–With the December 2013 result season drawing to a close, we review full-year 2013 performance for the banking sector where JS Banking Universe cumulative profits declined by 12%YoY in 2013.
–Decline in sector earnings was driven by (1) 5%YoY lower Net Interest Income (NII) of Rs215bn amid shrinkage in spreads, (2) higher cumulative provisions and write-offs (+16%YoY) and (3) rising operating expenses of Rs160bn (+9%YoY).
-Lower interest rate environment in 2013 coupled with stringent measures taken by the State Bank of Pakistan (SBP) on the cost side were the major reasons for lower spreads (-78bpYoY) and depleting NII.
-Despite NPLs shrinking by Rs23bn in 2013, cumulative provisions and write-offs grew by 16%YoY mainly led by provisions against bad loans being booked by NBP and AKBL.
-Non Interest Income, on the other hand, provided some respite to the under-pressure core business as higher gains on sale of securities and healthy fee income led the growth.
2013: A less than exciting year for Pak banks
December 2013 results season for Pak banks has drawn to a close where cumulative profits for our Banking Universe declined by 12%YoY in 2013. The same was led by a slowdown in core banking business (where NII for the sector dipped by 5%YoY) coupled with higher provisions and write-offs (+16%YoY) and an uptick in overall operating expenses (+9%YoY). On the balance sheet front, aggregate Investments and Advances grew by 4.6%YoY and 5.6%YoY respectively in 2013 to Rs4.07trn each. Pak Banking Sector more than emulated this growth on the deposit side, which grew by 12.7%YoY during the same period to Rs7.5trn.
NII slid by 5%YoY on lower spreads during 2013
Spreads compression continued throughout 2013 despite monetary tightening in 2H2013. Net spreads continued their downturn in 2H2013 due to SBP’s decision to link the Minimum Deposit Rate (MPR) on all savings deposits to the SBP Repo Rate, capping expansion in spreads. As a result, net spreads averaged at 6.24% in 2013 compared to 7.02% in 2012. Consequently, banks’ core business remained under pressure throughout 2013, resulting in NII depleting by 5%YoY to Rs215bn.
Non-Interest Income rose by 4%YoY
On the other hand, Non Interest Income rose by 4%YoY to Rs91.5bn as banks booked higher gains on sale of securities. To recall, the KSE-100 managed to clock in a return of 49% in 2013, resulting in banks booking gains on their investments. Within our sample MCB and HBL led the pack on non-interest income gains, closing the year with 22%YoY higher Non Interest Income each. Not only higher capital gains but higher Fee & Commission income (+14%YoY and 27%YoY, respectively) was a major factor for growth in Non Interest Income for both the banks. That said, income from dealing in foreign currencies also remained high as the Pak Rupee depreciated by 7.8% in 2013.
Provisions and write-offs on the higher side
Provision and write-offs against bad loans and investments rose significantly by 16%YoY in 2013 mainly led by higher cumulative provisions being booked by NBP (Rs19.5bn, +82%YoY) and AKBL (Rs11.1bn, +313%YoY). Barring these two banks, overall provisions actually declined significantly by 92%YoY in 2013 with a decline of 13-70% witnessed across the board. Provisions for NBP came from its Bangladesh operations (bulk of 2013 provisions) as well as some domestic corporates (largely in 4Q2013). Meanwhile MCB was the only bank under our coverage which booked reversals of Rs2.8bn in 2013 compared to provisions of Rs478mn in 2012.
Outlook: ‘Market-Weight’ maintained
Post 2013 results, we maintain our ‘Market-weight’ stance on the banking sector as we foresee limited growth triggers ahead for the industry. That said we believe spreads have likely bottomed-out in 2013 where we flag that interest rates have inched higher since September 2013. Note that 6-Month KIBOR averaged at 9.45% in 2013 while YTD 2014 it is averaging at 10.15%. That said, (1) SBP’s linking of MPR on saving deposits to the Repo Rate, and (2) our recent trimming of interest rate outlook (Discount Rate expected to remain flat at 10.0% till June 2014) suggests a cap on spread expansion. Resultantly we see limited growth in spreads and a modest recovery in NII in 2014. We currently maintain our ‘Buy’ call on UBL (TP: Rs151) and a ‘Sell’ call on HBL (TP: Rs140).