Banks: Back in the limelight

January 13, 2022 (MLN): Last year, Pakistan’s banking sector did not perform well despite stellar balance sheet growth, as foreigners sold around $167mn worth of shares in CY21 against $168mn in CY20 on account of PSX’s reclassification to frontier from emerging market status.

However, CY22 seems to be a better year for the banking sector as, several factors are turning in favor of banks such as likely monetary tightening by SBP, incumbent government’s focus on documentation of economy and digitization, and IMF’s push on increasing domestic savings to GDP.

Furthermore, COVID related asset quality risks have subsided to a large extent, deposit growth is in high double digits, margin expansion is on the cards, capital adequacy is well in excess of requirement, dividend payouts have been staggering, and MSCI related selling pressure is also behind us. These developments are likely to bring the banking sector back in the limelight.

According to the report by Insight Securities, sector’s earnings growth remained at 8% during CY21, primarily attributable to lower interest rates due to COVID related stimulus, resulting in drop in NII by 5%. Although, this was off-set by various factors such as higher non-funded income and lower provisioning compared to last year.

Sector’s deposits have grown by 17.3% to reach Rs20.9 trillion in CY21, which was higher than the last 10-year average deposit growth rate of 13% led by strong M2 growth and higher remittances. In CY22, the deposit growth rate momentum likely to continue which will drive asset growth and thus higher profitability.

Syed Noman Ahmed analyst at insight Securities said “deposit growth would stay 15% in CY22. However, sector could witness a slight shift toward high-cost deposits due to attractive rates, even though average current account mix is likely to remain over 40-42%.”

Asset quality of the banking sector seems impressive after aggressive provisioning booked in CY20. As a result, average Non-Performing Loans (NPL) coverage ratio improved from 103% to 111%. Likewise, infection ratio has also improved by 60bps to stand at 5.2%. With this improved asset quality & NPL provisioning, the provisions to remain on lower side in CY22 as well, despite interest rate tightening, he added.

Moreover, due to lower advances to deposit ratio (ADR), capital adequacy of the banking sector has been sufficient against the regulatory requirement, and it is likely to remain subdued given monetary tightening.

Therefore, banks will maintain healthy payouts. However, likely implementation of IFRS-9 would negatively affect the equity to some extent.

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