Return on Equity of Pakistan’s Large Banks Slid Over Past Decade: Report

The return on equity of large banks has deteriorated over the past decade, while that of mid-tier banks has improved, a report by Topline Securities reveals.

The brokerage firm said that the return on equity (ROE) of large banks has fallen from an average of 19 percent in 2011 to 13 percent in 2020, down by 600 basis points.

In contrast, the ROE of mid-tier banks has risen to an average of 18 percent in 2021 from 12 percent in 2011.

For the purpose of its research, Topline Securities categorized Pakistan’s listed banks into large and mid-tier banks.

The class of large banks, included Habib Bank (HBL), National Bank (NBP), United Bank (UBL), MCB Bank (MCB), and Allied Bank (ABL). Meanwhile, it classed all other listed banks as mid-tier.

Amongst large banks, ABL and HBL experienced the highest rate of decline, with ROE sliding to 13 percent in 2020 from 22 percent in 2011.

Topline Securities attributed the deterioration in ROE to factors, including an increase in minimum deposit rate (MDR), the implementation of BASEL-III, a declining Advance to Deposit ratio (ADR), lower payouts, and below-average CASA growth.

The State Bank of Pakistan’s (SBP) move to increase the minimum deposit rate benefitted depositors but led to banks making less profit.

To meet the requirements of Basel-III, which is the regulatory framework on bank capital adequacy and risk, the SBP orders banks to increase their capital adequacy ratio to 12.5 percent in 2019 from 10 percent in 2013. This not only increased the capital base of the banks but also raised interest expense.

In addition, the advance-to-deposit ratios of large banks fell to 60 percent from 40 percent, after they adopted an “ultra-cautious approach” following the 2008 financial crisis, which Topline Securities said prompted them to alter their “asset mix from high yielding advances to low yielding-low risk treasury papers.”

The reduction in dividend payout ratios of large banks has also led to a decrease in ROE. Similarly, large banks saw a slightly lower than industry average growth in current account and saving account (CASA), which may also have led to lower margins.

In contrast, mid-tier banks enjoyed a gradual improvement in average ROE.

Topline Securities attributed this to their “above average CASA growth, higher concentration in high yielding advances and domestic assets”.

Within mid-tier banks, Meezan Bank Limited (MEBL), Bank AL Habib Limited (BAHL), and Habib Metropolitan Bank’s (HMB) ROEs were the highest, averaging 24 percent, 22 percent, and 16 percent, respectively.

Amid all listed banks, MEBL and BAHL registered the highest ROEs, supported by strong growth in CASA and total deposits.

ABL witnessed the highest decline in ROE, on the back of a low-risk strategy where it avoided high-yielding assets and new initiatives. “Its ADR and payout ratios have fallen over the years and have remained below the industry average,” added Topline Securities.

Topline Securities expects the SBP to tighten regulation further, including the implementation of implement the International Financial Reporting Standard (IFRS-9) in 2022, which requires banks to take provisions for expected credit losses and could impact profitability.

It recommended that banks with strong coverage and capital adequacy ratio (CAR) ratios should invest in “high yielding advances, low-cost deposit growth and better payouts,” in order to raise ROEs.



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