THE 20 commercial banks listed on the stock market posted a combined profit after tax of Rs118 billion in 2012 against Rs107 billion a year earlier, showing a nine per cent growth.

The recently released financial figures of the banking sector for the year ended Dec 31, 2012 pointed out that lower provisioning by 28 per cent year on year (YoY), and 27 per cent higher non-interest income, compensated for the three per cent YoY decline in net interest income (NII).

However, combined profits for the fourth quarter of 2012 (4QCY12) clocked in at Rs25 billion, representing a dip of 18 per cent over the earlier quarter (QoQ), as NII declined by two per cent, while provisions spiked by 48 per cent QoQ, in line with traditional yearend book cleanups.

Raza Jafri, a banking sector analyst at brokerage AKD Securities, says that while 2012 was a good year for banks overall, a sequential decline in 4QCY12 results may extend into 2013.

The Big-6 banks (UBL, NBP, HBL, MCB, ABL and BAFL), with combined assets of Rs500 billion, posted a net profit of Rs96 billion in 2012, up by a modest nine per cent YoY.

Yet, they accounted for more than 80 per cent of earnings of listed commercial banks. In 4QCY12, the combined net profit of the sector amounted to Rs21 billion, representing a sharp drop of 12 per cent QoQ, with provisions rising by 53 per cent QoQ, also in line with yearend trend.

Many sector watchers stress that the banking sector finds itself stuck between a rock and a hard place. Low private sector credit off take, shrinking spreads, and investment in government papers are impeding sector growth.

“Our banking sector needs maturity,” Mr Ali Raza, eminent banker and former president of the National Bank of Pakistan, told Dawn. He observed that 20 million bank accounts in a country of 180 million people is much too small a number.

He said that in rich economies, banks derived only a quarter of their aggregate revenue through net interest income, while the other three-quarters came from fee-based transactions and other sources. “Over here, it is the other way round, as 80 per cent of the revenue is generated by NII.”

In order to grow and prosper, banks would have to introduce fee-based products and tap small and medium enterprises, and the huge undocumented economy, where all transactions are ‘cash-based’ with no place for banking, would have to be roped in, he said.

Sector analysts recall that in April 2012, the State Bank of Pakistan (SBP) had announced a 100bps increase in the minimum profit rate on savings accounts, from five to six per cent, effective May 1 of that year. “As expected, it resulted in a shrinkage of net investment margins of banks, which was revealed in their financial statements for 2012,” says Khurram Schehzad of Arif Habib Corporation.

Though staggering from the blow, most banks managed to find a way around the law by calculating six per cent on ‘minimum monthly balance,’ since the SBP had stopped short of stipulating whether the rate was to be applied on monthly average or minimum balances.

A circular by the central bank on March 15 clarified that point, and directed banks “to pay minimum profit at six per cent per annum on all local currency saving deposits on average monthly balances effective April 1, 2013”.

Mr Shaukat Tarin, former finance minister and currently serving as advisor to Silkbank, says that in fixing the rate on average monthly balances, the pendulum has swung from one side to the other.

“On one hand, the discount rates have been slashed from 14 to 9.5 per cent. But on the other, the rate on saving deposits has been raised from five to six per cent, and that too on average monthly balances. This has, in effect, widened the gap between the two to six per cent,” he told Dawn.

He opined that profit on deposits should be linked with discount rates. He also called for “prudent banking,” where banks may be restrained from heavily investing in government papers, as almost a half of the banks’ deposits are currently invested in T-Bills.

He thought that one way to discourage such a practice was to levy a higher tax on income derived by banks from their investment in T-Bills.

While he exuded optimism on the future of the banking sector as the economy improves, MrTarin admitted that going forward, smaller banks would have to give in to mergers so as to be able to swim in the sea of financial problems.

Banks are generally sour over having to pay interest on average balance. Analysts point to SBP figures that show that the deposit rates were increased to six per cent in April 2012, but lending rates had declined in eight months, from May 2012 to Jan 2013, from 13 per cent to 11.6 per cent respectively. In the same period, discount rates were reduced from 5.9 per cent to 5.4 per cent.

All of this suggested that in the eight months, banks’ spreads contracted from 7.1 per cent to 6.2 per cent.

In February 2013, the spreads hit an eight-year low at 6.18 per cent. “The last time such levels were witnessed was in April 2005, consequential to a 7.49 per cent average lending rate whereas average deposit rates stood at a meager 1.55 per cent,” said Muniba Saeed, an analyst at InvestCap.

Raza Jafri, an analyst at AKD Securities, said that the regulatory change would particularly affect banks with significant chunk in savings accounts.

As per SBP data, total deposits with banks in January 2013 stood at Rs6.61 trillion, of which around 38 per cent were in saving accounts.

Sector watchers say that banks may grumble. Yet in spite of the cut, Pakistani banks are enjoying the highest spreads in the Asian region, as compared to 3.21 per cent in India, three per cent in China, and just about 2.17 per cent in Thailand.

Other than the obvious hit on spreads, the SBP’s motivation in issuing new directives on rates on averages balances appears to be to promote savings-to-deposit ratio, increase financial market depth and intermediation, and encourage banks to focus on higher –yielding private sector credits, which have been stagnant for the last few years.