Karachi, January 18, 2023 (PPI-OT): Banks: Sequential profit growth trend may disrupt in 4Q
We preview 4QCY22 results for Pakistan banks under our coverage, where we expect Net Interest Income (NII) to remain steady. On the non-interest income front, we expect Fee Income to jump in 4Q, however expect the pace of growth to decline.
Cost to Income ratio may sequentially expand over inflationary pressure on operating expenses. Additionally, we anticipate the industry will once again increase General Provisions while taking advantage of improved profitability.
As a result, profit expansion trend may discontinue for some banks, while the growth pace may decelerate for others on a QoQ basis. However, all banks but AKBL under our coverage are expected to announce a final dividend alongside their respective results.
While higher yields would improve revenue streams, mark-to-market of the banks’ ‘Available-for sale’ fixed rate securities will once again result in a one-time dent on its unrealized gain or increase in its unrealized losses.
4QCY22: NII to remain stable over countering effects
We preview 4QCY22 results for Pakistan banks under our coverage, where we expect Net Interest Income (NII) remain steady as sector’s lower balance sheet growth this quarter and higher deposit costs for the last month of the quarter dilutes the impact of asset re-pricing from the interest rate increase announced in July. We expect NII to jump by an average of 2% QoQ, translating to a YoY growth of 50%.
On the non-interest income front, we expect Fee Income to jump in 4Q, however expect the pace of growth to decline. Where the sector has witnessed north of 20% YoY growth in Fee Income since the past six quarters, we expect 4QCY22 to report growth in the mid-teens. Forex income trends could be volatile and also vary from bank-to-bank given higher rates were offset to a certain extent by lower trade volumes and enhanced scrutiny by regulator / government on forex dealing of banks. The said head-item has been in the news as a potential segment for additional taxes by the government.
Inflationary costs may burden, watch some banks for lower taxes
On expenses front, Cost to Income ratio may sequentially expand over inflationary pressure on operating expenses. To recall, operating expenses increased by 30% YoY during 3QCY22, where we expect a similar trend to recur in 4QCY22. Moreover, we expect the sector to again take the opportunity of higher profitability in building General Provisions, providing cushion to any unforeseen credit losses, a practice many banks have been following since a couple of quarters amid macro headwinds.
On taxes front, amid sector reporting gross ADR higher than 50% as at Dec-2022, we expect some bigger banks, that carried lower ADR and booked higher taxes in 9MCY22 to comply with the required ADR for normalized taxes. This, in turn, would also result in reversal of higher taxes booked in 9MCY22 as the cut-off date of ADR application for tax purposes is Dec-2022. As a result, profit expansion trend may discontinue for some banks, while the growth pace may decelerate for others on a QoQ basis.
Another round of expanding unrealized losses
While higher yields would improve revenue streams, mark-to-market of the banks’ ‘Available-for sale’ fixed rate securities will once again result in a one-time dent on its unrealized gain or increase in its unrealized losses. On adequacy levels, though yield increase in the 3YR and 5YR tenor bonds have been the highest in 4Q, we believe banks would receive support from higher profits this quarter, shielding CAR from mark-to-market losses to some extent, maintaining comfortable buffer above their respective minimum requirement levels. All banks but AKBL under our coverage are expected to announce final dividend alongside their respective results.