Commercial Banks · • Reduction in policy rate by 375bps since the monetary easing cycle...

JCR-VISSECTOR UPDATE

Commercial BanksThis report covers 26 commercial banks and has been developed given the current industry stratification...

October 2016

Recent Developments• ThebankingsectorassetsinPakistanhavegrownataCompoundAnnual

GrowthRate(CAGR)of14.7%overthelast5years(2010-2015)reachingRs.14.1t(2010:Rs.7.1t).AssetbaseofthebankingsectorstoodatRs.15.4tratend-June2016.

• GrowthinassetbasehasbeenfundedbyincreaseindepositswhichhavepostedaCAGRof13.8%overthelast5years(2010-2015)reachingRs.10.4t(2010:Rs.5.4t).DepositsofthebankingsectorincreasedtoRs.11.0tratend-June2016.

• Despitehealthygrowthoverthelastfewyears,financialinclusionindicatorsofPakistanremainonthelowersidevis-à-visregionalcounterpartswithonly13%ofthepopulation(age15andabove)havingaformalbankaccount,indicatingsignificantroomforgrowthforcommercialbankstoincreasethedepositbase.

Table 01: Financial Inclusion Indicators 2015

People with Bank Accounts

(%)

People with

Formal Savings (%)

People with Formal Borrowings

(%)Pakistan 13 3 2SriLanka 83 31 18India 53 14 6Bangladesh 31 7 10China 79 41 10Kazakhstan 54 8 16Iran 92 22 32* People implies the entire adult population of a country i.e. aged 15 and above. Source: World Bank

• DuringMay’2015,theStateBankofPakistan(SBP)introducedvariousregulatorymeasuresforthesectorinanefforttoreducethevolatilityofovernightreporateincludingi)introductionofatarget/policyrate(50basispointsbelowdiscountrate,ii)contractionofinterestratecorridor(spreadbetweenceiling/discountrate&floor/SBPreporate)by50bpsto2%.Inviewoftheadjustmentintheinterestratecorridor,thedownwardadjustmentincostofsavingdepositswaslessthanthere-pricingofloansandcontributedtodeclineinnetinterestincome.

• Impositionofsupertaxof4%onbank’sincomefortaxyear2015and2016andflattaxof35%onallsourcesofbank’sincomehasexerted

The banking sector assets in Pakistan have grown at a CAGR of 14.7% over the last 5 years reaching Rs. 14.1t (2010: Rs. 7.1t)

JCR-VIS Credit Rating Company Limited

pressureonprofitabilityduring2015andexpectedtocontinuetodosoin2016,whiletaxrateonbusinessincomeofthecorporatesectorhasbeenrationalizedto31%.

• Inordertoincreasenumberofpeopleinthetaxnetandencouragepeopletofiletaxreturns,theadvancetaxoncashwithdrawalsandbankingtransactionsofRs50,000andabovebyanon-filerinadaywasimposedinitiallyat0.6%(federalbudget2015-16).Itwaslaterreducedto0.3%andthenrevisedupto0.4%.Consequently,growthindepositbasewasslowerat4.2%in2H15vis-à-vis8%in1H15.Asperfederalbudget2016-17,advancetaxoncashwithdrawalsfromeachaccountofRs50,000andaboveperdayhasbeenwidenedtocovercashwithdrawalofRs50,000andaboveperdayfromallbanks.

• ChinaPakistanEconomicCorridor(CPEC)worth$45.6bisexpectedtoresultinfinancinganddepositmobilizationopportunitiesforcommercialbanks.Workonprojectshasalreadystartedwithtimelineofallprojectsbeing15years.CPECinvolves:• 24energyprojects(US$34.4bn).• 4infrastructureprojects(US$9.8bn).• DevelopmentofGwadarport(US$800mn).• Formationofover30SpecialEconomicZones.

• Reductioninpolicyrateby375bpssincethemonetaryeasingcyclecommencedhastranslatedintoaverage6M-KIBOR(KarachiInterBankOffer)decliningby275bpsduring2015decreasingfrom10.09%(2014annualaverage)to7.34%(2015annualaverage).6M-KIBORhasdeclinedfurtherto6.05%asof8thSeptember,2016.MaturityofPIBsandlowinterestratesisexpectedtoimpactprofitabilitygrowthofthesector.

• Inordertoreducerefinancing/rolloverriskondomesticdebtgiventhesizeableconcentrationinshortmaturities(aroundtwo-thirdofdomesticdebthadmaturitieswithinoneyearatend-FY13),GoPstartedissuinghighyieldingmediumtolong-tenordomesticdebt(PIBs).BankingsectorexposuretoPIBsincreasedbyover4.5xtoRs.3.37trillionatyear-end’2015.IncreaseinexposuretohighyieldingPIBshasresultedinsignificantjumpinprofitabilityofthesectorintheformofhighernetinterestincomeandcapitalgains.ReinvestmentriskonmaturingPIBs(largechunkofPIBshadatenorof3years)willcontinuetobeadragonsectorprofitability.Around27%oftheoutstandingPIBsmaturedinJuly’2016.

