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Pakistan Banks: Profits up 56% YoY in 3Q2020; Higher NII more than offsets increase in provisioning

• We present review of Pak Banks’ profitability for 3Q2020, which includes a sample of 18 listed banks (out of a total listed 20 banks), representing 99% of the banking sector’s capitalization at the PSX.
• The sector’s profits have jumped by 56% YoY in 3Q2020 to reach Rs71bn on the back of higher (1) Net Interest Income (NII) by 33% YoY and (2) Non Interest Income by 25% YoY. NII was led by greater impact of repricing of Liabilities vis-à-vis Assets amidst declining interest rates, while Non Interest Income was fueled by Capital Gains on government securities. The provisioning expense increased by 119% YoY during the quarter, where majority of the banks booked General Provisions in light of COVID-19. This is a precautionary measure adopted by banks even if they feel that their respective loan book is not under particular duress. To give perspective, of the sample, the cumulative absolute increase in NII and Non-Interest Income are Rs52bn and Rs12bn (total Rs64bn) respectively, whereas Provisions and Operating Costs are higher by Rs15bn and Rs6bn (total Rs21bn), respectively.
• The growth in profitability was limited to 2% QoQ in spite of a decline in Provisioning expense by 35% QoQ, as (1) NII declined by 2% QoQ owing to downward re-pricing of Assets (liabilities were largely repriced in the earlier quarter) and (2) Non Interest Income declined by 8% QoQ due to lower Capital Gains.
• In absolute terms, the highest quarterly profit has been earned by NBP (Rs11.0bn) followed by HBL (Rs10.1bn), MCB (Rs10.0bn) and MEBL (Rs6.4bn). In terms of profit growth the highest increases were seen in BOK (+348%), SNBL (+189%), AKBL (+159%), BAHL (+135%) and NBP (+110%) on YoY basis.
• NII of the Pakistan banks in 3Q2020 was driven by lower Interest Expense (-36% YoY) as re-pricing of the interest rate cuts took immediate effect on the liabilities front.
• In comparison, Interest Earned declined by just 13% YoY due to delayed impact of interest rate cuts on the Asset side.
• In terms of NII, the highest increases were recorded by HMB (+104% YoY), NBP (+71% YoY), BAHL (+62% YoY), AKBL (+50% YoY) and BOK (+46% YoY).
• Interest Expense declined by 21% QoQ due to repricing of liabilities, whereas large proportion of PIBs bought in 1H2020 consisted of floaters, which were re-priced in 3Q2020. This resulted in Interest Earned to decline by 12% QoQ.
• Out of the sample banks, only BAHL managed to depict an increase in Interest Earned by 16% YoY for the quarter while the rest saw a decline.
• On the other hand, top banks with the highest drop in Interest Expense were ABL (-50% YoY), UBL (-48%) and MCB (-47%). 
• Non-Interest Income has increased by 25% YoY driven by Capital gains which grew exponentially due to falling interest rates.
• On a QoQ basis, Capital Gains saw a decline of 28% QoQ but this was somewhat offset by the 17% QoQ growth in Fee Income due to resumption in branch operations following the lifting of COVID-19 related lockdowns.
• Operating Expenses grew by just 5% YoY with least growth in costs were recorded by BOK (-8%), HBL (-6%) and UBL (-1%).
• The Cost to Income was at 46% for 3Q2020 compared to 57% in 3Q2019 and 43% in 2Q2020.
• The improvement was a function of both higher income along with a limited increase in Operating Expenses.

The lowest Cost to Income were booked by SCBPL (34%), HMB (34%), MCB (36%), NBP (38%) and MEBL (40%).