During the third quarter of 2022, banks in Pakistan achieved a remarkable milestone, recording their highest-ever quarterly earnings.
The combined earnings of the top 16 banks reached an impressive Rs. 85 billion, marking a substantial 26% year-over-year (YoY) increase.
According to Ismail Iqbal Securities, robust fees and foreign exchange (FX) income have been key drivers behind the surge in revenue. Additionally, rising interest rates have played a significant role in boosting Net Interest Income (NII) for the banks.
Despite an increase in provisions, particularly for loan portfolios, the impact has been relatively low, and most banks have managed to navigate the challenges posed by the COVID pandemic and fluctuations in interest rates with minimal damage. However, the change in the tax system, which resulted in a higher effective tax rate of 52% compared to 41% during the same period last year, has been a minor drawback.
Quarter over quarter (QoQ), the NII of banks saw a notable 17% increase due to the lag effect of asset repricing. Notable performers among individual banks include SCBL (+42% QoQ), HMB (+35% QoQ), AKBL (+34.9%), MEBL (+32.2%), and BIPL (+25%), while BOP (-9.5%) and NBP (+0.7%) reported relatively lower growth rates.
The Non-Markup income experienced a slight 5% QoQ decrease, primarily due to a marginal dip in fees and FX income. Notwithstanding the expected normalization, FX income remained strong with only a slight 2.7% QoQ decline.
To reach Rs. 15 billion, provisions witnessed a significant 135% QoQ increase. The subjective provision of BAFL and UBL on GOP Eurobonds were major contributors to this rise. Moreover, operating expenses (Opex) jumped by 8.3% QoQ due to strong economic inflationary pressures.
Industry deposits rose by an impressive 15% YoY, and the Advance-to-Deposit Ratio (ADR) increased to 48.6% compared to 47.7% in June and 46.9% in the same period the previous year. Notably, HBL experienced a 10% reduction in deposits QoQ, pushing their ADR above 50%, while UBL raised its deposits by 9.5% QoQ, causing its ADR to drop below 40%, and an increase in ETR (Effective Tax Rate) to 59.5%.
Looking ahead, the report anticipates further improvement in NII as asset repricing from the 125bps increase in July is yet to take full effect. Additionally, provisions on government bonds may rise for some banks if GOP Eurobond prices do not grow in the current quarter, especially with the potential effects of the economic slowdown becoming more apparent in the coming quarters.
The outlook for deposit growth in the December 2022 quarter is projected to be subdued as banks work to meet their ADR requirements, which are based on the last day of the year.