KARACHI (November 18 2002) : The profits of commercial banks listed at the Karachi Stock Exchange (KSE) nearly doubled in the third quarter ended Sept 30, 2002, despite the fact that interest rates lowered by a substantial amount.
Iffat Zehra Mankani, head of research at IP Securities, said that banking system of the country has been propitious in the sense that the government had designed a prompt corrective action frame work with an objective of having strong banks with improved capital adequacy, asset quality, efficiency and profitability. This phase of restructuring is being carried on for the last five years with some of the impacts already realised while some are under way.
In line with the objective of SBP to have sturdy banks, a number of steps have been taken. These include the de-assistance from issuing more commercial banking licences realising that the country is 'over-banked' on the one hand to raising the capital requirements of the existing banks from January 1, 2002 to Rs 750 million and Rs 1 billion by December end.
Moreover, in response to the easing of the monetary policy that started in July 2001, the banks are being forced to cut their lending rates.
According to SBP's data, the weighted average lending rates of the overall banking sector has been lowered from 12.08 percent in July 2002 to 11.89 percent in September 2002. The probable reason of this decline is the load of surplus money available with banks, coupled with the sluggish credit demand.
The falling yield on government securities, along with the decline in lending rates, is shrinking the spreads of the commercial banks.
However, in the times of spreads' shrink, the profitability of commercial banks is showing improved growth, one of its reasons being the larger inflows of home remittances. These are assisted by the concentration of the nationalised banks on reducing their overhead expenses and continual lowering of tax rates on banks by the government. It is expected that tax rates on banks will be lowered to 35 percent by the FY07.
The third quarter of the current fiscal year has posted decent growth in profitability of the commercial banks listed at KSE.
Iffat said that analysis of the financial statement of 15 commercial banks shows a commendable growth of 98 percent in their after-tax profits for the period July-Sep, 2002 against the same period last year.
These 15 commercial banks posted profit after tax of around Rs 1.6 billion in 3Q FY02 as compared to around Rs 832 million same period last year while their pre-tax profits jumped to Rs 3.4 billion in 3Q-FY02 from Rs 2.1 billion in 3Q- FY01, showing a growth of 64 percent.
However, if MCB and NBP are kept aside, the growth in the net earnings of the privately listed banks is 21 percent, indicating the marvellous growth rate achieved by the two in the current year. Among the private sector banks Askari and Faysal were the major contributors to the growth of the sector.
The overall increase in profitability, in spite of reduced interest income, higher profits earned through non-mark-up interest income directs a positive outlook for the sector.
Though it is a fact that most of the banking stocks are low dividend yielding securities, MCB by announcing an interim dividend of Rs 2.5 during the third quarter in addition to the 10 percent bonus already announced by it during the year, has come up as a positive surprise for the investors. Furthermore, most of the sector stocks have performed fairly well depicting capital gains for their investors and adding value to their investments.