The ubiquitous filth and poverty on the roads of Karachi appear less disturbing as the capsule elevator lifts up to the 22nd floor of the newly built United Bank Ltd (UBL) head office on I.I. Chundrigar Road.

Built on the country’s priciest commercial avenue on a plot twice the size of a petrol pump, the skyscraper affords an idyllic view of the city, obscuring the poverty-ridden slums along railway tracks in a thick haze of pollution.

Overlooking mangrove swamps in the distance, the oddly shaped suite of UBL CEO Sima Kamil serves as the nerve centre of the second most profitable bank and the fifth highest grossing business in Pakistan.

“We make money, and we are not ashamed of that. We are commercial entities… banks making money is not a sin,” says Ms Kamil.

UBL’s net profit grew 25.6 per cent to Rs19.1 billion in 2019. Its bottom line was higher than the collective ad revenue of the entire print media industry in the same year.

According to the CEO, the bank’s profitability expanded by one-quarter last year on the back of an improved net interest margin (NIM). In simpler words, the bank was able to grow the gap between the interest rate it charged its borrowers and the one it paid out to its depositors. Its NIM on domestic business rose to a three-year high as the spread expanded to 4.5pc, up 59 basis points from 3.9pc a year ago.

Other key reasons for high profit growth were 41pc lower provisioning and the absence of the one-off pension-related expense of Rs6.6bn that dented the bottom line in 2018.

‘We make money, and we are not ashamed of that. We are commercial entities… banks making money is not a sin,’ says UBL CEO Sima Kamil

Despite improving margins last year, the increase of 9.8pc in UBL’s net interest income was lower than the industry-wide growth rate of 27pc.

“There’s a simple reason for that. We have some old bonds. They are at the old rate. Those are 6-8pc rate bonds (bought before the hike in the benchmark interest rate). As they mature, you will see that this year we will start catching up,” she says.

As for non-interest income, which records revenue streams like fees, dividend income, foreign exchange business and capital gains, UBL posted a year-on-year decline of 13.3pc. In contrast, non-interest income of the banking industry grew 7pc over the same year.

“There’re two reasons for that. First, we didn’t book capital gains. Secondly, investment banking income went down a little. There’re some risks in the power sector that we are being careful about,” Ms Kamil says.

Profits of the banking industry soared 20pc in 2019, according to Topline Securities. The sector’s performance was in stark contrast to the rest of publicly traded companies, which posted subdued results in 2019. In other words, banks grew their bottom lines by one-fifth in a single year while the wider economy limped along under the weight of the IMF’s demand-crushing policy prescriptions.

So how can the performance of one sector of the economy be diametrically opposed to that of most other sectors? The answer lies in a fundamental distortion in the economy that plays out in favour of the banking industry.

People don’t pay taxes, which forces the government to borrow from banks. Since borrowing from the central bank produces inflation and higher interest rates, private banks stand to rake in risk-free returns at the expense of private-sector borrowers.

“The government is the biggest borrower. It wouldn’t need to borrow if people paid taxes and the fiscal deficit was in control. The government comes to borrow from us. Are you saying that we shouldn’t lend to it?” Ms Kamil says.

Investments constituted almost 45pc of UBL’s balance sheet at the end of 2019. More than 86pc of them were in risk-free federal government securities like treasury bills, bonds, eurobonds and sukuk.

“To be honest, we don’t have a long line of borrowers waiting for credit,” she says, insisting the bank is open to lending to anybody provided they prove their credit worthiness.

UBL’s loan book shrank 5pc to Rs623bn in 2019. Average domestic advances remained flat at Rs476bn while the size of international loans came down by 30pc. UBL has been “de-risking” its international business of late. It “voluntarily” closed down its New York branch, liquidated its stake in Oman United Exchange Company and is in the middle of voluntary liquidation of UBL Bank Tanzania Ltd last year.

Ms Kamil says the share of funds extended to small and medium enterprises (SMEs) in the bank’s loan book is only 10pc. SMEs have a share of 40pc in the national GDP and account for 80pc jobs in non-agriculture sectors. UBL’s lending to small enterprises increased 12pc in 2019 while consumer loans, mainly in the auto sector, surged 23pc, its annual accounts show.

“We have an SME proposition. But we have to assess how the borrower would return the money, which belongs to our depositors and shareholders,” she says.

Bank CEOs bring up the fiduciary duty to shareholders and depositors when they try to rationalise their conservative lending approach. But depositors seem to be out of the picture when it comes to sharing the profits that the banks earn by investing the same deposits.

The ratio of current and saving accounts (CASA), which shows the share of low- or no-cost deposits, was a whopping 86.2pc — a feat that “enabled the bank to contain its cost of deposits during the year despite the increase in the average six-month treasury bills yield by 489 basis points”.

Ms Kamil agrees that ignoring the lending part of banking while solely focusing on raising deposits won’t achieve financial inclusion. “As an industry, we have not done much for financial inclusion. About 30-35m bank accounts for an adult population of 100m are not sufficient. Now we are making inclusion a major target,” she says.

Going forward, her focus will be on increasing the number of active users of its digital banking app. “We got 1m of our 5m customers registered on the app by last year. We aim to double that number in 2020.”

Published in Dawn, The Business and Finance Weekly, March 9th, 2020