Karachi, January 04, 2022 (PPI-OT): 4QCY21: Multiple factors to outweigh the sharp rise in deposit costs

Quicker recovery in topline yields and absence of higher credit costs are expected to expand 4QCY21 earnings of the banking sector by 12% YoY, taking CY21 earnings up by 10% YoY.

With the year end result announcements, we expect most banking companies to announce cash dividends.

Higher bond yields are expected to reduce the sector’s outstanding unrealized gains, followed by adjustment in adequacy ratios as well.

4QCY21: Banking sector earnings preview

Despite higher rise in cost of deposits amid sharp monetary tightening during 4QCY21, the sector’s core income is expected to remain almost flat as compared to the preceding quarter. Our core income estimates gather support from partial increase in top-line led by (1) faster upward movement in KIBOR and investment yields as compared to increase in cost of deposits and (2) 20% YoY asset growth expected at quarter end.

Moreover, higher base of provisioning expenses registered during the same period last year and double-digit growth trend in Fee Income is likely to outweigh (1) absence of hefty capital gains and (2) increase in administrative expenses in-line with inflation during the quarter. We flag that equity and money market, both, registered an unfavourable trend in 4QCY21, offering limited space for capital gains. Resultantly, we expect 4QCY21 earnings for the sector to report a 12% YoY growth.

For CY21, we expect earnings growth to clock in at 10% YoY, broadly streaming from lower provisioning expenses. To recall, provisioning expenses during CY20 expanded as the sector opted to increase General provisions to provide cushion for (1) any unforeseen asset quality deterioration from the pandemic, (2) the impact from implementation of IFRS-9 and (3) expected credit loss from the Oil and Gas Marketing sector. Alongside results, we expect most banking companies to announce cash dividends.

BVs likely to face (a softer) setback

We also expect a negative impact of rise in bond yields on the balance sheet front. Albeit the secondary market yields have softened from their respective highs during 4QCY21 by 180bps-220ps at quarter end, the same have registered and increase of 120bps-170bps when compared to 3QCY21 end. The bond yield increases are expected to clip the sector’s BV through reduction/increase in Surplus/Loss on Revaluation of Securities, which may also trim adequacy ratios. Nonetheless, the impact may be limited as compared to what was witnessed during 4QCY18, the last when the banking sector observed similar bond yield spikes. Reason for a softer blow this time is the placement of Investments of the sector in Floater PIBs as well, versus only availability of Fixed PIBs during 4QCY18.