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Banks' profits triple from capital gains, dividends

KARACHI (November 11 2003): The banks listed at Karachi Stock Exchange (KSE) posted a tremendous growth during nine months and the profits witnessed over 200 percent improvement on back of higher returns from dividends and capital gains.

Banks in Pakistan have been posting extraordinary profit growth since 2000. Recently, the banks showed excellent earnings in first half of 2003.

This trend of rising profitability seems to have continued in the third quarter of 2003, too.

Following other players in the banking sector, private banks have also earned exceptionally high profits in first nine months (Jan-Sep) of 2003.

There are currently 14 private banks in Pakistan, with only one unlisted (Bank Alfalah). Profit after tax of private banks has reached Rs 7.6 billion in nine months of 2003.

This figure indicates an increase of Rs 5.1 billion, or 203 percent, against the figure of Rs 2.5 billion in corresponding period of 2002, while the pre-tax earnings reached Rs 12 billion from Rs 4.7 billion showing a jump of 155 percent, a report of Investcapital Securities prepared by Kashif Atrani said.

In the profitability contest, Bank Alfalah topped the chart, which has recorded Rs 2 billion after-tax earnings, while second was Faysal with Rs 1.96 billion after-tax profit, and Askari was on third rung of the ladder whose profit totalled at Rs 0.8 billion.

As far as incremental earning is concerned, profits of Bank Alfalah and Faysal increased the most, with growth of Rs 1.7 billion and Rs 1.5 billion, respectively. Bank Al-Habib was third with an increase in earnings of Rs 0.4 billion.

In 3Q2003 (July-September 2003), profits of sample private banks surged by 277 percent or Rs 2.4 billion to reach Rs 3.3 billion in 3Q2003 from Rs 0.9 billion in 3Q2002.

Net interest income of private banks reached Rs 10.8 billion in January-September, 2003 as compared to Rs 6.3 billion last year.

Interest income of banks increased by Rs 820 million, while banks' interest expense on deposits reduced by Rs 3.7 billion.

This signals that in lowering interest rate environment banks are able to witness surge in net interest income on the back of increased volume and banks' ability to pass on burden of decline in interest rates to their depositors.

Non-interest income of sampled banks increased to Rs 10.6 billion in Jan-Sep 2003 as compared to Rs 4.6 billion last year.

Main contribution towards this increase came from capital gains on investments. 'Other income', a huge portion of which is capital gains, reached Rs 5.7 billion in Jan-Sep 2003–a surge of Rs 4.8 billion from last year.

People nowadays argue that without capital gains, banks could have faced lot of difficulties.

But this belief is not correct. Analysis shows that though capital gains on investments are contributing substantially towards banks' earnings, their exclusion would still result in extraordinary profit growth.

Excluding capital gains, after-tax profits of private banks still show growth of 144 percent in 9 months of 2003, while the pre-tax earnings show growth of 65 percent.

Non-interest expense also increased in Jan-Sep 2003 and reached Rs 9.4 billion, an increase of Rs 3.2 billion from last year, driven by higher administrative expenses.

Benefits of lower tax rates applicable on banks also became visible in Jan-Sep 2003 when effective tax rate declined from 46 percent in 2002 to 36 percent this year.

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