LAHORE - Effects of declining yields government papers as well as on advances and rising deposit costs have resulted into lowest banking spreads, since June 2005.
Statistics revealed that in 1H2013, banking spreads averaged 6.25 per cent versus 7.23 per cent in 1H2012. Resultantly, net interest income (NII) of Big 5 banks declined by 6.9 per cent YoY to reach Rs92.6 billion in the half, capital market experts said and added that profitability of big banks eroded by 12.1 per cent YoY to reach Rs41.1 billion. Last year in 2012, profits of these banks increased by 6 per cent to Rs88.3 billion.
“Continuous monetary easing and tightening requirement of minimum return of 6 per cent on average saving deposits affected banking margins and, resultantly, their profits,” observed Zeshan Afzal, a banking sector analyst at Topline Global Securities. He said that sample includes large commercial banks, ABL, HBL, MCB, NBP & UBL, with extensive branch network, covering 72 per cent of banking market capitalization and 53 per cent of industry deposit base.
He said that though earnings declined in the half, picture turned favorable in 2Q2013 despite low banking spreads. During the outgoing quarter, large banks profits increased by 4 per cent QoQ to Rs21 billion. 
Going forward, experts attach high probability to monetary tightening due to expected hike in inflation that carries potential to revive banking spreads and profitability. Expected economic revival may also help credit growth that will further support earnings.
“Down the line, higher provisions against diminution in investments, rising non-markup expenses (up 7.4 per cent to Rs62.1 billion) and low dividend income (down 40 per cent to 4.3 billion) dampened the profitability in 1H2013. However, better gains from booming capital markets provided some support to the fall and resulted in 50 per cent YoY surge in gain on sale of securities to Rs7.6 billion in 1H2013,” observed Zeshan Afzal.
He observed that though the variables painted gloomy picture in the first half, situation turned positive in 2Q2013. During this quarter, profits of big banks increased 4.1 per cent QoQ to Rs21 billion despite NBP’s major book cleaning. In 2Q2013, NBP provided Rs6.0 billion against NPLs vs. Rs577mn in 1Q2013, he stated in a report.
On a sequential basis, NII of these banks increased by 5.1 per cent to Rs47.4 billion while non-interest income rose by 23.8 per cent to Rs21.4 billion in 2Q2013. 127 per cent higher capital gains to Rs5.3 billion caused the improvement in non-interest income. However, 210 per cent increase in provision to Rs6.6 billion diluted the impact partially.
Though cumulative profits of these banks fell by 12 per cent during 1H2013, interestingly, MCB reported increase of 6.1 per cent in its bottom line. We attribute capital gains, provisioning reversals and controlled non-markup expense to the growth. 
Similarly, on QoQ basis, profits of MCB, HBL and UBL grew but decline in NBP and ABL’s profits contained the profitability growth to 4.1 per cent QoQ.

Large banks’ 1H2013 profitability (Rs m)

    2Q2013    1H2013

Banks    PAT    QoQ    YoY    PAT    YoY
ABL    2,701    -4.5%    -25.2%    5,527    -16.9%
HBL    4,859    6.2%    -9.1%    9,436    -14.1%
MCB    6,119    6.1%    50.5%    11,887    6.1%
NBP    2,989    -1.4%    -47.0%    6,021    -30.9%
UBL    4,314    9.1%    -1.8%    8,268    -10.7%
Big 5    20,983    4.1%    -9.0%    41,139    -12.1%