LAHORE - During 3Q2018, Pakistan banking sector profitability declined to Rs31.6b, down by 27 percent YoY. The decline in sector profits is primarily owed to Rs6.8b total provision charge, lower non interest income and higher non-interest expense during the outgoing quarter.

Net Interest Income (NII) of the banks improved by 9 percent YoY to Rs122b in 3Q2018, led by higher interest rates & better deposit mix. However, on a sequential basis, NII is down 2 percent despite higher rates due to lower asset base as well as differences in re-pricing period of assets and liabilities post change in policy rate.

To note, SBP has raised policy rate by 275bps in 2018, 100bps of which were raised at the beginning of 3Q2018.

Within the listed banks, the 5 largest banks (HBL, UBL, MCB, NBP, ABL) depicted a 48 percent YoY decline in earnings. On the other hand, mid tier banks (BAHL, BAFL, MEBL) continued with growth momentum and reported profitability growth of 17 percent YoY.

The sector booked significantly higher provisioning charge during the quarter, clocking in at Rs6.8b compared to Rs2.1b provision reversal in the same period last year. Majority of this charge originates from big banks with UBL, NBP and HBL contributing Rs3.1b, Rs2.0b and Rs1.7b to the total, respectively.

NBP booked significant provision charge on its loan portfolio while HBL booked charge for impairment in investments. Simultaneously, UBL’s provision charge originates from both its international loan book as well as impairment of equities.

Non-interest income of the banks declined by 11 percent YoY, mainly due to lower capital gains (Rs993m in 3Q2018 vs Rs7.8b in 3Q2017).

Non-interest expense rose by 12 percent YoY mainly led by HBL (non-interest expense up by 29 percent YoY) due to costs associated with compliance. Excluding HBL, expenses rose by 8 percent YoY. Resultantly, cost to income of the sector increased by 4.7ppts YoY to 63.5 percent in 3Q2018.

During the period under review, effective tax rate of the sector declined to 40 percent in 3Q2018 as compared to 54 percent in 3Q2017. However, normalized for HBL penalty amount, effective tax rate was at 35 percent in 3Q2017. The higher effective tax rate is due to banks booking super tax on a quarterly basis (as a result of change in law) as compared to no super tax charge in 3Q2017.