% of the total industry deposit are anticipated to register impressive growth despite a 350bps decline in policy rate during 2015. This is due to major investment in high yielding long term Pakistan Investment Bonds (PIBs) by these banks (34% of total deposits) and volumetric deposit growth of around 10% for big banks.

Despite sharp fall in interest rates and big PIB maturities expected in 2016, banks still trade at attractive multiples. These banks investment to deposit ratio (IDR) reached an all-time high of 71%, whereas advance to deposit ratio (ADR) dropped to 44% as of Sep 2015. Their Net Interest Income (NII) of these banks is projected to grow by 17% to Rs298 billion driven by major investments in PIBs and double digit deposit growth. Alongside increase in NII of these banks, growth in capital gains is likely to drive earnings of banks in 2015. The expectation are capital gains to grow by 79% to Rs37 billion in 2015. Banks have aggressively realized capital gains on PIBs and equities in 2015. In 9M2015, big banks had reported capital gains of Rs30 billion in 9M2015, up 109% YoY.

Meanwhile advances of big banks are expected to grow by 4% in 2015 as against 9% in 2014 due to lower working capital requirement and aggregate demand. However, with commencement of China-Pakistan Economic Corridor (CPEC) projects and uplift in economic activity we expect advances of big banks to grow by 13% on average during 2016-18. The private sector credit has already started depicting improvement as In 2H2015, credit to private sector has grown by 9% as against 7% in the same period last year and 7.5% for the full year 2015.