Large banks earnings up 19pc in 1Q2011

LAHORE –– With all top tiers banks announcing their 1Q results, we present 1Q2011 earnings snapshot of the banking sector. The earnings growth remained impressive at 19 percent which is inline with expectation that banking sector will outperform in 2011.

This analysis is based on 5 large banks including NBP, HBL, UBL, MCB and ABL which contribute more than 57 percent share of the total banking sector deposits and represent approx. 80 percent of the market capitalization. In Pakistan banks are classified as large and small on the basis of deposit and branch network which have the access to low cost stable deposit unlike small banks which rely on large size institutional deposits.

Thanks to higher return on advances, overall net interest income (NII) grew by 17 percent. This shows impressive core banking operations as average 6-months KIBOR increased by 168bps while cost of funds remained stationary on the lower side. Moreover, large banks continue to opt for a risk averse approach by parking their funds into less risky government securities (up 29 percent YoY) which contributed to higher NII. Similarly, with overall improvement in trade activities, non interest income of big banks which contributed 13 percent of the total income grew by 10 percent YoY. While operating cost remained rose by 16 percent, overall net provisioning remained flat despite devastating floods and high interest rate scenario.

Though broad based improvement in earnings was seen in 1Q2011, ABL posted highest earnings growth of 41 percent amongst 5 big banks. This was followed by HBL (31%), MCB (21%) and UBL (18%) while profits of NBP remain flat.

Farhan Mahmood, banking expert, said that though it is expected that advances growth would remain lower amid higher interest rate scenario and lower appetite for credit, better spread will keep NII on the higher side. Non performing loans and continuous growth in operating cost will slightly dilute the topline growth. At current levels NBP and UBL remain our as best picks in banking sector.

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