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Higher interest rates boost profit of Pakistan commercial banks

Higher interest rates boost profit of Pakistan commercial banks

During 3QCY19 aggregate profitability of listed Pakistani commercial banks (excluding Silk Bank) rose to Rs45.5 billion, up 48%YoY. The increase in profit is primarily on the back of a 33%YoY increase in net interest income and 17%YoY growth in non-interest income. Biggest increase was posted by BankIslami, followed by Habib Bank and Meezan Bank.

Cumulative 9MCY19 profits of the listed banks grew by 20%YoY to Rs127.7 billion. In absolute terms, the highest quarterly profit was earned by MCB Bank (Rs5.7 billion) followed by National Bank (Rs5.2 billion) and UBL Bank (Rs5.0 billion). Net Interest Income (NII) of the banks during the quarter under review increased by 33%YoY to Rs158 billion. Over 12-month period average policy rate has increased by 5.5% resulting in the higher NII of the sector. NII of Meezan Bank (87%YoY), BankIslami (73%YoY) and Standard Chartered Bank 952%YoY) recorded the highest pace during the period. On a sequential basis, NII growth was 9%QoQ primarily due to 1ppts hike in July 2019 and delayed asset re-pricing which increased the sector’s interest expenses for the quarter.

It is pertinent to mention that mid-tier banks outperformed the larger peers in terms of NII growth primarily due to better sensitivity to interest rates. Non interest income during the quarter was up by 17%YoY, Rs46 billion, which was driven by fee income (up by 15%YoY) and forex income was up 30%YoY due to volatility in currency market. Non-interest expense increased 17%YoY primarily driven by growth recorded in operating expense due to inflation, depreciation of Pak rupee and branch expansions. During the quarter, listed banks recorded provision expense of Rs12.8 billion, rising by 82%YoY. During the quarter highest provision was booked by NBP of Rs3.4 billion followed by UBL of Rs2.0 billion, while reversal in provisioning was recorded by ABL of Rs67 million.

Meezan Bank (MEBL) posted profit after tax of Rs3.9 billion for 3QCY19 (EPS: Rs3.0), up 86%YoY on the back of increase in net spread earned; up by 87%YoY. The Bank also announced interim cash dividend of Rs1.0/share. Cumulative earning for 9M2019 of the Bank was recorded at Rs8.5 per share; up 77% as compared to Rs4.8 for the corresponding period last year.

Analysts attribute significant rise in net spread earned to the non-applicability of Minimum Deposit Rate (MDR) on Islamic banks which has resulted in higher sensitivity of income to the tightening monetary policy. On quarterly basis, earnings of the Bank declined by 5%QoQ primarily due to 26%YoY rise in provisional expenses and 10%YoY decline in non-interest income owing to lower fee income and loss on securities. MEBL’s other income grew by 31%YoY to Rs2.3 billion, wherein fee & commission income and foreign income grew by 21%YoY and 158%YoY, respectively. Other expenses during the outgoing quarter were up 39%YoY to Rs6.7 billion. This was on the back of 41% increase in operating expenses. Effective tax rate for the quarter of the Bank increased marginally to 40% as compared to 39% in the same period last year. Key risks for the Bank include 1) deterioration in Pakistan macros, 2) uptick in provisioning charge and 3) lack of investment avenues

Bank Alfalah (BAFL) has posted earnings of Rs1.85/share, up by 23%YoY in 3Q2CY19 primarily due to NIMs expansion owing to higher interest rates. Cumulative earnings during 9MCY19 of the Bank were reported at Rs9.7 billion (EPS: Rs5.48), up by 10%YoY. Although, NII of the Bank increased by 11%QoQ, earnings remained flat on quarterly basis primarily on the back of decline in non-interest income by 16%QoQ and higher provisional expenses by Rs500 million. Non-interest income (NII) remained flat despite recording hefty gains in foreign exchange income of 33% primarily due to loss on securities of Rs373 million compared to gains of Rs185 million during the same period. Non markup expense increased significantly by 26%YoY to Rs7.8 billion as compared to Rs6.2 billion in 3Q2018. This was primarily on the back of higher operating expenses which grew by 26%YoY to Rs7.5 billion. The Bank booked provision of Rs1.0 billion during the outgoing quarter as compared to a reversal of Rs96 million during corresponding period last year. Key risks for the Bank include: 1) lower than expected advances and deposit growth and 2) deterioration in Pakistan macros.

