KARACHI: Pakistan banking sector’s peak performance has passed and is likely to suffer pressures on profitability from a slowdown in loan growth and further declines in asset growth due to rising interest costs, estimates Fitch Solutions.

Sector’s profitability has been on the decline and is expected to continue the downward trend in the coming quarters as economic and credit growth slows amidst tightening monetary policy. The health of banking sector is likely to dip the overall progress of economy, already under stress on account of external debt and rising oil prices.

According to exchange filings for the third quarter ending Sept 31, sector’s profitability declined by 27 per cent to Rs31.6 billion on a year-on-year basis, said a research report of Topline Securities issued on Friday.

The plunge comes after adjusting for Rs23.7bn penalty imposed on Habib Bank Limited (HBL) by New York State Department of Financial Services during the same period last year

“The decline in sector profits is primarily owed to Rs6.8bn total provision charge, lower non-interest income and higher non-interest expense during the outgoing quarter,” said the report.

Net Interest Income of the 19 banks under review improved by 9pc YoY to Rs122bn in the third quarter, led by higher interest rates and better deposit mix.

The central bank has raised policy rate by 275bps during the year; 100 of which were raised in the third quarter.

Within the listed banks, top five banks – HBL, United Bank Ltd (UBL), MCB Bank Ltd, National Bank of Pakistan (NBP), Allied Bank Ltd (ABL) – depicted a 48pc YoY decline in earnings (normalised for HBL penalty).

On the other hand, mid tier banks — Bank AlHabib Ltd, Bank AlFalah, Meezan Bank Ltd — extended their growth momentum and reported profitability growth of 17pc YoY basis.

The sector booked significantly higher provisioning charge during the quarter, clocking in at Rs6.8bn compared to Rs2.1bn provision reversal in the same period last year.

Majority of this charge originates from big banks with UBL, NBP and HBL contributing Rs3.1bn, Rs2bn and Rs1.7bn to the total, respectively.

Non-interest income of the banks declined by 11pc; mainly due to lower capital gains (Rs993 million in 3Q2018 vs Rs7.8bn in 3Q2017).

Published in Dawn, November 3rd, 2018