ISLAMABAD, 20 September 2004 — Banks operating in Pakistan have announced a record Net Interest Income as credit volume to private business continues to expand. Banking industry analysts foresee this trend in Net Interest Income to continue. But, banks’ overall investment in the stock market will be restrained resulting in reduced yields. This is because the central bank has restricted their investment in stocks to 20 percent of their capital investment.
Most banks performed quite well. However, only three of them saw their NII come down in the first half of 2004, compared to the same period of 2003. The overall banking industry NII was up 4.9 percent during the first half of calendar 2004 — January-June, 2004. The real picture is much better, because aside from three banks, NII before provisioning rose by 32.8 percent. The three banks that spoiled the overall average were: UK-based Standard Chartered Bank (SCB), the oldest foreign bank operating in Pakistan. It saw its NII decline by Rs. 232 million. The NII of the state-owned National Bank of Pakistan, the country’s biggest bank, was down Rs. 112 million and that of Muslim Commercial Bank (MCB), one of the biggest private bank, was down Rs.835 million. NII increase after provisioning works out to 13.2 percent. The Non-Interest Earnings, during the period, were also higher than 2002 but these had grown faster in 2003, due to bigger capital gains. However, the smaller capital gains, as of now, are being substituted by banks’ NII growth, better dividends and fee-based services.
Overall, the NIE drop was minus 7.4 percent as compared to the same period of 2003. Four banks recorded a phenomenal growth in NII during the first half of 2004. They were led by small Bolan Bank, based in business-poor Balochistan province. It recorded a profit after tax (PAT) of 2,109 percent, at Rs. 55 million, up from Rs. 2.0 million in the like period of 2003. It was followed by, a new merged bank, KASB Bank, operated by a company that is well established in the stock market. It recorded a growth of 244 percent. Its profit rose to Rs. 67 million, up from Rs. 19 million in the like period of 2003.
Askari Bank, that was started by war veterans and serving army personnel but has expanded its business with civilians, was third with a 124 percent growth. Its profit rose to Rs. 1,179 million from Rs. 526 million in the like period of 2003. A new small bank, born with a merger of three banks and financial institutions — NIB Bank-NDLC-IFIC Bank, witnessed a 108 percent growth, at Rs. 77 million, up, from Rs. 37 million in the like period of 2003. NII growth for other banks ranged from 13 to 50 percent. Two banks had a minus NII.
But, as the economy looks up, the bank business is booming according to the volumes and numbers for the first two months — July and August that are generally slow — of the current fiscal 2005. State Bank of Pakistan the central bank, reports all banks’ advances grew by Rs. 40.4 billion. Deposits rose by Rs. 67 billion and investments by Rs. 64.3 billion.
Looking at a longer span of eight months — January-August of calendar 2004, SBP reports, banks advanced a total of Rs. 144.4 billion — up nearly 3.5 times from Rs. 42.8 billion in the like period of calendar 2003. The key borrowers were the private business and consumers that are in the market for consumer durables ranging from autos to TV sets, air conditioners and refrigerators. Housing loans are moving up - fast - although such money has still to touch the huge, potential middle and lower middle class segment.
State-owned enterprises and institutions are borrowing less than ever before, because some of them are doing financially fine, while a large number of them are under official wraps.
September, each year, marks the beginning of big borrowing by private business and industry. Now has started the season to buy raw cotton and sugarcane from the growers and ginners. Textile spinners and sugar mills are now using the bank facilities of running finance and doing short term borrowing to buy these commodities. The bank advances are rising fast, already.
In spite of a ridiculously low profit rates allowed to 28.8 million savers, surprisingly, deposits, are rising, too. January-August this year, have seen deposits rise by Rs. 263.2 billion - or 14.65 percent. It favorably compares with an increase of Rs. 204.7 billion — or 13.55 percent — in the like period of 2003. The deposit growth is important as inflation is rising.
The benchmark Consumer Price Index (CPI) rose 9.25 percent year-on-year in August, only a shade lower than 9.33 percent in July, that was the highest rise in the last six years. Food prices in August alone rose 14.35 percent — that should worry the new government. Independent economists project the overall inflation rate of 6.5 percent during the current fiscal 2005, rather than the official forecast of 5.0 percent. Both the economists and the government, however, can prove to be wrong — and inflation may have shot up higher — when the fiscal closes June 30, 2005.
The rising inflation in recent months, provides a negative return. This is because the weighted average profit rates on deposits further declined from an annual 1.12 percent in January to 1.20 percent at end-July, 2004. The lending rates, at the same time, declined from 5.04 at end-January to 4.63 percent at end-July. The difference between deposit and lending rates, in the same period, declined from 392 to 343 basis points (bps).
SBP data show, the banks’ weighted average lending rates declined to 4.63 percent at end-July, on fresh advances, that is 0.41 basis points (bps) from 5.04 percent at end-January this year. But, the rates now are looking up. To the misfortune of depositors, the banks justify low profit rates given to savers.
Shaukat Tarin, chairman of the privately-owned Union Bank, and president of Pakistan Banks Association, says: “We are fully cognizant of the current interest rate structure ... depositors in general are getting a negative real return.
From a peak of 13 percent in mid-2001, government Treasury Bills (TBs) rates came down to its lowest level of 1.27 percent in August, 2003. It pushed down the lending rates drastically. The bank had no option but to rationalize their deposit rates accordingly.” However TBs rate for the benchmark 6-month paper rose from 2.67 to 3.0 percent this week, signaling that SPB is starting to mount an effort to contain rising inflation.