Banks achieve 86pc growth in profits

Pakistan’s banks listed on the stock market have reported an outstanding growth of 86 percent in their net profit in the year ended December 2023, boosting total earnings to a record high of Rs572 billion amid a higher interest rate season in the country.

The banks have managed to achieve a record high profit despite economic slowdown and underperforming industrial activities in the country.

In a brief commentary, Topline Securities’ research analyst Sunny Kumar said, “This profit was primarily driven by a significant jump in net interest income (NII) amid high interest rates and balance sheet growth.” In US dollar terms, listed banks’ profit was up 36 percent to $2 billion in 2023 compared to 2022.

In a recent report, Arif Habib Limited’s economist Sana Tawfik said that almost all the listed banks have recorded their historic high profits during the calendar year 2023.

“In calendar year 2023, the banking sector in the listed space witnessed significant profits (i.e., 86 percent year-on-year) driven mainly by policy rate hikes of 600 basis points coupled with volumetric growth in deposits (over 24 percent in 2023 compared to 2022),” she said.

The net profits were also “supported by 21 percent lower provisioning (bad loans or non-performing loans) and 16 percent higher noninterest income during the year.”

However, with rates likely to have peaked, she foresees the onset of a monetary easing cycle in the ongoing first half of 2024, leading to a decline in rates, down from the current record high of 22 percent.

Despite the projected decline in sector net interest margins in the latter part of the ongoing calendar year 2024 due to a likely reversal in monetary policy stance (interest rate cut), AHL’s optimism regarding the overall profitability outlook remains unwavering.

“We find several mitigating factors supporting this positive sentiment, including the lagged re-pricing of assets versus funding cost, potential expansion of the balance sheet, sustained support from non-interest income, reduced inflationary pressure mitigating operating expenses, and the opportunity to realise capital gains on the fixed PIB (Pakistan Investment Bonds) portfolio. We expect the sector’s near-term earnings to maintain strength, with full-year CY24 earnings growth estimated at 12 percent.”

However, it is important to note potential challenges such as the implementation of IFRS-9 and the possibility of Non-Performing Loan (NPLs/bad loans) accretion exceeding projections, which could dampen the overall financial performance of the sector, she said.

Last week, Moody’s Investors Service upgraded Pakistan’s banking sector outlook to stable (Caa3) from negative, believing the financial institutions’ solid profitability and stable funding and liquidity provide an adequate buffer to withstand the country’s macroeconomic challenges and political turmoil.

It, however, raised a serious concern on banks lending depositor money mostly to the government under the provided high-interest rate and high inflation scenario, leaving a little chunk of the funding for the private sector, which remains the engine of economic growth in the country.

“High-interest rates and inflation will continue to curb private-sector spending and investment. Furthermore, banks are financing the sovereign’s wide fiscal deficits, leaving little space to lend to the real economy.”

Pakistani banks remain highly exposed to the government via large holdings of government securities that amount to around half of total banking assets, which links their credit strength to that of the sovereign. Government securities account for 51 percent of Pakistani banks’ total assets and around nine times their equity.