With clear signs of economic recovery and reviving business activities in Pakistan, local banks will be the key beneficiaries in coming years.

As credit appetite has started to grow, local banks are all prepared to finance power, textile, telecom, consumer, construction and transport/ communication sectors when credit penetration in Pakistan is at multi-year low of 19pc of GDP, analyst banking sector at Topline Zeeshan Afzal said.

With rising investors’ confidence in the new business friendly Govt. banks have started to accumulate high yielding Govt papers at a time when Govt is restructuring its debt to long duration under IMF instructions. This will further support Net Interest Margins (NIM). Reducing Non-Performing Loans (NPLs) coupled with adequate Capital Adequacy Ratio (CAR) will further help banks overall profit growth.

In addition, evolution of branchless and Islamic banking will improve bank’s outreach and volumes, which in turn will increase overall banking sector profits. In a country with population of 188m, only 35m bank accounts are there in Pakistan. Thus branchless banking provides huge potential to tap new accounts and increase deposit base. In next years, deposits are estimated to grow at CAGR at12.9pc compared to 15.6pc in last 3 years. Similarly, its estimate advances growth of 13.5pc CAGR in next 3 years vs 7.9pc in last 3 years.

The analyst expects contribution from NII (Net Interest Income) and Non-Interest Income in the total earning growth. In next 3 years (2014-16), NII of Topline banking universe is likely to grow at 14.5pc CAGR vs 2.8pc during 2011-13. Similarly, Non-interest Income growth is estimated to remain at 13.5pc CAGR during 2014-16 vs. 17.4pc in 2011-13. Due to rising branch network in an attempt to improve service qualities, banks are likely to spend more.

The analyst expects cost to income ratio to remain at average 49.0pc in next 3 years vs. 47.1pc during 2011-13. Asset quality would also improve in coming years, net infection to drop to 1.6pc by 2016 from current 2.5pc. Due to improved banking fundamentals, earnings of banks to grow by 21.9pc in next 3 years (2014-16) compared to 5.5pc growth in last 3 years (2011-13) and 8.1pc CAGR in last 5 years. In 2014, the analyst expects earnings to grow by 35pc.