Bank al-Habib (BAHL) posted earnings of Rs2.3/share, up by 48%YoY for 3QCY19 primarily due to NIMs expansion owing to higher interest rates and increase in fee income. Cumulative earnings for 9MCY19 rose to Rs7.0 billion (EPS: Rs6.3), up by 18%YoY. Net markup income of the bank grew by hefty 38%YoY to Rs10.4 billion as compared to Rs7.5 billion for the same period last year. Non-interest income (NII) grew by 18%YoY owing to healthy growth in fee income to Rs1.3 billion as compared to Rs1.1 billion for the corresponding period last year. Non markup expense increased by 21%YoY to Rs7.5 billion as compared to Rs6.2 billion for 3QCY18. This was primarily on the back of higher operating expenses, growing by 21%YoY to Rs7.4 billion. BAHL booked provision of Rs657 million, taking 9MCY19 provisional expense to Rs 2.8 billion. Effective tax rate of the Bank crawled to 41% as compared to 40% for the same period last year. Key risks for BAHL include: 1) lower than expected hike in interest rate, 2) lower than expected advances and deposit growth and 3) deterioration in Pakistan macros.

National Bank of Pakistan (NBP) reported profit after tax of Rs16.6 billion (EPS: R7.81) for 9MCY19 as compared to Rs16.2 billion (EPS: Rs7.59) for the corresponding period last year. On a quarterly basis, 2QCY19 net profit was reported at Rs5.2 billion (EPS: Rs2.47), down 25.9%QoQ. The result was in line with market expectation. On a quarterly basis, Net Interest Income (NII) registered a decline of 8.4%QoQ, which could be due to leveraged balance sheet growth, with lagged re-pricing of assets also contributing to fall in income. Non-funded income declined 25.6% attributable to fee income dropping 28.3%QoQ to Rs4.4 billion as a result of seasonality usually associated with the quarter. Additionally forex income diminished to Rs869 million during 3QCY19 as compared to Rs1.7 billion in the last quarter. Effective tax rate remained stable at 40.6% in 3QCY1



Allied Bank (ABL) posted an EPS of Rs2.9; up by 19%YoY in 3QCY19, while cumulative EPS for 9M2019 was recorded at Rs8.4, down by 5%YoY. Admin expenses of the Bank increased by 18%YoY to Rs20.6 billion primarily on the back of branch expansion, rupee depreciation, increase of minimum wage and rise in inflation. Investments have increased by Rs60 billion since December 2018 mainly parked in T-Bills. Investments in PIBs are both on fixed and floating rates, with tentative mix of 50:50. The management expects deposits growth for the year 2019 to clock around 5%. The Bank booked reversals of Rs67 million taking 9M2019 total reversals to Rs356 million. The bank expects reversals to continue in 4QCY19. On domestic loan book, agriculture sector may lead to higher provisions owing to weak cotton crop. The management believes that interest rates have peaked and there is a high chance that it will come down in 2020. ABL booked capital gains amounting to Rs500 million which emanated from both equity and fixed income securities. The management expects that capital gains can emanate from equity side trekking stock market performance in 4QCY19. However, on fixed income front, as the bank have recently purchased fixed income securities on higher rates, the management wishes to book interest income rather than gains. Despite the Bank has the highest Capital Adequacy ratio of nearly 23% in the banking sector it does not wishes to increase payout ratio.

