Bank Profits Surge by 66% in Second Quarter of 2020

Topline Securities has published a report on Pakistani Banks’ profitability for the second quarter of 2020, which includes a sample of 18 banks (out of a total listed 20 banks), representing 99% of the banking sector’s capitalization at the PSX.

According to the report, the sector’s Profit after Tax has increased by 66% year on year (YoY) in 2Q2020 on the back of immediate repricing of liabilities and capital gains on government securities. The profits are also up by 44% quarter on quarter (QoQ), driven by instant benefits of the decline in interest rates.

Net Interest Income (NII) increased by 41% YoY, while Non-Interest Income improved by 36% YoY during 2Q2020.

On the other hand, Provisions increased by 212% YoY, where the majority of the banks booked General Provisions in light of COVID-19. This is a precautionary measure adopted by banks even if they feel that their respective loan book is not under particular duress.

To give perspective, of the sample, the cumulative absolute increase in NII and Non-Interest Income are Rs. 63 billion and Rs. 17 billion (total Rs. 80 billion) respectively, whereas Provisions and Operating Costs are higher by Rs. 30 billion and Rs. 6 billion (total Rs. 36 billion) respectively.

In absolute terms, the highest quarterly profit has been earned by HBL (Rs. 11.0 billion) followed by NBP (Rs. 10.9 billion), MCB (Rs. 6.8 billion) and MEBL (Rs. 6.2 billion).

In terms of NII, the highest increases were recorded by Soneri Bank (+71%), Askari Bank  (+67% YoY), Bank Al Habib (+63% YoY), NBP (+58%) and JSBL (+57%).

NII of the banks was driven by higher investment income. The banks have aggressively bought PIBs, as view shifted towards declining interest rates at the behest of COVID-19. As a result, Interest Earned increased by 24% YoY (but was down by 4% QoQ) in 2Q2020, said the report.

Top banks with the highest increases in Interest Earned were Soneri Bank (+45% YoY), Bank Al Habib (+40%) and NBP (+40%).

At the same time, Interest Expense increased by only 12% YoY (and down 21% QoQ) during the quarter due to the immediate repricing of deposits. The banks with the least increases in deposit costs were Allied Bank Ltd (-11% YoY), MCB (-6% YoY) and Faysal Bank(-4% YoY).

Non-Interest Income has also increased by 36% YoY even though Fee Income declined by 22% YoY due to COVID-19.

The main reasons for the increase were improvement in Forex Income of 23% YoY and capital gains which came in at Rs. 18.7 billion (vs. a loss of Rs. 2.4 billion for the same period last year). Capital gains were primarily driven by gains on government papers, added the report.

Topline stated that in 1Q2020 under the relief measures, banks booked impairment on equity book to an extent. This quarter we also saw some reversals given the market performance in 2Q2020.

The Cost to Income was at 43% for 2Q2020 compared to 58% in 2Q2019 and 55% in 1Q2020. The improvement was a function of higher-income along with a limited increase in Operating Expenses of 6% YoY.

The lowest Cost to Income were booked by Standard Chartered Bank (26%), Bank of Khyber (34%), MCB (39%), MEBL (40%) and UBL (40%). The least growth in costs were recorded by HBL (-5%), UBL (-4%) and MCB (+0%).

As expected provisions for the listed banks have grown by 212% YoY for the quarter. The increase has been dominated by loan provisions of which a certain percentage has been allocated due to COVID-19 as general provisions.

The year 2020 has been adversely affected by the COVID-19 Global Pandemic. In a series of emergency/regular meetings, the Policy rate has been brought down by 6.25% to 7% by the Pak Central Bank.

Additionally, with the interest rate corridor now symmetrical to the Policy Rate, banks’ MDR is 1.5% below policy rate from 2% earlier. Due to the falling interest rate scenario, banks’ NIMs will come under pressure during 2H2020 as assets re-pricing kicks in.


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