MANY eyebrows are raised when a foreign corporate or bank decides to close operations in Pakistan. So it was on Friday with the news that the HSBC Holding plc, the UK-based bank was pulling down its shutters.
It took some time for the public to reckon that the event was part of the Group’s global strategy and not because the banking business in Pakistan had turned sour. As it happens, the banking industry in the country is raking in profits.
And the year 2011 proved to be an exceptionally profitable year for commercial banks in Pakistan. This was revealed by the recently released reports of the banking industry. All banks together posted stellar earnings growth of 51 per cent in 2011. Total bank deposits topped Rs 5.9 trillion.
The robust profitability was attributed mainly to the increase in ‘interest income’ and a drop in ‘provisioning for bad and doubtful debts’. Earnings were further supported by ‘non-markup income’, which went up on account of high volatility in currency market and improving trade activity.
Provisioning expenses of banks witnessed 26 per cent decline over the earlier year, due to aging of non-performing loans and improvement in cash recoveries by banks. The commercial banks were able to improve their returns on equity from 9.5 per cent in 2010 to15 per cent in 2011. The SBP data show that corporate sector was the one driving growth of advances, while consumer sector credit off-take declined, as has been the case in recent years.
On economic sector-wise basis, growth in advances was driven by textiles and financials. The non-performing loans in the financial sector also declined. “Given prevailing economic environment banks with low ADR are set to benefit from revival in the economy which is expected to be fueled by agriculture growth” commented banking sector analyst Nurali Barkatali at BMA capital.
On the basis of size of banks, UBL with 39 per cent growth in net income led the top tier banks. During 2011, top tier banks’ earnings grew by 20 per cent. Medium tier banks also posted healthy results; whereas among small banks JSBL, Samba and Silk Bank turned to profit.
A synopsis of earnings revealed by banks follows: MCB recorded 15 per cent growth in profit from Rs16,873 million in 2010 to Rs19,425 million 2011; NBP reported flat profit growth, Rs17,563 million in 2010 and Rs17,605million in 2011; HBL earnings showed a graceful rise by 33 per cent from Rs15,613 million to Rs20,742 million. TheUBL net profit surged 39 per cent from Rs11,160million to Rs15,500 million, Profit at Bank Al-Falah shot up by 262 per cent from Rs968 million to Rs3,503million; earnings of Allied Bank grew 23 per cent from Rs8,225 million to Rs10,140 million. Askari Bank profits soared by 73 per cent from Rs943 million to Rs1,628 million, Faysal Bank earnings edged higher by eight per cent from Rs1,190 million to Rs1,280 million, Habib Metropolitan Bank bottom line improvement was 16 per cent from Rs2,818 million to Rs3,281million, BAHL profit was up 26 per cent up from Rs3,602 million to Rs4,533 million and NIB Bank reduced its losses by 80 per cent from Rs10,112 in 2010 to Rs2,044million in 2011.
The numerous positives that helped banks to lift their profitability in the year ended December 2011 included: increase in total income by 28 per cent, lower cost of funds, greater investments in government papers at higher yields, continuous increase in remittances, high volatility in currency market and improving trade activity
A banker also said that under the prevailing economic environment, banks with low ADR were set to benefit from revival in the economy which was expected to be fueled by agriculture growth.
But not everyone eyes the banking sector profitability with envy and admiration. Zubyr Soomro, former head of Citibank, who now runs ‘Hikmah’ Consultants, a financial consultancy firm, observed that the strong banking sector financial results were primarily based on their propensity to avoid risk and invest heavily in government papers.
He said that such a widespread practice among banks, widens budgetary deficit, requiring government to resort to heavier borrowings — the figure already hitting the ceiling at one trillion rupees. “Big econo-mies can sustain such an awkward trend but low-income economies are sooner or later likely to come to grief”, he said.
The eminent banker emphasised the point that mobilising deposits and giving advances were the essence of banking. Yet, all of that had been sidelined in quest for risk free high profit. In good times, commercial banks tend to follow the footsteps of one another as they were currently doing by making easy money through investment in government papers. “But in the long haul, every bank would have to discover and build upon its strength and that would require banks to forge their specific strategy” Mr.Soomro insisted.
Another senior banker who agreed with Mr Soomro said that in a situation where banks were reluctant to fulfill their basic objectives, the essential sectors were starved of credit. He identified such sectors as small and medium enterprises, agriculture sector and housing. The banker, like many others of his ilk, was sure that the merger and acquisition in the banking sector was inevitable. “I say this not only as smaller banks are groping for cash to meet the increasing Minimum Capital Requirements set by the central bank,” he explained, “But as competition gets grueling, smaller banks will have to choose between merger with large banks or sink in the sea of financial crisis”, warned the banker.
