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Pakistan Banks: 1Q2019 Banking Sector profits up by 5% YoY

(PDF attached)

(May 8, 2019)

 

• During 1Q2019, Pakistan Banking Sector profitability rose to Rs32.9bn, up by 5% YoY. The increase in profitability is primarily on the back of 28% YoY increase in net interest income. However 6% YoY decline in non-interest income coupled with additional impact of super tax in 1Q2019 (on 2017 results), resulted in nominal growth of the sector. For our analysis, we have taken results of all listed banks that have announced their 1Q2019 financial results so far (excluding NBP, BOP, JSBL, and  BOK that have not yet announced their 1Q2019 results).
• Net Interest Income (NII) of the banks improved by 28% YoY to Rs115bn in 1Q2019 as a result of a lagged impact of 425bps hike in policy rate during 2018 and 25bps in 1Q2019. Similarly, on a sequential basis, NII is up 17% QoQ as the lagged impact of asset re-pricing kicked in.
• Comparing the big-4 (MCB, HBL, UBL, ABL profits up 7% YoY) vs. our covered mid tier banks (MEBL, BAHL, BAFL, AKBL profits up 15%), we see that the latter have outperformed their larger peers due to better sensitivity to interest rates as well as absence of significant provision charge during the outgoing quarter.
• Non Interest income down by 6% YoY and 2% QoQ to Rs35bn mainly due to limited growth in fee commission income.
• Sequentially, Non interest expense up by 12% YoY primarily driven by growth recorded in operating expense. HBL continue to record expense on account of business transformation and cost relating to New York operations .
• Banking sector recorded net provision of Rs1bn in 1Q2019 compared to net reversal of Rs64mn in 1Q2018. During the quarter highest provision was booked by UBL of Rs883mn followed by BAHL of Rs725mn while highest reversal in provisioning  was recorded by SNBL of Rs577mn.
• During the 1Q2019, pretax earnings of banks came in at Rs68bn, up 37% YoY. However, net earnings growth was restricted to just 5% due to higher effective tax rate of 52% compared to 37% in same period last year. To note, the govt. in its last economic reforms package imposed super tax on banks for the year 2017 to 2020, due to which banks have recorded additional super tax (2017 annual earnings) in their 1Q2019 accounts. 
• We maintain our ‘Overweight’ stance on banking Sector as we expect net interest income to expand further due to the lagged impact of policy rate hikes. We anticipate SBP to increase policy rates by further 125bps from 10.75% to 12% during 2019.