Bank of Punjab (BOP) reported earnings of Rs0.81/share for 3QCY19, primarily due to growth in NII by 36%YoY. Cumulative earnings of the Bank grew to Rs6.1 billion (EPS: Rs2.33) as compared to Rs5.5 billion (EPS: Rs2.08) for the corresponding period last year. Non‐markup income for the outgoing quarter declined by 5%YoY mainly due to loss on Foreign exchange of Rs63 million as against a gain of Rs57 million. Furthermore, fees & commission income remained muted. Non‐markup expense on the other hand was up 14%YoY mainly on the back of higher operating expenses up by 12%YoY to Rs3.6 billion. During the outgoing year the Bank recorded net provision of Rs435 million as compared to Rs28 million during same period last year. However, provisions expense declined on QoQ basis by 44%. Effective tax rate of the Bank rose to 40% as compared to 39%. Key risks for BOP include: 1) significant impact of IFRS-9, 2) slow down in advances growth, and 3) deterioration of Pakistan macros.

Habib Bank (HBL) posted an EPS of Rs3.36, up by 192%YoY for 3Q2CY19, while cumulative EPS for 9M2CY19 came to Rs5.8/share down by 10%YoY. Expenses related to domestic transformation (AML, KYC etc) are completed. Winding up of New York branch is expected to be completed in the year 2020, while expenses related towards the said will depict a downward trajectory. The Bank eyes a deposit growth of 10%. As per the management, deposit growth is expected to track M-2 growth of the country and documentation drive by the government. On the contrary, loan growth is expected to slow down primarily due to macro-economic slowdown. During 9M2019, NII of the Bank increased by 23%YoY to Rs74 billion, wherein domestic NII increased by 22%YoY to Rs67 billion, while international NII increased by 13%YoY driven by Middle East and UK region. Domestic NIMs improved by 75bs to 5.1% in 9MCY19 which was driven by higher earnings assets yields of 11.1%. This was mainly led by maturing old investments at high rates coupled with increase in current accounts which kept cost of funds to 6.05%. Fees income continues to grow, up by 21%YoY to Rs15.5 billion led by investment banking, consumer finance, trade/loan and card related fees. The major factors which contributed to 23%YoY growth in non-markup expenses were: 1) New York branch related expenses of Rs2.8 billion, 2) Rupee depreciation impact on overseas expenses of Rs2 billion, 3) regulatory initiatives related to debit and credit cards of Rs1.3 billion and 4) additional depreciation of new head office of Rs0.8 billion. Despite a reversal of Rs1.8 billion, HBL charged a net provisions charge of Rs1.2 billion owing to aging of previous classified names as well as new classifications. On international front, the bank booked nominal provisions of US$0.1 million during 9MCY19. Domestic NPLs increased by Rs3.9 billion over December 2018 mainly related to the one large exposure on agriculture business. The coverage ratio declined to 87% largely due to this exposure.

United Bank (UBL) posted earnings of Rs4.1/share, up by 42%YoY for 3QCY19 primarily due to: 1) NIMs expansion, 2) Lower provision expense and 3) absence of one-time expense related to pension liability. Cumulative earnings for 9MCY19 rose to Rs14.2 billion (EPS: Rs11.6), up 46%YoY. Along with the results, the Bank announced a cash dividend of Rs3.0/share taking total dividend payout to Rs8.0/share for 9MCY19. On quarterly basis, earnings of the bank were flat primarily due to flattish NII; up by 2%QoQ owing to higher exposure in PIBs and massive growth in markup expense amidst 100bps hike in policy rate. The Bank also booked one-time gain of Rs1.00 billion during 2QCY19 emanating from closure of NYC branch. Net Interest Income (NII) settled at Rs15.8 billion, up 10%YoY owing to increase in markup earned amidst lagged impact of interest rate hikes. Non mark-up income grew by 5%YoY to Rs5.8 billion for 3QCY19 primarily on gain on securities to Rs462 million. Non-markup expenses recorded a slight growth of 4%YoY during the outgoing quarter owing slightly higher admin costs. Effective tax rate declined to 40% as compared to 43% for 3QCY18. Key risks for UBL include: 1) limited NII growth owing to lower rate PIBs exposure, 2) lower than expected advances growth, and 3) deterioration of Pakistan currency.

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