January 8, 2021 (MLN): The Banking Sector’s earnings are expected to de-escalate on a yearly as well as on quarterly basis in 4QCY20, on the back of dimmed loan growth and lower investments yields, however, the sector is expected to make up for skipped interim dividends by announcing higher payouts.
As the regulatory restrictions on dividends ended in 3QCY20, and no new directives have been provided by the central bank, therefore, it is predicted that the banks will resume paying dividends with upcoming results.
According to the banking sector preview by Aba Ali Habib Securities, the slowdown in loan growth and lower investment yields are expected to shrink the sector’s earnings by 9% YoY in 4QCY20. Whereas, on a quarterly basis, earnings are likely to dip by 23% QoQ, largely attributable to lower credit growth, Net Interest Income (NIM) normalization, and unimpressive performance of non-interest income sources.
However, on a cumulative basis, the sector is expected to post earnings growth of around 28% YoY, the report stated.
The monetary tightening and the slowdown in the economy led to a sharp deceleration in loan growth momentum in 2019. The drag on credit demand was further aggravated with the start of the pandemic and the lockdown in 2Q20 as credit demand weakened and banks de-risked their loan book, cutting back on exposure to riskier segments.
The latest figures released by the State Bank of Pakistan (SBP) show that advances of the sector have grown meagerly with 1.3% YoY in 4QCY20 mainly due to muted private sector offtakes and growth concerns due to the second Covid wave. Thus, based on this, the sector’s NIMs that benefitted from a reprising mismatch in the second and third quarters, are likely to normalize in the fourth quarter of CY20.
At the onset of the pandemic, the SBP, through a circular, instructed banks to skip dividends for two quarters. With the impact and length of the pandemic unidentified, the requirement was more as a precautionary measure and in line with the global trend to ensure that banks remain well-capitalized to absorb the shock and maintain lending capacity. This constraint on dividend coupled with 17% YoY growth in bank deposits and stellar earnings growths on capital gains has left the sector with significant capital. To note, banking sector capital adequacy ratios remain above the central bank’s relaxed CAR requirement of 11.5%, this creates sufficient room for banks to pay out excess capital.
As per the projections put forwarded in the report, the earnings per share (EPS) of HBL, UBL, MCB, ABL, and BAHL is expected to grow by 114%, 7%, 23%, 15%, and 53% YoY respectively in CY20, however, BAFL and BOP are expected to witness a dip in EPS by 13% and 8% YoY respectively.
In 4QCY20, except for HBL whose earnings outlook has improved dramatically with the closure of the NY branch and the end of the associated remedial costs, which led to a sharp normalization in its cost base, the EPS of UBL, MCB, ABL, BAHL, BAFL, and BOP are likely to plummet by 7%, 15%, 20%, 6%, 22% and 16% YoY respectively.
With regards to provisioning expenses, the report underscored that comparatively slower activity and concerns over the second Covid wave may keep asset quality concerns in lights, however, steady provisioning build-up in previous quarters has paved the way for lower provisioning expenses in 4QCY20.
In addition, the credit cost of the sector is expected to decline 14bps QoQ to 0.18% in 4Q from 0.32% in 3Q, the report added.
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