Profitability of big banks in 4Q2014 remained strong as they reported earnings of Rs31b, up by 50%YoY and 9%QoQ. Growth in NII (net interest income) of banks remained strong despite a cut of 50bps in discount in Nov 2014. NII of the banks grew by 30%YoY and 17%QoQ. Sharp rise in provisioning expense (mainly NBP) in 4Q kept profitability growth in check on QoQ basis. However, profits before provision and taxes recorded a growth of 21%QoQ.

Country’s large banks that include ABL, HBL, MCB, NBP and UBL reported earnings growth of 31% in 2014 due to improving margins and growth in earnings assets. Lower provisioning expense during the year, led by sharp decline in NBP provisions, also resulted into higher profitability for the banks.

According to statistics, in 2014, total profitability of big banks stood at Rs111.3b versus Rs84.7b in 2013, showing an impressive growth of 31%YoY. In 2013 profits of these banks declined by 6% led by NBP’s abnormal provisions and ABL’s lower tax rate. Bank’s strategy to shift into high yielding long term Pakistan Investment Bonds (PIBs) from short term Treasury Bills (T-Bills) resulted into improved margins for the sector. Yields on 3-year PIBs offered on average 11.8% in 2014 as compared to 9.9% in 2013. Till Sep 2014, big banks had invested Rs1,275b in PIBs, which is 27% of the total deposits. This ratio at the end of 2013 stood at just 9% of deposits since investment in PIBs stood at Rs385b. A significant shift in asset mix by banks led to strong growth in core income and profitability.

Banking industry experts said that net interest income (NII) of banks expanded by 20% in 2014 due to higher income from PIBs and growth in earnings assets. Interest Income of banks improved by 16% to Rs483b, whereas interest expense stood 13% higher at Rs250b. Consequently, NII of banks stood at Rs233b as against Rs193b in 2013.

Rise in interest expense was partly due to volumetric growth in remunerative deposits and partly due to linkage of saving accounts with the policy rate in 4Q2013. Minimum deposit rate are now set a 250bps discount to the prevailing policy rate as per revised regulation of SBP. This was also reflected from slight decline in banking spreads during the year that stood at 6.0% as compared to 6.2% in 2013. In 4Q2014, NII of banks improved by 17%QoQ and 30%YoY indicating banks continuous focus to invest in risk free Govt. securities. Total investment of the banking sector increased by 26% in 2014, whereas, advances reported growth of just 9%. IDR (Investment to Deposit Ratio) of the banking sector, at the end of 2014, stood at 61% versus 54% in 2013.

Provisioning expense reported a decline of 39% in 2014 to Rs12.2b in 2014 largely due to sharp decline in provisioning expense booked by NBP. Provisioning expense booked by NBP declined by 52% to Rs9.3b as against Rs19.5b during the last year.  Overall NPLs of the sector also showed improvement as total NPLs of the sector in 2014 declined to Rs605b from Rs607b last year.

 Gross NPL ratio also improved to 12.3% in 2014 as against 13.3% in 2013, indicating major recoveries.

In 2014, non-interest income of big banks increased by 20% to Rs103.2b thanks to the growth in fee income and capital gains. Fee and commission income of big banks stood at Rs49.5b, up by 11%YoY. Capital gains on the sale of securities reported an increase of 51% in 2014 increasing to Rs19.1b. In order to meet the SBP’s prescribed level of investment in equities, banks adjusted their portfolios and booked significant capital gains during the year. Banks including ABL and NBP booked major capital gains from the sale of investments in equities and mutual funds. In contrast to non-interest income, non-interest expense of banks increased by 14% to Rs161.3b mainly due to higher admin expenses.