Karachi, March 08, 2022 (PPI-OT): Banks: Geopolitical tensions add to concerns on int’l ops

A stream of negative developments on various international operations continue to weigh on the book value growth of various Pakistan banks. BAFL and NBP are the latest ones on the list, following UBL and HBL earlier. The Russia Ukraine tensions add to the concerns, with some of the impact potentially spilling over to parts of the local operations as well.

The uncertainty in global financial markets has spiked global bond yields. International branches of Pak Banks which invest in global bonds could face mark to market losses and drag on adequacy ratios in 1QCY22 due to the same.

On local operations, while dealings currently continue smoothly, any disruption in payment flows or any other impediments could hurt trade business. We understand banks are closely monitoring and evaluating options to be better prepared.

Russia events bring more fears from international front

When pain from respective international operations was not enough, recent geo-political developments on Russia have led to Pak Banks to start worrying about its implications on their local operations. On-going announcements of varied sanctions on Russia could possibly lead to difficulty in trade. While Pakistan’s usual annual trade with Russia totals to ~US$350mn, both countries’ bilateral trade accumulated to ~US$750mn (~1% of Pakistan’s total trade), the jump largely contributed by wheat imports to Pakistan. We understand banks are closely monitoring and evaluating options to be better prepared.

When some banks are already facing drag from intl ops

Pak banks have had a fair share of pain from international operations. Yesterday, Bank AlFalah Ltd (BAFL) disclosed in CY21 financials it has booked impairment cost of Rs1bn under Afghanistan operations. A couple of weeks ago, National Bank of Pakistan (NBP) was fined US$55mn over noncompliance in their New York Branch (USA). Moreover, spike in Middle East book’s Infection ratio in United Bank’s (UBL) books during CY17-CY19 and HBL’s US$225mn penalty on its New York Branch (USA) in CY17 have also left a sour taste.

Watch out for global bond yields

Another implication of the on-going Russia-Ukraine war has been on global bond yields that have had a sharp increase in the last two weeks over inflationary concerns over surge in global commodity prices. International branches of Pak Banks which invest in global bonds could face mark to market losses and drag on adequacy ratios in 1QCY22 due to the same.