Banks earnings to rise

KARACHI - The big five banks will continue to report strong financial performance in the upcoming quarters due to growing interest and non-funded income of such banks, according to banking sector analyst. However, rising loan losses and higher administrate expenses are expected to remain the great sources of concern for the top five banks in the quarters ahead. In contrast to the impressive results posted by banks in the first quarter, the performance of the banking sector remained lacklustre in the 1Q. The sector underperformed the KSE-100 Index by 3.1 per cent in 1Q and 1.2 per cent so far. The mid-tier banks surprisingly posted decent earnings in the first quarter of the current calendar year. A total of 21, out of 25 listed banks represented 98 per cent of the sectors total market capitalisation at the local bourse. The 1Q 2011 remained an impressive quarter for the listed banking sector as its earnings rose by a significant 26 per cent year-on-year. The results portrayed an encouraging trend of growing funded plus non-funded income, which is likely to continue in second quarter as both interbank lending rate, trade and remittance business remained on the higher side, said Mustufa Bilwani, an analyst at JS Global Research. For the second quarter, we expect more of the same to continue with interest income to remain buoyant more so as banks build up their books on commodity financing, he anticipated. National Bank of Pakistan, countrys largest commercial bank in the public sector, recorded an increase of 29 per cent in its earnings in the previous quarter while the growth of UBL rose to 17 per cent. ABL, MCB and HBL reported 7 per cent, 4 per cent and 1 per cent boost in their earnings during the quarter under review, said the analyst, citing data from banks balance sheets. Further, an important takeaway from the results included marked improvement amid mid cap banks results (BAFL, AKBL, BAHL, MEBL), which led to the big-5s share in profit to drop 5.7 percentage points to 77.4 per cent during 1QCY11, according to the analyst. He further said that higher average of 6-month Kibor at 140bps YoY, leading to strong spreads of 7.56 per cent remained the prime driver for rising interest income augmented by 20 per cent YoY to Rs73.6 billion during the first quarter. The loan repricing impact following tightening of the policy rate by the central bank (150bps to 14pc in 2H2010) has begun to surface. The inter-bank lending rate averaged at 13.75 per cent in 1Q up140bps from 1Q2010. Amongst the sample, mid-tier banks posted the largest rise in their interest income (BAFL 49pc, AKBL 48pc, BAHL 41pc), with MCB (25pc) and HBL (23pc) triggering the pack amongst the big-5, Bilwani said. NPL pressure has somewhat re-emerged since 3Q of last year, with the affect evident in the provision expense in 1Q2011 up 21 per cent YoY to Rs13.0 billion. Out of the 21 banks, 13 reported a rise in loan losses with BAHL and BAFL reporting the largest growth. As far as the big-5 banks are concerned, an average 10 per cent increase in provisioning expense was witnessed with HBL (50pc YoY) and UBL (27pc YoY) reporting the largest jump on build up of new NPLs, he revealed. Rising trade and remittance business boosted fee income of the listed banks by 4 per cent YoY to Rs10.2 billion, with BAFL (38pc), MEBL (21pc) and MCB (17pc) outperforming others. This along with higher 'other income led non funded income to increase by 9 per cent to Rs20.9 billion. Interestingly, gains made on trading of securities declined by 18pc YoY particularly because of the laggard KSE performance in 1Q2011, down 2 per cent versus a rise of 8.4 per cent in 1Q2010, according to the analyst. In line with rising inflation and expansion/investment into infrastructure by some of the banks, administrative costs for the banks ascended by a cumulative 16 per cent YoY to Rs42.6 billion, he said.