Karachi, March 2, 2020: The year 2019 has been an exceptional year for the banking sector with profitability increasing by 20 percent or Rs30 billion to reach Rs177 billion, in spite of economic slowdown.
The primary driver this year has been the net interest income which has increased by 27 percent from Rs486 billion to Rs620 billion this is mainly due to higher interest rates. Weighted average Policy Rate in 2019 remained 12.2 percent compared to 7.2 percent in 2018.
In absolute terms, the highest yearly profit was earned by MCB bank (Rs23.8 billion) followed by UBL (Rs19 billion) and NBP (Rs16.6 billion). However in terms of earnings growth BIPL came out on top with 247 percent growth followed by MEBL with 73 percent and AKBL with 58 percent growth.
Out of 17 listed banks (see page 5 for more details) we have not taken SILK, SMBL and BOK in our analysis whose results have not been announced.
As mentioned Net Interest Income (NII) of the banks remained major earnings driver in 2019. In Pakistan rising interest rates bodes well for banks as ~34 percent of deposits are non-remunerative (Current Deposits on which banks give no return) that leads to a higher spread. Top banks with the highest growth in NII are BIPL (78 percent), MEBL (65 percent) and SCBPL (50 percent).
Non funded income has increased by a mere 7 percent. Prime reason for the limited increase was the lack of capital gains given the under performance of the market. Secondly, given the tough economic conditions lower payouts resulted in lower dividend income from portfolios. However, the cover came through Forex income which improved by ~Rs7 billion or 20 percent as the banks capitalized on the volatile exchange rate in 2019.
Cost to income for the year decline to 57 percent from 60 percent. Besides above average increase in income, a number of banks exercised cost rationalization measure in order to endure the current economic slowdown. The lowest cost to income ratios belonged to SCBPL (30 percent), MEBL (46 percent) and MCB (48 percent). The lowest increase in non interest expenses was achieved by SCBPL growing by a mere 5 percent followed by 6 percent by MCB and 10 percent by JSBL.
As expected provisions for the listed banks have increased by 63 percent or Rs17 billion to reach Rs44 billion in 2019. The increase has been a mix of diminution in value of investments and loan related charges. We believe that loan provisions would be higher given the prevalent economic conditions and high interest rates.
Tax expense for the listed banks went up by Rs37 billion to Rs128 billion in 2019. Effective taxation in 2018 was at 38 percent which increased to 42 percent on account of payment of super tax for 2017.
The year 2020 is expected to be a transitionary year for banks and lot will depend upon the timing and quantum of the interest rate cut. Higher than expected inflation numbers have pushed back industry consensus of a cut by few months compared to earlier estimates of a likely cut in 1Q2020.
Margins of banks in Pakistan are typically affected with falling rates as floating saving and fixed deposits normally go down, whereas, remunerative deposits (34 percent of total deposits) remain unaffected.
This time in falling interest rate scenario, banks’ NIMs will come under pressure sooner as they have not managed to invest fixed coupon high yielding long tenor PIBs as compared to last time. It is evident from T-bills/PIBs investment ratio of 1.7x this time compared to average of 0.8x last time.
Banks with strong deposit franchises with a high mix of Current Accounts are likely to be in the limelight due to lower exposure to minimum deposit rate.
We expect credit growth to improve going forward partially offsetting impact of NIMs contraction. Banks’ credit growth was muted at 3.4 percent in 2019. However, we expect growth of 10 percent in 2020 and 13 percent in 2021.
We expect our sample banks to post earnings growth of +30 percent in 2020. We maintain our Market weight stance on Banks that trades at 2019 P/E of 8.3x and PBV of 1.1 with ROE of 18 percent.
