Banking Sector: Result Review CY15; Bottom line Surge by 16% Y/Y – By HMFS Research
In a year marked with harsh policy measures, multi decade low interest rates, banking sector fared relatively well with profitability witnessing a spike of 16% Y/Y in CY15 (excluding Bank of Punjab, Bankislami and Meezan Bank Ltd). On a sequential basis, earn- ings contracted by 33% Y/Y as banks adopt to low yield environment and forgoing one time gains. Tapering of earnings in 4QCY15 was underpinned by 1) NII income shrinking by 10% Y/Y due to laggard asset re-pricing and lower weighted yield on investments, 2) Sig- nificant blip in equity portfolio impairment, and 3) Non-core income declining by 8% Y/Y owing to low forex trading and portfolio gains. In spite imposition of 0.3% WHT on bank- ing transactions, deposits of the industry grew by a healthy 11.54% Y/Y as advances swell by 7.26% Y/Y. Investments, on the other hand, ratcheted up by an astounding 31.66% Y/ Y, keeping private credit off take limited.
Earnings Drivers in CY15
Braving the storm of policies targeting the sectors margins through out the year, banks through foresight managed to post robust increment of 19% Y/Y in NII by investing in high yielding PIBs/T-bills, and strategic re-profiling of deposit mix. JSBL and BAFL remained at the top witnessing jump of 45% Y/Y and 31% Y/Y in NII;
Playing it safe, banks revved up their provisioning coverage against bad loans along with booking pre-emptive provisioning against some advances, driving net provi- sioning expense to rise by 2.5x Y/Y. With the commodity rout playing havoc with equities prices, ABL, UBL and MCB were the big ticket banks to book substantial impairments on their portfolios (Cumulative: PKR3.4bn);
Non-mark up income continues to lend support to core operations as it recorded a gain of 20% Y/Y with fee based income and dividend income being the main drivers in addition to one off gains on investments. Liquidating its position in government securities, SBL’s non-core income spiked by 3.7x Y/Y followed by 61% Y/Y increase booked by HMB on their PIB portfolio;
Tax incident for the industry blew up by 54% Y/Y with the imposition of one time super tax of 4% on CY14 profits coupled with uniform rate of 35% on all sources of income, taking effective tax rate to 40%. Small tier banks faced the brunt of this harsh measure with SMBL effective tax rate of 67% followed by 47% for SBL;
By: Habib Metropolitan Financial Services Limited