Banks made huge profits during Jan-March this year. And, they may continue to make huge profits in April-June as well.

During Jan-March 2022, the announced annual results of 20 banks listed on the Pakistan Stock Exchange showed that they made Rs80.712 billion after-tax profit, up 19 per cent from 67.673bn they earned during October-December 2021, according to a Topline Securities’ report. The year-on-year increase in profitability was 28pc.

What helped banks make this much profit were higher interest rates charged on bank loans to the private sector — and more importantly higher yields earned on government debt papers. A sharp decline of 80pc year-on-year in provisioning expenses also had a favourable impact on banks’ profitability, the author of the Topline Securities report Umair Naseer noted in his brief. (Banks have to set aside a sum of money to make up for any possible loss in case of non-servicing of their loans. During the quarter under review, this process was rather reversed to create room for generous lending to the private sector as part of the State Bank of Pakistan’s (SBP) drive to boost post-Covid-19 lending).

That banks’ sizable profits in spite of a tight banking spread is a welcome development. Banking spread, or the gap between banks’ net average fresh lending rate and deposit rate, stood at 244 basis points in March 2022 from 248bps in March 2021, according to SBP data. (This calculation is made on the basis of fresh lending rate excluding zero-mark-up rate and interbank rate and fresh deposit rate excluding zero-mark-up and interbank rate).

Financial institutions are sure to invest aggressively in government debt papers and since the demand for government borrowings will remain very strong in April-June, the returns on T-bills will remain high, contributing to growth in banks’ overall net interest income and profits during this quarter

During the first quarter of this year, higher yields on the Treasury Bills and Pakistan Investment Bonds (PIBs) plus higher interest rates on private-sector lending and the decline in provisioning requirements made it possible for banks to increase their net interest income (NII). And that, in turn, led to higher profits. The same factors are expected to help them add more to their NII and continue to book large profits in the second and third quarters as well.

April 7th’s dramatic increase in the SBP policy rate (from 9.75pc to 12.25pc) has pushed up the yield on the T-bills and PIBs, much to the pleasure of all banks. Their post-7th April short-term investment in T-bills in regular auctions and trading of the bills in the secondary market both would continue to yield progressively growing profits for them. Investment in PIBs of three-year and five-year tenures and their trading in the secondary market would also produce progressively higher quarterly yields for banks.

The government’s appetite for short-term borrowing through T-bills is already strong and one can expect that it will become stronger in May-June, the last two months of the fiscal year. Within 10 months of this fiscal year (1st July 2021-29th April 2022), the federal government’s borrowing from banks stood at Rs1.538 trillion, according to the SBP.

In a little more than 10 months, banks made net fresh lending of about Rs1.296tr to the private sector whereas, during the same period in the last fiscal year, this figure was about Rs421bn

Finance Minister Miftah Ismail has already said that the fiscal deficit of FY22 could reach as high as Rs6.4tr against the initial target of Rs4tr. In three quarters of this fiscal year, the deficit stood at just Rs2.565tr but traditionally, the fiscal deficit in Pakistan spikes in the last quarter.

All this means that banks are sure to invest aggressively in government debt papers. And, since the demand for government borrowings is certain to remain very strong in April-June, the returns on T-bills will remain high as well, contributing to growth in banks’ overall net interest income and profits during this quarter.

Private sector credit demand is also strong — so far. In a little more than 10 months (between July 1, 2021, and May 6, 2022) banks made net fresh lending of about Rs1.296tr to the private sector whereas, in the same period of the last fiscal year, this figure was just one third—about Rs421bn. The 7th of April’s 250bps rise in SBP policy rate and consequent rise in banks’ lending rates for customers will take at least a full quarter in depressing the effective demand for private sector credit as the economy continues growing so far.

This means banks’ April-June 2022 credit disbursement will remain robust even amidst increased interest rates, contributing to banks’ net interest income and overall profits at least during the April-June 2022 quarter.

Banks’ NII can increase a bit faster too because in April-June the banking spread would likely remain larger than in Jan-March. This may happen because in response to monetary tightening banks quickly raise their interest rates on loans but increase deposit rates with a time lag.

Also, many banks — particularly those that cannot manage operational costs well — increase lending rates by much larger margins than they increase the return on the deposits. So far (up till March 2022) the banking spread is well below 300bps but banks are not happy with it, particularly in the midst of headline inflation running in double digits. The spread is all but sure to expand in April-June this year — and even in July-September.

In Jan-March 2022, Standard Chartered reported a 119pc year-on-year increase in after-tax profits beating all other banks. Meezan Bank, Bank Alfalah and Askari Bank followed with 51pc, 47pc and 30pc YoY growth in profits, the Topline Securities report shows. MCB Bank and National Bank were not too far behind, claiming 29pc and 24pc annualised growth in after-tax profits.

Published in Dawn, The Business and Finance Weekly, May 23rd, 2022