IN a first sign that the continued monetary easing seems to be having some impact on the banking sector’s earnings, Askari Bank Ltd reported a drop in its interest income for the third quarter of the year.

But it remains to be seen if this is an anomaly or an indication of a wider trend, as a majority of banks have yet to declare their third-quarter results.

The two major sources of interest income for banks are advances and interest-bearing investments (particularly government debt securities). When interest rates drop, the yields on freshly issued loans and government bonds fall immediately, while those on existing advances (with variable rates) fall with a slight time lag.

The rise in deposits was helped by the addition of 78 branches during the nine-month period, which took the bank’s total network to 399 outlets

Most banks, particularly the larger ones, are said to have locked in higher yields on their Pakistan Investment Bond (PIB) holdings by stacking up bonds of higher maturities, thus shielding their interest incomes from the continued monetary easing in the short term, at least.

Many sector analysts expect this benefit to start wearing off from next year when a bunch of PIBs are set to retire and the banks will be left with no option other than to bid for lower-yielding bonds.

However, the drop (albeit a marginal 1.1pc on a yearly basis) in Askari Bank Ltd’s (AKBL) core income in the third quarter (3QCY15) indicates that this might already have started.

The drop came despite a 15.6pc increase in the bank’s PIB portfolio, which reached Rs114.1bn by September 30. Its Treasury bill holdings also surged 35.3pc to Rs132.9bn.

But the bank benefitted from the higher core earnings it had booked in the first two quarters of the year, which took its overall interest income for the first nine months of CY15 (9MCY15) to Rs27.6bn, up 10.6pc from last year.

This helped it post an unconsolidated pre-tax profit of Rs6.95bn, a sizable improvement of 57pc over earnings of Rs4.42bn in 9MCY14. However, owing to new taxation measures introduced in the FY16 budget, the bank’s overall tax bill swelled to Rs2.88bn from Rs1.3bn last year.

AKBL’s post-tax earnings came in at Rs4.07bn, still up 30.6pc from Rs3.11bn in 9MCY14. This translated into earnings-per-share of Rs3.23, against last year’s Rs2.47. The bank did not declare any dividend for the quarter.

Meanwhile, the drop in interest rates also helped control the rise in the bank’s interest expenses, which went up by a marginal 1.9pc to Rs16.5bn during 9MCY15. As a result, its net interest income grew by a solid 26.7pc to Rs11.1bn.

The bank’s core expenses were also kept in check by its deposit mix, which was heavily in favour of current and savings accounts. Its

savings accounts — the minimum rate on which has now dropped to 4pc owing to consistent monetary easing — rose 20pc to around Rs243.8bn by end-Septem-

ber, while its non-remunerative current accounts went up 9.2pc to Rs96.7bn.

The bank’s total deposits grew 10.2pc to over Rs427.3bn by end-September from Rs387.6bn by end-2014.

The rise in deposits was also helped by the addition of 78 branches during the nine-month period, which took the bank’s total network to 399 outlets. Since assuming management control of the bank in 2013, the Fauji Foundation consortium has been pursuing an aggressive branch-expansion strategy.

It also got rid of a lot of bad debts from the bank’s books that had accumulated under its previous management.

However, the bank’s stock of non-performing loans (NPLs) rose slightly to Rs30.93bn by end-September. This resulted in the booking of Rs230.2m in provisions against NPLs during 9MCY15. But the higher provisions improved the bank’s coverage ratio to 92pc from 90pc at end-2014.

Alternative revenue streams: The bank relied heavily on the non-interest-based side of its business for revenues. And within this category, a majority of earnings came from capital gains, which surged to Rs3.14bn during 9MCY15 from Rs1.35bn in 9MCY14. And a major share of these gains — Rs2.46bn — came from the sale of government securities.

Another Rs215m in capital gains came from the “sale of shares of a former associated company (Askari General Insurance Company Ltd,” the bank said in its third quarter report.

This took its overall non-interest income to Rs9.15bn — up 8.7pc from last year.

Meanwhile, AKBL’s Islamic banking division entered into an agreement with EFU Life Assurance Ltd in August to distribute EFU’s window Takaful products. Bancassurance — where banks act as distribution agents for insurance companies — is fast emerging as a major source of alternative revenue for banks, with the business carrying margins as high as 50pc, with the banks virtually bearing no insurance risk on their own.

This helped the bank’s fee-based income rise 10.5pc to Rs1.26bn in 9MCY15. The bank’s directors credited this growth to higher contributions from the “trade, remittances, bancassurance and investment banking” segments.

Meanwhile, the AKBL stock is down a marginal 3.8pc this year and closed last Wednesday at Rs22.34 a share. That compares with the benchmark 100-index’s modest 5.6pc gain during the period.

Published in Dawn, Business & Finance weekly, October 26th , 2015

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