Pakistani banks report strong 2020 profit growth despite pandemic andrising provisions, says Moody’s Investors Services.
Moody’s in its latest report on Pakistan stated that as of 22 February,three of Pakistan’s large banks had reported their 2020 results, with MCBBank Limited (B3 stable, b31 ), Allied Bank Limited (B3 stable, b3), andHabib Bank Ltd. (B3 stable, caa1) each reporting higher profitability andcapital buffers than in 2019, and robust liquidity.
“The results are credit positive for the banks and reflect containment ofthe pandemic’s adverse effects. However, we expect pressure on 2021profitability amid narrower net interest margins and ongoing asset qualitydeterioration,” it added.
Profitability for MCB in 2020 increased 23 percent to Rs. 29.6 billion,translating to a return on assets (ROA) of 1.6 percent; Allied Bank’sprofitability rose 27 percent to Rs. 18.4 billion for a ROA of 1.2 percent;and Habib Bank’s profitability rose 99 percent to Rs. 30.9 billion for aROA of 0.8 percent.
These results reflect robust net interest income and strong balance-sheetgrowth facilitated by increased deposits and good treasury positioning,despite a cumulative 625-basis-point cut in interest rates since July 2019.A significant increase in gains on securities to Rs. 14 billion from lossesof Rs65 million in 2019 also supported the three banks’ bottom-lineprofitability.
Growth in income more than compensated for MCB’s provisioning chargeincrease to Rs. 7.3 billion from Rs. 2.7 billion in 2019, and Habib Bank’sincrease to Rs. 12.2 billion (including Rs. 6.4 billion of generalprovisions) from Rs. 3.3 billion over the same period. Allied Bank’sprovisioning charge only marginally increased to Rs. 844 million from Rs.547 million, partly reflecting its best-in-class asset quality, withnonperforming loans (NPLs) accounting for 2.8 percent of gross loans. MCBreported an NPL ratio of 10 percent, up from 9.2 percent in 2019, whileHabib Bank’s NPL ratio fell to 6.3 percent from 6.6 percent in 2019.
‘For 2021 we expect profitability to remain at 2020 levels mainly becauseof a squeeze in net interest margins after the interest rate cuts. This wasnot visible during 2020 because Pakistani banks held a high proportion ofPakistani investment bonds (PIBs) purchased in previous years and theycarry high yields that protected margins from the interest rate cut’, itadded.
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However, when these PIBs are repaid, new issuances will carry lower yields(three-year PIB yields fell to 8.2 percent in December 2020 from 14.2percent in August 2019; yields on 12-month treasury bills fell to 7.3percent from 13.1 percent during 2020).
‘We also expect provisioning costs to remain elevated in 2021 because weanticipate that NPLs will increase with the gradual withdrawal ofCOVID-19-related support measures’, Moody’s added.
Pakistani banks have also yet to introduce IFRS9, which requires moreforward-looking risk provisioning; once implemented (likely in 2021,according to the State Bank of Pakistan Circular), this will potentiallylead to higher provisioning requirements that will directly affect banks’capital. All three banks increased their capital buffers in 2020. Thecapital adequacy ratio (CAR) at Habib Bank increased to 17.2 percent from15.4 percent in 2019, while MCB’s CAR rose to 21 percent from 18.9 percentand Allied Bank’s CAR rose to 25.4 percent from 21.8 percent.
Lower dividend payouts (following the State Bank of Pakistan’s request tosuspend dividend payments for two quarters) supported the increased CARs,as did strong profitability and modest increases in the loan book and inrisk-weighted assets. The banks maintain robust liquidity buffers,supported by inflows of deposits and strong remittances.
Core liquidity (cash and interbank balances) accounted for around 9 percentof MCB’s total assets, 10 percent for Allied Bank and 12 percent for HabibBank. In addition, investments (mainly in government bonds) comprised 55percent of MCB’s total assets, 52 percent of Allied Bank’s and 51 percentof Habib Bank’s.
