Banking sector earning to remain flat in 2Q

LAHORE: With 1Q sector earnings rising by 24 percent, the banking sector experts view a similar trend is likely to prevail for the remaining part of the year. High interest rate environment is likely to keep spreads steady at current levels of 7.5 percent. Further, many of the banks continue to work on generating a higher fee income via increased share of export and remittance business, with large banks streamlining international operations for this purpose.

Although NPLs have been on the rise since 2H2010, managements remain of the view that the dampening provisioning affect on the earnings is likely to decline over the next 12 months due to already high loan coverage. With average loan coverage of the big-5 banks at 74 percent (ABL highest at 81 percent, NBP lowest at 62 percent) a slowdown in new accretions is likely to provide significant boost to earnings. Further, this is supported by the increased number of NPLs under the fully provided loss category.

Banks have been utilizing bulk of their deposits collected over the past 18-24 month in treasury securities as the government continues to raise funds at relatively attractively yields. More so, this continues to be a suitable option for the banks given their stringent risk policy structure post increasing NPLs.

Although, this is likely to persist in the medium term, large banks are looking to build up their loan books as well, especially with demand coming in from energy and textile sectors. On the liability front, concentration on CASA deposits in order to keep their cost of deposits in check remains high on the agenda for all big banks.

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