The big five (B5) banks lent almost similar amount to the private sector in 9MCY19, that they did a year ago. The net advances of the B5 banks stood at Rs3.66 trillion at the end of September 2018, which is the same seen in December 2018. Failing to lend more does not mean failing to earn more. The pre tax profits of B5 banks went up by 21 percent year-on-year.

The 9MCY19 profit growth story is in an uncanny contrast to that of CY18, where profit making was tough. Back then, the B5 banks had collectively witnessed a 20 percent growth in advances. Doing some real banking does not guarantee you profit growth every time. Back to today, the asset growth has been steady, without being exemplary – and the B5 banks witnessed the assets grow by a decent 6 percent over December 2018.

The asset composition again shifted heavily in favour of investments as the IDR jumped from 65 percent in December 2018 to 73 percent and the ADR slipped to 47 percent. The entire asset base growth was built on a massive 16 percent increase in the investment portfolio, which was largely skewed towards short term government papers. The interest rates had provided an opportunity to the banks and the banks rode it alright – especially as the economic slowdown was visible, limiting genuine private sector credit appetite.

Big Five banks  (Consolidated P&L)
Rs (mn)1HCY191HCY18chg
Markup Earned647,440418,31555%
Markup Expensed402,397215,22287%
Net Markup Income245,043203,09321%
Non Mark-up / Interest Income78,03979,258-2%
Total income323,082282,35114%
Non Mark-up / Interest Expenses186,630166,63012%
Extraordinary item08,747
Profit Before Taxation117,83597,01721%
Profit After Taxation65,25160,0989%
Source: Companies' accounts

On the liabilities front, the deposit growth was rather muted at 3 percent over December 2018. This is understandable, given the LSM contraction and overall economic slowdown. That said, almost all big banks, witnessed improvement in the deposit quality, reducing the average cost of deposits, with improved CASA ratio, which is one of the reason why the NIM growth has helped keep the momentum till the bottomline, despite lower non-core income and significantly higher provisioning expenses.

The decline in capital gains and dividend income resulted in a year-on-year reduction in non markup income. That said, increased contribution from currency gains and fee, commission income almost balanced out the slowdown on other two key fronts.

The major blow was dealt by manifolds increase in provisioning charges for the year – which almost doubled year-on-year. The provisioning charges were well spread across advances and investments – with the likes of UBL and NBP contributing the highest. The infection ratio inched up, without being threatening – and continues to be adequately provided for.

The slowdown in economic activity could lead to lower advances demand in CY19. Strictly in terms of profitability, the analyst community expects NIMs to expand due to lagged impact of policy rate hike, and lower provision charges. The banking sector spreads are at a multiyear high, and should more than make up for any potential loss that may come in shape of higher NPLs, as the LSM performance is far from encouraging.

The interest rate cycle seems to have peaked, and the reversal appears around the corner. It remains to be seen, if the asset mix takes another shift from being investment heavy to one that results in higher lending to the private sector. All said, all top banks are in good health, with the soundness indicators well placed.