Large private banks: Profits grew 27 per cent in 2011

ISLAMABAD: At a time when there are fears of US recession and banking stocks remained under pressure in 2011, large private banks in Pakistan have posted above average growth of 27% in 2011.

Our analysis is based on large 4 private banks based on bank deposits and branches including HBL, UBL, MCB and ABL which contribute more than 50% share of the listed private banks’ deposits and represent approx. 60% of the total branch network.

Cumulative earnings of these 4 banks reached Rs66bn in 2011, up 27% from 2010. Amongst listed private banks, these 4 banks contribute 70% of the market capitalization. Bank wise profitability shows that UBL posted highest profitability growth 39%, followed by HBL 33%, ABL 23% and MCB 15%.

Thanks to higher return on advances and better yield on government papers, overall net interest income NII of these 4 big banks grew by 17%. This shows impressive core banking operations as average 6-months KIBOR increased by 70bps in 2011 compared to 2010 while cost of funds remained on the lower side.

Similarly, with overall improvement in trade activities, better opportunities in forex and money market, non interest income of these big banks grew by impressive 21%. Moreover, restrictive lending resulted into lower provisioning in 2011 which stood at Rs21.5bn, down 10%.

Though we expect earnings growth to slightly cool down in 2012 amid decline in interest rate, however, gradual recovery in economy and infrastructure spending could create appetite for credit and will impact positively on banks with lower ADR. Moreover, with decline in interest rates there is high probability that NPL accretion to slowdown in 2012 which could limit overall provisioning.

We continue to maintain ‘Over-weight’ stance on Pakistan banking sector with ‘MCB’ remain our best picks in banking sector while we also maintain ‘Buy’ on NBP. The ongoing global recession fear may not impact local banks having no or very little exposure to global bonds and stocks.

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