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Bank profits fall due to no new investments

HARIS ZAMIR

KARACHI: The profits of private banks listed at the Karachi Stock Exchange (KSE) fall as bank credit remained low because of no new investment made in the country and decline in treasury bill rates.

The accounts of nine banks were available, out of 13 listed at the KSE. There has been a sharp decline in mark-up rates and much lower return is being offered on investments in government securities as well as in inter-bank market based on substantial cut in SBP discount rates. As a result, the profit margin remained under pressures throughout 1999.

The mark-up/interest and discount and/or return earned by nine banks fell to Rs 14.631 billion in 1999, from Rs 15.597 billion of 1998, showing a drop of 6.19 percent.

During 1997 and 1998, the rates on the treasury bills generally remained high - exceeding 16 percent per annum at one stage - but these rates declined drastically in 1999. As a result, the profitability of banks came under tremendous pressure. The after-tax profit of these banks fell by 16.14 percent, to Rs 1.008 billion, in 1999 from Rs 1.202 billion of 1998. In terms of individual performance, some of the banks performed well. The profit of Platinum Bank was Rs 80 million in 1999 from Rs 37 million in 1998, Union Bank Rs 145 million and Gulf Commercial Bank Rs 91 million.

The deposits of seven banks were available, which recorded a small growth of 4.4 percent in 1999, to Rs 85.206 billion in 1999 from Rs 81.605 billion in 1998.

A leading analyst said that though some of the macro-economic indicators improved during 1999, the operating environment for the banking sector continued to remain difficult. The overall demand for bank credit remained low because of no new investment in any of industrial sectors.

This low demand led to an intense competition among banks for the relatively few good borrowers in the market, resulting in substantial reduction in the lending rates. At the same time, the government retired about Rs 78 billion of its borrowings from the commercial banking sector.

He said that it was able to do this because of lower debt servicing requirements owing to rescheduling of substantial part of its foreign debt-repayments, which were due in 1999 and 2000.

The government also succeeded in directly mobilising about Rs 60 billion through its new prize bonds schemes. As a result, the Treasury Bill rates nose-dived, and hovered below 10 percent throughout the year, reducing the profits of the banks. Thus, banks' profit margins on their funds operations reduced substantially.

He pointed out that, at the same time, the managed exchange rates, and the freedom to customers to shop around for the best rate possible, eroded banks' exchange earnings to an extent so that, at times, these were negative, if the cost of funding the export bills was taken into account. The narrow exchange spreads trimmed the profits of the banks, he added.

The payouts announced by these banks in 1999 showed mixed trend, as few of them declared more for shareholders while some lowered their dividends. Askari Bank declared 17.5 percent dividend in 1999 as against 20 percent, Bank Al-Habib 20 percent (10 percent dividend and 32 percent bonus); Faysal Bank nil; Gulf Commercial Bank 10 percent (7.5 percent); Metropolitan Bank 25 percent bonus (33.33 percent bonus); Platinum Commercial Bank 10 percent bonus (nil); Prime Commercial Bank nil (10 percent); Soneri Bank 25 percent bonus (10 percent); and Union Bank 15 percent bonus (nil).

The banks, to improve their profits and increase their relationship, have adopted several measures, especially the setting of Automated Teller Machines (ATM), and increasing the branches in the country.