LAHORE - Pakistan banking sector profitability declined by 3 percent annually to Rs39b mainly on account of increased expenses incurred by big banks on the back of pension and compliance cost.

According to the data, net Interest Income (NII) of the banks improved by 8 percent to Rs124b in 2Q2018, led by higher interest rates and improved deposit mix. SBP had raised policy rate which will continue to support NII going ahead.

Mid tier banks remained outperformers as they posted above average NII growth during the quarter. Amongst large banks, MCB Bank (MCB) and National Bank (NBP) posted NII growth of 13 percent.

Total provisioning expense of sector was up by 5 percent as banks continued to see major NPL recoveries as bank booked provision reversals. United Bank (UBL) and National Bank (NBP) continued to book higher provisions charge against NPLs as they booked provision expense of Rs2.3b & Rs2.6b respectively.

Non-markup expense of the sector was up 14 percent to Rs102b as big banks like UBL and Habib Bank (HBL) registered higher cost amid pension charges and compliance cost. UBL booked additional pension charge of Rs2b during 2Q2018, whereas HBL increased compliance cost on the back of ongoing concerns on its international operations. This restricted bottom-line growth of the sector.

Along with higher non-markup expense, non-markup income of the sector was down by 5 percent YoY to Rs48b driven by lower capital gains registered by the banks on account of lower gains on equities and Pakistan Investment Bonds (PIBs).

During the period under review, effective tax rate of the sector also declined to 41 percent in 2Q2018 as compared to 44 percent in 2Q2017 as banks booked super taxation on the basis of 6M2018 profitability compared to full year super tax charged during same period last year after change in tax laws.