AS banks start coming out with their half-yearly results in the coming days, investors and market stakeholders eagerly await to see the magnitude of the impact of the recent regulatory and fiscal measures on their bottom lines.

Quite a few analysts following the industry have projected a slowdown in the yearly growth rate of after-tax earnings for the second quarter, and a double-digit drop from first quarter earnings.

The principal reason seems to be the retroactive, one-time application of the 4pc ‘super tax’ introduced in the FY16 budget.

Banks’ reliance on income from capital gains will increase given the low interest rate scenario, and hence they are likely to become more active in the equity market

And this was confirmed when United Bank Ltd announced last Thursday that its tax bill for the second quarter had more than doubled to Rs5.6bn from Rs2.7bn in the same quarter last year. One sector source confirmed that all banks’ second quarter results are likely to witness higher tax bills.

Another factor seems to be the projected drop in banks’ net interest incomes (NII) as the earliest batch of relatively high-yielding Pakistan Investment Bonds (those that were issued before monetary easing set in) start to mature and as the banks increasingly rely on the low-yielding bonds for their core incomes.

And while private sector lending picked up in the first half of the calendar year — net credit to the private sector stood at Rs3.94tr by end-June, up from Rs3.55tr at end-December 2014, according to provisional SBP data — there is not much hope from this front, at least not immediately, owing to interest rates being at record lows.

Besides, banks’ margins were further squeezed when the central bank introduced a target rate within an interest rate corridor in May. The weighted average banking spread for the first five months of the year stood at 5.75pc, down 30 basis points from the same period last year.

“Lower spreads due to the discount rate cut in 1QCY15 are expected to have a greater impact on banks having higher advance-to-deposit ratios and a lower proportion of savings deposits,” commented JS Global Capital analyst Amreen Soorani.

“The second quarter should mark the culmination of the rising NII trend, which is likely to decline in the coming quarters as higher relative minimum deposit rate vs the benchmark lending rate enacted in the May monetary policy starts to take effect,” wrote Kasb Securities banking analyst Farid Aliani in a recent report.

In addition to that, some banks are also expected to witness a slowdown in capital-gain income coming from their trading in Pakistan Investment Bonds (PIBs), as they had collectively already booked sizable income from this area in the first quarter after bond yields had dropped.

“The sector benefitted from trading in PIBs following the hefty decline in their yields in the first quarter, deriving 40-60pc of their reported capital gains from there. While some opportunity continued to exist on that front in the second quarter, the quantum of gains [is likely] to be limited compared to the previous quarter. Therefore, overall non-funded income growth should remain in check for 2QCY15,” added Aliani.

Future outlook: Some sector analysts believe that the worst is over for the industry as far as fresh harsh regulatory and budgetary measures are concerned. And more also believe that the ongoing cycle of low interest rates will come to an end by next year.

“Considering that the weighted average spreads will not be too much higher than the 4.5pc that the central bank desires (and that the spread on fresh business is already less than 4pc), further regulatory steps to curtail banking spreads are unlikely. Alternatively, banks [are likely to] focus on higher yielding loans, alongside attempts to raise credit spreads going forward,” said Intermarket Securities Ltd analyst Raza Jafri.

He added that banks’ reliance on income from capital gains is also likely to increase given the low interest rate scenario, and hence they are likely to become more active in the equity market.

This appeared to be borne out by NCCPL data, which showed that from April 1 to June 30 — the quarter when the more adverse regulatory and budgetary measures were introduced or announced — banks were net sellers of Rs11.1bn worth of equities. That compares with them buying a net Rs3.27bn worth of shares in the first quarter.

Besides, some sector watchers are also hopeful that the multitude of power projects that are in the pipeline — both under the China-Pakistan Economic Corridor and otherwise — would boost credit demand from this long-neglected segment of the economy.

And over the medium-term, a gradual improvement in the power supply situation is likely to kick-start idle industrial activities, which would then open another avenue for bank lending.

“Beyond the near-term, improvements in energy sector dynamics can potentially kick start a second round of borrowing, for instance [from] textile expansions. This can be a significant credit growth driver — the share of textile loans among private sector businesses is currently less than 20pc, against a peak of 30pc in mid CY2006,” said Jafri.

Published in Dawn, Economic & Business, July 27th, 2015

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