Pakistan’s Banking Sector Closes CY23 with Record Profits Amid High Interest Rates

Islamabad, Pakistan’s banking sector concluded the calendar year 2023 on a high note, achieving another year of record-high profitability, driven by a 600 basis points increase in interest rates and a significant 30% year-over-year jump in asset base. A detailed analysis conducted on a sample of 12 banks, accounting for 85% of the market capitalization, highlights the key profitability and balance sheet indicators for the fourth quarter of CY23, revealing a strong performance across the sector.

According to JS Global, the banking sector’s substantial asset base expansion was partly fueled by leveraging high-yielding papers in anticipation of a monetary easing cycle, alongside robust deposit mobilization efforts. Despite facing pressures from all-time high inflation, which expanded operating expenses, the sector managed to maintain efficient Cost to Income levels. Additionally, most banks announced dividends, contributing to strong Dividend Yields (D/Y), alongside notable returns on equity (ROEs) and gains on investment books, leading to significant growth in book value.

Deposits saw double-digit growth across most banks, with BAFL achieving the highest year-over-year growth and re-entering the Top-5 Club after nine years. Notably, some banks prioritized zero-cost deposits to maintain a competitive edge in the high-interest-rate environment. Banks like NBP, MEBL, and UBL reported higher growth in zero-cost deposits compared to their overall deposits, enhancing their zero-cost deposit mix.

Asset allocation and quality shifted towards investments, especially in government securities, as banks navigated the high interest rate environment and macroeconomic challenges. However, the sector also faced pressures from the textiles segment, leading to an increase in Non-Performing Loans (NPLs) and subjective provisioning. Nonetheless, coverage ratios remained comfortably above 100% for most banks.

The report also highlights the strategic use of higher investments funded partially by borrowings to avail high-yielding papers, with UBL and NBP’s exposure to Repo borrowings accounting for a significant portion of total Repo borrowing. This strategic positioning supported the banking sector’s profitability and adequacy levels, ensuring a strong financial standing as CY23 ended.

The banking sector’s robust performance in CY23, marked by record profitability, efficient asset and deposit management, and strategic investment allocations, positions it strongly for the coming year, despite the ongoing macroeconomic challenges and anticipation of monetary policy adjustments.

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