Banking Sector profits up by 6pc in 4Q2018.

Karachi, March 5, 2019: Pakistan Banking Sector profitability rose to Rs38.3 billion up by 6 percent YoY during the fourth quarter of last year (2018).

The increase in profitability is primarily owed to 16% YoY increase in net interest income as well as 7% increase in non-interest income.

For  analysis, Topline Securities has taken results of all listed banks that have announced 4Q2018 financial results.

Moreover, for 4Q2018 reversals in pension charge and Workers Welfare Fund (WWF) amounting to Rs4.2bn and Rs6.7bn, respectively, also supported the bottom-line.

Net Interest Income (NII) of the banks improved by 16% YoY to Rs135bn in 4Q2018 as a result of a cumulative 425bps hike in policy rate during 2018.

Similarly, on a sequential basis, NII is up 10% as the lagged impact of asset re-pricing kicked in. To note, SBP has raised policy rate by 425bps in 2018, with 150bps coming in 4Q2018. 

Comparing the big-5 (MCB, HBL, UBL, ABL, NBP; profits down 24% YoY) vs the rest  under our coverage (MEBL, BAHL, BAFL, AKBL), we see that mid tier banks have outperformed their larger peers due to better sensitivity to interest rates as well as absence of significant provision charge during the outgoing quarter.

Profits of Mid-tier banks are up 32% YoY (we have excluded BOP from mid tier numbers due to substantial one off provisioning in 4Q2017).

Despite 16% YoY growth in net interest income, profitability growth was contained to 6% YoY  primarily due to high provision charge specifically by the large banks including HBL, UBL and NBP. 

Cumulatively, total provision charge by the said three banks for 4Q2018 was Rs15.7bn (~73% of total provision by the sector), with NBP, UBL and HBL charging Rs6.8bn, Rs5.6bn and R3.3bn, respectively.

Overall, the sector booked provision charge of Rs21.5bn compared to Rs13.3bn in the same period last year. To note, BOP booked significant provision charge of Rs12.7bn during 4Q2017 compared to reversal of Rs137mn in 4Q2018.

NBP booked significant provision charges on its loan portfolio, specifically with regards to its exposure to Omni group.

Similarly, majority of UBLs charge was related to NPLs (Rs5.0bn) mostly from its international loan book and most of HBLs booked charge was also on account of NPLs (Rs2.3bn).

Despite lower capital gains and dividend income, Non-interest income of the banks rose by 7% YoY mainly due to 17% higher fee income and 86% higher income from dealing in foreign currencies.

Admin expenses grew by 20% YoY while non-interest expense rose by 14% YoY. The growth in non-interest income was contained due to reversal in provision for Workers Welfare Fund (WWF) by select banks (Rs6.7bn in total). Cost to income of the sector increased by 3.1ppts YoY to 64.2% in 4Q2018.

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