ISLAMABAD, 26 May 2003 — It may not be an extraordinary performance, but banks in Pakistan may still lap up good, interest-related profits by the time they close their books Dec. 31, 2003.
Larger credit take off by the private sector, which means larger business turnover, though at declining interest rates, likely improvement in Treasury Bill (TB) rates, new fields of business, development of innovative products and lending to several whole fresh sectors will largely enable the banks to maintain a good deal of their profitability. The equity and capital market investment is also a good source of earnings. Now when this is becoming visible on the financial horizon, the earlier cloudy forecasts of the commercial banks to get a considerable beating and face a major reduction in profitability are thinning away.
But, if this process really gets going, the banks may come out leaner, smarter, more efficient, competitive and aggressive marketers at the end of the year. Again, the question is whether the bank managements will really grasp this situation, follow the market, and help business and industry, thereby ensuring a good piece of cake for themselves, or they will waste these opportunities and join the ranks of laggards and losers? Independent reports on the banking industry and analysts confirm that clouds are likely to slowly thin away. This picture is not as bleak as it was thought only a few months back, at the onset of an easy money policy, consciously piloted by the central bank, the State Bank of Pakistan (SBP). The key reason for launch of this SBP policy was to help lift the economy from a prolonged recessionery situation and stagnation caused, both, by domestic and international factors.
This is in sharp contrast to the gloomy profit picture for the banks, which conservative bankers had been painting while opposing the SBP policy of getting the lending rates slashed.
Finance Minister Shaukat Aziz, and SPB Governor Dr. Ishrat Hussain, had vowed to bring the interest rate “down to a single digit,” from the highs of 22 percent only three years ago. Those high rates had stifled business. Working capital to industry and business was hardly to come by. The medium-to-long-term capital was not forthcoming, too, because of huge previous loan defaults that had skyrocketed to a total of Rs.250 billion for all banks, forcing the bankers into their shells, and to stop lending at all. Aziz, Hussian, and the business itself have been clamoring against the banks to bring down their intermediation cost that was more than six percent, for most of the Pakistani commercial banks, both state-owned and private. Foreign based banks operating in Pakistan had a much less intermediation cost. They mostly lent to the big blue chip corporates and dominated the lucrative foreign trade business.
Most of the banks will be in a position to continue to make good of earnings, an analysis of half dozen out of forty-four banks operating in Pakistan indicates. Part of the findings are based on the banks’ business performance during January-March, the first quarter of calendar year 2003. The bank earnings were quite good in this first quarter.
How did it come about? The banks’ deposit base was enlarged by Rs.58 billion during the quarter. The banks that had large investment portfolios booked good capital gains, as a result of lower interest rates. At the same time, the banks further reduced the profit rates allowed to depositors.
The first quarter business of the banks analyzed showed “very good earnings.” One of them, Faysal Bank recorded a 313 percent profit increase. Askari Bank’s after-tax profit was up 74 percent, while Muslim Commercial Bank (MCB) declared a 98 percent growth in its post-tax earnings, compared to the like period of 2002. All the three are privately owned, and are considered leading lights of the banking industry. Their profits jumped up despite lending rates continue declining, and competition growing.
These two trends are most likely to continue for a fairly long-term.
The high cost of bank credit was one of the inhibiting factors — not letting investment and economy to expand. Things now seem to be changing.
However, the fact remains that the banks still have a large amount of unutilized liquidity, although part of it is now being borrowed by the business.
