In the rising interest rate climate, commercial banks have no incentive for venturing into consumer finance. On top of all the Government of Pakistan is not only the biggest borrower but also offers a very lucrative rate of return. Still, to satisfy the apex regulator, the State Bank of Pakistan (SBP), commercial banks keep the business within the family by extending the facility to corporates, high net-worth clients and employees of the corporate sector.
Let us, first of all, see much profit is being earned by the commercial banks. According to a report by Pakistan’s leading brokerage house, Topline Securities, the profitability of listed banks increased to a record PKR126 billion, up 56%YoY for the first quarter of 2023 (1Q2023). This was primarily driven by higher Net Interest Income (NII) amid high-interest rates and strong balance sheet growth.
The NII of the sector for 1Q2023 was reported at PKR358 billion as compared to PKR220 billion for 1Q2023, up 63%YoY as average policy rates during 1Q2023 remained at 19.0% as against 9.75% for 1Q2022.
Non-interest income of the sector improved by 10% to PKR75 billion driven by FX income and fee, commission & brokerage income. The non-markup expense was up 30% to PKR200 billion due to higher administrative expenses.
On a QoQ basis, banking sector profitability was up 25% to PKR126 billion led by higher NII and lower provisions.
For 1Q2023, BankIslami (BIPL) and Soneri Bank (SNBL) reported the highest earnings growth of 244%YoY and 174%YoY respectively. Bank of Punjab (BOP) reported an earnings decline of 45%YoY followed by Summit Bank (SMBL) which reported a loss of PKR935 million.
In terms of NII growth, Standard Chartered (SCBPL), BankIslami (BIPL) and Bank Alfalah (BAFL) reported the highest growth. Bank of Punjab (BOP) posted a decline of 4%YoY in NII.
The first preference of banks is an investment in T-Bills and investment bonds. Despite being risk-free these securities offer very lucrative results. Auction is held twice a month and banks have to simply submit bids, no hustle of running after the borrower and no fear of default. It is believed that nearly 80% of deposits are deployed. The tenor ranges from three months to 12 months. Depending on the government’s appetite/urgency of borrowing most of the funds are parked in 3-months papers.
Similar is the observation in Pakistan Invest Bonds (PIBs). Though the bond ranges from 3 years to 30 years banks prefer to invest in 3 to 5 years. Maybe because neither the GoP nor the banks are keen on investing in bonds of the longer tenor.
It has been observed that after having mopped up the liquidity of conventional banks, the next target is Islamic banks, enjoying surplus liquidity. Lately, the government has started issuing Ijarah Sukuk. This offer a win-win situation for the GoP as well as the Islamic banks, which can’t invest in interest-bearing T-Bills and PIBs.
Within consumer financing bulk of the lending is for property and cars and the key borrowers are high-net-worth clients and employees of the corporates. In either of these classes of borrowers, the rate of default is low. This could be verified by the low rate of repossession and auction of repossessed assets.
According to one of the banking sector analysts most of the lending to the bank/corporate employees can be termed ‘watta satta’, one bank lends to the employees of other banks.
Lately, another phenomenon has been observed that lending against cars has declined substantially. It is because of a substantial increase in car as well as petrol prices.
The Japanese car franchise in the country dubbed, “Toyota Indus Motors,” recorded a jump of 6% in its sales. The company sold 1,912 units in March against 1,803 units in February. The company sold 1,119 units of Corolla and Yaris and 793 units of Fortuner and Hilux.
Honda Atlas car sales posted a new low – dropped by 49%, selling 835 units in March compared to 1,636 units in February. Honda Atlas sold 611 units of City and Civic and 224 units of BR-V and HR-V.
Hyundai Nishat sales reported down 34%, selling 836 units last month compared to 1,271 units in February 2023. The company sold 188 units of Elantra, 118 units of Sonata, 150 units of Porter, and 380 units of Tucson.
Pakistan Suzuki Motor Company (PSMC) has been one of the most affected companies during the last couple of months. But the latest report released by Pakistan Automotive Manufacturers Association (PAMA) narrated that even prolonged non-production days and price hikes have not plunged the company’s sales. As per the PAMA report, Pakistan Suzuki reported a jump of 1200% in Swift sales, selling 877 units in March against 67 units in February. Moreover, Pak Suzuki Motors Company’s sales marked a surprising increase of 475%, surpassing fellow Toyota and Honda. The company sold 5,628 cars last month, contrary to 978 cars in December.
Pakistan Suzuki Motor Company sold 2,542 units of Alto, 475 units of Suzuki Cultus, 489 units of Suzuki Wagon R, 877 units of Suzuki Swift, 782 units of Suzuki Bolan, and 463 units of Suzuki Ravi.
Coming to MoM sales, the PAMA report revealed a 54% increase last Month. The car sales clocked in at 9,351 units last month against 6,072 in February – which increased by 54% MoM. Coming to year-on-year sales, observed a decrease of 66%, selling 27,202 vehicles in the corresponding period of last year.