Banks’ record Rs85 billion FX trading fueled revenue growth despite the rupee’s wild collapse.
The quarter ended September 30, 2022, had a record-breaking net profit for Pakistan’s commercial banks of Rs85 billion. The freefall of the rupee’s value in relation to the US dollar has continued to be a key factor in the increase of bank earnings.
In the quarter under review, as compared to the prior quarter (Apr.–Jun.) of 2022, bank earnings increased by a factor of two to Rs. 85 billion. Comparing these three months to the same time last year, the profit grew 26% year over year.
Alpha Beta Core (ABC) CEO Khurram Shehzad made the following statement in a tweet that was posted online: “The foreign exchange (rupee-dollar exchange rate) income growth for these banks ranged between 50%-550% on a year-over-year basis with the US dollar going up by 46% from Rs157 in June 2021 to Rs229 by June 2022.”
The two best enterprises to run in Pakistan, he continued, are banking and forex.
Ishaq Dar, the finance minister, has previously claimed that eight banks had manipulated the rupee-to-dollar exchange rate in order to make more money. According to reports, the central bank is still looking into these claims.
According to Shameer Alam Zaidi, a research analyst at Ismail Iqbal Securities (IIS), “Healthy fees and FX (foreign exchange) income have been the primary revenue generators for banks.”
According to the data breakdown, these banks’ FX business revenue climbed by about 168% to Rs35 billion in the third quarter (July-September) of 2022 from Rs13 billion in the same quarter the previous year.
According to data gathered by IIS, their FX income was somewhat higher at Rs36 billion in the previous quarter (Apr.-Jun.) of 2022.
Data about the top 16 banks listed on the Pakistan Stock Exchange have been compiled by the trading house (PSX).
The current, high benchmark interest rate of 15% was a major factor in these banks’ net profits reaching a record level in the period under review. Remember that from September 2021 to July 2022, the central bank raised its benchmark interest rate by a total of 800 basis points to 15%,” said Zaidi.
To reduce aggregate demand in the overheated economy, the key policy rate was aggressively raised. As a result, the action indirectly assisted banks in finishing the quarter with high profit margins.
He said, “The increased interest rates have also contributed to an increase in NII (net interest income).
The profit for the aforementioned banks soared to a new high in the third quarter (Jul-Sep) of 2022, despite the imposition of new taxes on profit-before-tax, according to Zaidi. “The NII of the 16 banks increased by 17% on a quarterly basis due to the lagged impact of asset repricing,” he continued.
“However, the circumstance of high-interest rates has raised the amount of non-performing loans” (NPLs). Although the amount of problematic loans is still below a worrisome level, the ongoing economic recession raises fears that it may increase.
Despite the fact that provisions (non-performing loans and bad loans) have grown, according to Zaidi, “Banks have so far mostly escaped Covid-19 and the interest rate shock.”
“On a quarterly basis, the provisions spiked by 135% to Rs15 billion. The change in tax law, which resulted in an effective tax rate of 52% as opposed to 41% in the same period last year, has been the only negative, he said.
The brokerage house still anticipates that net interest income will increase since asset repricing from the increase of 125 basis points in July has yet to take effect, even though the majority of the assets and deposits have been revalued, according to the IIS analyst.
He projected that if Pakistan’s Eurobond prices do not increase in the current quarter, provisions on sovereign bonds may also rise for some banks as the impact of the economic slowdown becomes more apparent in the next quarters.
In the quarter ending in December 2022, deposit growth is anticipated to be muted as banks work to meet their advance to deposit ratio (ADR) goals.
Bank deposits increased by 15% year over year, and ADR increased to 48.6% from 46.9% in the same period the previous year and 47.7% in June.
