Pakistan Banks’ Earnings Surged by 95% in 3Q2023

Staff Report

Pakistan Banks’ Earnings saw their profitability increase to a record Rs163 billion, up 95% YoY in 3Q2023.

This significant growth was primarily driven by a substantial increase in Net Interest Income (NII) due to high-interest rates and balance sheet expansion.

In terms of USD, listed banks’ profits also increased by 50% YoY, reaching US$560 million in 3Q2023.

NII for the sector reached Rs481 billion in 3Q2023, compared to Rs283 billion in 3Q2022, representing a 70% YoY increase.

This growth can be attributed to the higher average policy rates during 3Q2023, which remained at 22% compared to 15% in 3Q2022.

Interest income increased by 79% YoY to Rs1.6 trillion, while interest expenses grew by 84% YoY to Rs1.1 trillion.

Non-interest income in the sector decreased by 5% YoY, amounting to Rs79 billion in 3Q2023, mainly due to losses on securities and a decline in FX income.

On the other hand, non-markup expenses increased by 30% YoY to Rs229 billion in 3Q2023, primarily driven by higher administrative expenses in line with inflation.

The sector’s Cost-to-Income ratio improved to 41% in 3Q2023, compared to 48% in 3Q2022.

Interestingly, despite high-interest rates, the provisioning charge for the sector declined by 9% YoY to Rs14.7 billion in 3Q2023, mainly due to strong asset quality.

On a quarter-on-quarter (QoQ) basis, listed banks’ profitability increased by 24% in PKR and 22% in USD.

This significant QoQ growth in earnings is mainly due to the absence of the higher taxes recorded in 2Q2023, which were a result of the implementation of a 10% super tax announced in the Federal Budget FY24.

The effective tax rate for 3Q2023 was 48% compared to 52% in 2Q2023.

In the first nine months of 2023 (9M2023), the sector’s earnings increased by 102% YoY to Rs421 billion (a 44% YoY increase in USD, reaching US$1.5 billion), primarily driven by higher NII, which increased by 69% YoY.

Additionally, a lower effective tax rate of 48% in 9M2023, compared to 55% in 9M2022, also contributed to higher profit growth.

For our analysis, we have included all banks that have announced their financial results, except for Silk Bank (SILK), which has not yet released its results.SBP imposes Rs 58m fine on top five banks

Bank-wise, Meezan Bank (MEBL), MCB Bank (MCB), Habib Bank (HBL), United Bank (UBL), and Standard Chartered (SCBPL) posted the highest profits of Rs25.5 billion, Rs19.7 billion, Rs16.6 billion, Rs15.0 billion, and Rs12.7 billion, respectively, during 3Q2023.

On the other hand, Summit Bank (SMBL) reported a loss of Rs2.1 billion in 3Q2023.

In terms of NII growth, Bank of Khyber (BOK), Soneri Bank (SNBL), JS Bank (JSBL), Standard Chartered (SCBPL), and BankIslami (BIPL) recorded the highest growth rates of 154% YoY, 134% YoY, 131% YoY, 106% YoY, and 104% YoY, respectively, in 3Q2023.

In 3Q2023, we observed surprise dividends from a few banks, which supported the share prices of listed banks. Moving forward, we anticipate a strong dividend payout to continue due to the sector’s robust profitability.

The Topline Banking Universe is currently trading at compelling valuations, with a 2023E PE and PBV of 2.7x and 0.7x, along with an ROE of 28%.

We maintain our ‘Overweight’ stance on banks, with MEBL and UBL as our top picks.