Low CG and high provisioning to scratch banks’ profitability in 2QCY21

July 26, 2021 (MLN): The financial results of banking sector is expected to announced in the last week of July wherein lower capital gains (CG) and higher provisioning to hit profitability in 2QCY21.

With the loan deferment scheme having expired last month, banks may book relatively higher provisioning as compared to the subdued amounts that were seen last quarter.

According to Taurus Securities, the overall provisions will likely to increase by 1.4x on a sequential basis mainly on account of losses booked in relation to their exposure to a distressed oil marketing company.

Net Interest Income of banks is expected to depict a flattish trend, with asset repricing impact having fully reflected. Healthy volumetric growth in deposits is likely to support the banks’ balance sheets, with deposits posting a staggering 7% QoQ uptick, as per the banking sector preview by Arif Habib Limited (AHL).

Non-Funded income of banks is likely to support earnings with fee income expected to remain healthy this quarter attributable to higher trade volumes and robust economic activity, while banks may also book capital gains on equities as well as fixed income instruments due to expectation of the monetary tightening cycle initiating soon. release in next few days, a report said.

As per estimations made by BMA Capital, it is expected that the profitability of the banking sector will likely to decline by 17% YoY and 15% QoQ to reach Rs36.7bn during 2QCY21. However, the deposit growth continues to remain healthy, up by 15.2% YoY.

on a YoY basis, the slowdown in profitability of the sector on the back of lower interest income, declined by 12% YoY and non-funded income, dropped by 19% YoY, as a result of interest rate cuts and rationalized capital gains respectively.

On a sequential basis, Net Interest Income (NII) of the sector to expand by 4% QoQ due to swelling investment income, which has increased by 27.2% YoY to Rs13.5 trillion.  however, lower NFI plunged by 20% YoY as a result of lower capital gains and greater provisioning charge will likely weigh down on profitability.

With regards to the projections put forwarded in the report, HBL will post earnings per share (EPS) of Rs4.75 in 2QCY21, drop by 37 YoY and 16% QoQ. The decline in earnings is owed to lower non-funded income as a result of decline in capital gains and streamlined fee and forex income. Greater provisioning charge and higher operating expenses are also expected to dent earnings however, lower tax charge ETR of 41% in 1Q will likely provide some respite. Furthermore, weakening PKR in the outgoing quarter, depreciated by 3.19% QoQ is expected to put pressure on forex income as a result of the open USD position.

It is expected that a mild 3.8% increase in admin expenses to Rs25.1bn. Total provisions for the 2QCY21 are expected to clock in at Rs2bn. Along with the result, HBL will likely pay dividend of Rs1.75 per share.

With regards to UBL, the projected EPS would be around Rs4.50, declined by 14% YoY and 26% QoQ. The reduction in earnings despite incline in NII, owed to greater investment income, is expected on the back of lower NFI, higher admin expenses and greater provisioning charge. It is expected that NFI to decline due to milder capital gains worth Rs1.9Bn in 1Q and slight decline in fee income. Given the scenario, it is assumed that bank will likely make a pay-out of Rs3 per share.

The earning per share of MCB would likely clock in at Rs5.68 in 2QCY21, declined by 1%YoY and 4% QoQ. Meanwhile, the mild decline in earnings is also anticipated due to higher provisioning charge (reversals of Rs213mn in the previous quarter) and slight decline in NFI as a result of lower fee income and capital gains. Admin expenses are forecasted to inch up slightly to Rs10.3bn from Rs10.1bn in 1Q. “As for provisioning, we have assumed a charge of PKR 1bn.”, the report noted.

Given this, the bank will likely maintain its dividend pay-out of Rs5 per share this quarter.

With respect to MEBL, it is expected that the bank to report an EPS of Rs3.79 in 2QCY21, witnessing a drop by 13YoY and 12% QoQ. 4.1% acretion on quarterly basis is expected in net spreads however, softer NFI, higher provisioning charge and greater admin expenses are forecasted to weigh down on the bottom-line. Decline in NFI is expected to emanate from lower fee income and streamlined forex income while material change has not been assumed in capital gains. With regards to provisioning, charge of Rs1.3bn for the quarter is assumed while the bank will likely deliver a cash pay-out of Rs1.5 per share.

It is anticipated that ABL to report an EPS of Rs3.45 in 2QCY20, down by 14% YoY and 4% QoQ. A slight decline in earnings to emanate from milder capital gains and higher admin expenses due to higher compensation expense is expected. On the provisioning side, ABL to pay Rs0.5bn for the bank compared to a reversal of Rs139mn in the previous quarter. It is assumed that the cash pay-out to reach Rs2 per share.

Based on estimations, the projections made by BMA Capital further stated, “BAHL to report an EPS of Rs3.62 in 2QCY21, declined by 8% YoY and 12% QoQ. NII will likely surpass Rs14bn on the back of healthy investment income and improving CA ratio. However, NFI is expected to slow down to PKR 2.9Bn due to streamlined fee income.”

On the provisioning front, a charge of Rs640mn is expected while admin expenses to reach Rs9.7bn. Moreover, no interim pay-out from the bank is anticipated.

Estimations further indicated that EPS by BAFL to clock in at Rs1.29 in 2QCY21, dipped by 17% QoQ and 34% YoY. The sequential decline in earnings is owed to streamlined capital gains worth Rs 1.1bn in the last quarter, normalized tax charge (only 35.4% in 1Q) and higher provisioning charge. However, surge in NII to PKR 11bn is forecasted to provide some respite to the bottom-line. Provisioning charge of Rs1bn for the bank is projected while there is no interim pay-out expectation.

As far as the investment books are concerned, “Banks are increasing exposure on the shorter end of the yield curve which would investment to expand, as they prepare for the monetary tightening cycle. IDR of the sector has inched up to 72.8% as of Jun’21 compared to 64.6% in Dec’20, with investments rising 13% CYTD.

Loan growth has managed to pick some pace with advances up 6% CYTD while ADR continues to remain sluggish, clocking in at 47.2%. Deposit growth has remained aggressive in line with expansion in broad money in the economy, with deposits of the sector posting a 9% jump CYTD and a staggering 15% YoY jump during FY21”, the report by AHL noted.

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Posted on: 2021-07-26T23:44:00+05:00