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Pakistani banks profits to stay under pressure

Pak bank spreads hit 11-year low on easy money policy.

Pakistani banks' spreads hit an eleven-year low on the back of an easy money policy and low interest rates, but prospects for the sector in 2016 are predicted to be better.
The banking spread tumbled to an 11-year low of 5.88 per cent in nine months to October, calendar year-2015 - the period for which all commercial bank accounts are unveiled by the State Bank of Pakistan (SBP). Just a few years ago, the average banking spread was 7.7 per cent - the highest at least in Asia. The falling spread has reduced the corporate and banking profits because the banks had a higher interest rates while their own income was moving downwards due to lowering of the benchmark discount rate and interest rate.
But then who is the beneficiary of the declining spread - borrowers or lenders? Not the borrowers from the private sector business and industry for which the credit has largely failed to take off. The easy money policy of the SBP to slash the benchmark discount rate to decade-long lows was the reason for doing so.
It means that the SBP's mission has failed. The key reason: the ongoing energy crisis, which has shut down the industry for a quarter of the time. The energy crisis has eaten up more than two per cent of the annual GDP, for several years, officials admit.
The second reason is the slowdown in the European demand for Pakistani products. The demand for Pakistani products worsened by the latest oil-led crisis in the western, EU and the Middle East markets. Pakistan's overall exports stagnate at $24 billion annually for the last three years.
The government borrowing from the commercial banks is swelling, as its own budget deficit sees no end in sight. This boom has assured the commercial banks a sovereign guarantee for repayment of the borrowed amount and better interest rates available from the government.
Part of the business gloom is expected to end when the full-year banking results will be reported by the SBP in the coming days.
Credit, in fact, rose 37 per cent to Rs212.34 billion by December 25 in CY-15, compared to Rs155.8 billion in the like period of CY-2014, SBP said in a report.
Financial analysts attribute the private sector credit off-take to "lower interest rates and political stability helped improved business activities." The central bank had forecasted that the monetary easing, which is leading to declining interest rates, and "marginal improvement in he energy supplies will improve the demand for loans."
It also said the government borrowing for budgetary support from the SBP will decelerate. The federal government borrowed Rs654 billion from the commercial banks in CY-15. It was Rs641 billion in CY-14.
The effects of easy monetary policy and lower interest rates are now seem to be working well to achieve its actual goal: Cheap money for business growth. The SBP's policy has brought down the benchmark interest rate by a cumulative 3.5 per cent to a "multi-decade low of six percent during the seven monetary policy decisions announced from November 2014 to November 2015.
Banks also reported that during the nine month period - January to September CY-15, their accumulated profits rose to Rs148 billion - up from Rs115 billion in the like period of CY-14.
Sakib Sherani, chief executive at Macroeconomic Insights and formerly the chief economist of the Ministry of Finance, Government of Pakistan, said the banks have done well over the past few years in terms of profitability on account of heavy borrowing by the government.
"This has been a risk-free lending, but at a relatively higher interest rate than what risk-free lending should be at. To a partial extent, this has compensated for the crowding out of the private sector from the credit markets. The robust profits of Islamic banking also helped boosting the overall sector's earnings," he said.
How will banks fair in 2016? "The banking sector's profitability will see some pressures, but the overall conditions are unlikely to be too different or difficult for the banks in 2016," Shirani said.
Ministry of Finance Senior officials said the share of the government bonds in the total banking assets continued to rise. The total assets of the banks rose to Rs13.518 trillion in nine months to September CY-15, from Rs11.129 trillion in the like period of CY-14. The banks' investment in the government bonds, securities and sukuk increased 30 per cent at end-November, CY-15, over the same period in CY-14. Banks invested Rs5.841 trillion in the government securities in eleven months to November, CY-15, up from Rs4.474 trillion in the like period of CY-14.
Several analysts are of the opinion that the ongoing monetary easing will make its real impact in CY-16. That will unveil the benefit of the locked-in yields in the long-term papers. It will partially vanish off.
What big challenge the commercial banks will face in CY-16? Analyst Rohit Kumar of Taurus Securities said: "It is the huge amount of Pakistan Investment Bonds (PIBs), which are to mature in the second half of CY-16. The government is likely to roll-over these PIBs, but the current yields, will come to be much lower."
Kumar also said that earnings of the banking sector in CY-16 are likely to decline by an average four to five per cent, chiefly due to the absence of capital gains and contracting net interest margins."
So that is the projection for banks: Good earnings but not too extraordinary.
Views expressed by the author are his own and do not reflect the newspaper's policy.