ISLAMABAD, 24 March 2008 — Despite a slowdown in the economy, bank profits are rising again albeit slowly. The profits rose 4.7 percent in 2007, over and above the previous year. This is indicated in an analysis of banking operations for the calendar year 2007.

The analysis is based on the operations of 17 banks listed on the bourses. These banks own 87 percent of the assets of the total banking sector. The assets, during the year, grew to Rs. 73 billion - up from Rs. 69.8 billion in 2006.

Higher provisioning by banks is the key element that kept profitability low. This one-time provisioning - or adjusting the bad loans - followed a directive of the state Bank of Pakistan (SBP), the central bank, which withdrew the arrangement of forced sales value of collateral on non-performing loans (NPLs).

A report by the First Capital Equities Limited (FCEL), analyzing the banking sector operations in 2007 says, “On the basis of bank deposits and advances, these 17 banks represent 86 percent of the overall banking sector of Pakistan.” The report excludes eight banks which had not, at the time of the analysis, declared their operational results. These banks are: ABN Amro, Standard Chartered, Habib Metropolitan, Bank Islami, JS Bank, Bank of Khyber, Crescent Commercial and KASB Bank.

The seventeen banks made a Rs. 25 bn (b) provision in the last quarter of 2007 alone. The full year provisioning in 2007 was Rs. 34.5 billion - a whooping 166 percent higher as compared to 2006.

Another category that eroded the profitability was a 17 percent escalation in administrative expenses to Rs. 86 billion.

But the net interest income (NII) recorded a 13 percent growth to Rs. 159 bn, in spite of the political and industry-related slowdown of the economy. The reduced growth of NII is attributable to advances recording only a 10 percent increase to Rs. 242 billion. The interest-expense to interest-income ratio increased to 47 percent, compared to 41 percent in 2006.

The mark-up expenses rose 39 percent to Rs. 140 billion. The gross mark up income rose 24 percent to Rs. 299 bn.

The banks’ reduced spread also adversely affected NII. The spread in 2007 averaged 7.3 percent — indicating a decline of 10 basis points compared to 2006 -- but comparatively still quite high in this region. The advances and credit to the private business and industry slowed in 2007. However, a high spread helped the bank raise their profits.

Slow credit flow to the private business followed SPB’s two-year long tight monetary policy (TMP), which was targeting spiraling inflation. TMP induced banks to buy more Treasury Bills, instead of expanding credit to the private business.

High capital gains on investment and fee income led a rise in the non-interest income. The income from these two categories rose 43 percent to Rs. 59 billion, compared to 2006.

The big banks continue to perform better, and undertake increasing business in spite of the several new banks joining the financial sector. The Big Five Banks (BFF) National, Habib, United, MCBank, and Allied, are performing still better. Their collective profits were 80 percent of the entire banking sector in 2007.

Among the Big Five the largely state-managed National Bank, stashed up the highest profit in the industry. Its profit was Rs. 19.40 billion --up 12.5 percent compared to 2006.

Muslim Commercial (MCBank) closely followed the National with a Rs. 15.266 billion profit. Its profit was up 25.7 percent compared to 2006.

Habib and United profit, on the other hand, declined. Habib’s, which is undergoing restructuring, saw its profit decline 14.6 percent. United’s profit declined 11.2 percent compared to 2006. But, Allied maintained its profit.

As competition to attract deposits is heating banks are slowly improving their rates for depositors.

As a result of this and other elements, the average banking spread eased 39 basis points to 7.07 percent in January 2008, compared to 7.46 percent in the like period of 2007, SPB reports.

SBP, in its monetary policy for January-June, 2008 has raised its discount rate (DR) by 50 basis points to 10.5 percent, The average lending rate had also risen by 8 basis points to 11.26 percent from 11.18 percent.

The deposit rate offered by banks have risen by 47 basis points from 3.72 percent in January, 2007 to 4.19 percent. It was 6.5 percent in 2000. But 25 million depositors in Pakistan consider it to be too little in the face of nearly 9 percent annual inflation. At this average profit rate, there still is much to be desired as far as deposit mobilization and hoped-for increase in domestic savings is concerned.

The banks, both Pakistani and foreign-based, have enjoyed a high degree of profits over the past several years. The banks’ profits rose from just Rs. 7.0 bn (b) in 2000 to Rs. 123 billion in 2006-a record.

The banks and the financial sector analysts are projecting “higher profitability” in 2008. This projection is based on the fact that SPB has raised its discount rate in which the banks can invest to earn a good return. The rising lending rates will also contribute considerably to ensuring an increased profitability. This will be a continuation of four years of high banking growth and profits.