• Thesignificantdropincommoditypriceshavereducedquantumofworkingcapitalfacilitiesthatmajorityofbanksprovidetotheircorporateclientele.Non-fundbasedfinancinghasalsodeclinedresultinginlowerfeebasedincomeforbanks.Reductioninrebateonremittance1businesswillalsoimpactfeebasedrevenuesofbanks.EffectiveJuly1,2015,rebateswerereducedto20Saudiriyalpertransaction(previously25Saudiriyalpertransaction)onaminimumremittanceof$200(previously$100).

Industry Classification• TheStateBankofPakistan(SBP)includesintheirquarterlycompendium26localcommercial

bankssplitbetweentheprivate(21)andpublic(5)sector.Besideslocalcommercialbank,therearefourforeignbankswiththenumberofforeignbankshavingdecreasedby1withthemergerofHSBCBankOmanS.A.O.G.withMeezanBankLimited.

• TheJCR-VISBankingSectorOverviewcovers26localcommercialbanksandhasbeendevelopedgiventhecurrentindustrystratificationwherebytop6banksaccountfor59.8%ofbankingsectordeposits,includingpresenceinvariousoverseasmarkets.Besidestheselargebanks,theindustryiscomposedofafewmediumsizedbanksandseveralsmallsizedbanks.

Commercial Banks2


1 Under Pakistan Remittance Initiative scheme, the government pays the remittance fee charges against home remit-tances to encourage remittances through legal channels.

Giventhatriskprofileofbanksindifferentclassificationsvarieswidely,wehaveaccordinglysplittheindustryanalysisonthebasisofmarketshareindeposits.

• Bankshavebeenclassifiedinto3groups:Largebanks(marketshare>than6%),Mediumbanks(marketsharerangingbetween3-6%)andSmallbanks(marketshare<than3%).Foreachriskarea,JCR-VIShascommentedontheissuesofthesector,asawhole,followedbyspecificcommentsforstrongandweakbanksineachclassification.

Table 02: Banking Industry Classification (in order of market share provided in [] paranthesis)

Large Banks Medium Banks Small BanksHabibBankLimited(HBL)-

[14.1%]MeezanBankLimited(Meezan)-[4.9%]

SoneriBankLimited(Soneri)-[1.9%]

NationalBankofPakistan(NBP)-[13.1%]

BankAl-Habib(Al-Habib)-[4.7%]

BankIslamiPakistanLimited(BankIslami)-[1.6%]

UnitedBankLimited(UBL)-[8.6%]

AskariBankLimited(Askari)-[4.1%]

JSBankLimited(JSBank)-[1.5%]

AlliedBankLimited(ABL)-[7.6%]

BankofPunjab(BoP)-[3.9%]

DubaiIslamicBankPak.Limited(DIB)-[1.4%]

MCBBankLimited(MCB)-[7.3%]

HabibMetropolitanBankLimited(HabibMetro)-

[3.6%]

NIBBankLimited(NIB)-[1.3%]

BankAlfalahLimited(Alfalah)-[6.6%]

StandardCharteredBankLimited(SCB)-[3.4%]

TheBankofKhyber(BoK)-[1.2%]

FaysalBankLimited(Faysal)-[3.0%]

SummitBankLimited(Summit)-[1.2%]

SindhBankLimited(Sindh)-[0.9%]

SilkBankLimited(SILK)-[0.8%]

BankAlbaraka(Pakistan)Limited(Albaraka)-[0.7%]

SambaBankLimited(Samba)-[0.4%]

BurjBankLimited(Burj)-[0.3%]

FirstWomenBankLimited(FirstWomen)-[0.2%]

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Concentration• Thebankingindustryischaracterizedbysignificantconcentrationwithlargebanks(top6

banks)accountingforaround60%ofassets,depositbaseandbranches.However,contributiontoprofitabilityissignificantlyhigherat71.1%.Accountingforprofitabilityofmediumsizedbanks,largeandmediumsizedbankscumulativelyrepresent95.1%ofbankingsector’saftertaxprofits.Theremaining13bankscontributeonly5%ofprofitaftertax.

Table 03: ConcentrationLarge Banks Medium Banks Small Banks Total (Rs. M)

AssetBase 60.0% 26.2% 13.8% 13,562,504Deposits 59.8% 27.5% 12.7% 10,243,268ProfitAfterTax 71.1% 24.0% 4.9% 180,877Advances 56.1% 27.0% 16.9% 4,631,453Non-performingLoans 52.5% 30.1% 17.4% 578,702Branches 60.8% 21.2% 18.0% 12,102

Credit Risk• Overalladvancesportfolioofbankingsectorhaswitnessedgrowthof8.1%and7%during

2015and1H16,respectively.GrossadvancesofthesectorstoodatRs.5.7trillionatend-June’2016.

• Privatesectorcreditgrowthwitnessedgrowthof3.9%during1H16ascomparedtoaslightdeclineduring1H15.However,growthinlendingtogovernmentandpublicsectorenterpriseshasoutpacedprivatesector,indicatingbank’spreferenceforlowriskexposures.Lendingtogovernmentandpublicsectorenterprisesincreasedby21%and13%,respectivelyduring1H16.

Commercial Banks4


Table 04: Sector-wise Industry Analysis

In Rs. bHY16 2015 2014

Advances NPLs Infection Advances NPLs Infection Advances NPLs Infection

Textile749

197 26.30%762

198 26.00%792

198 25.00%13.1% 14.3% 16.1%

Production/TransmissionofEnergy

78938 4.90%

68141 6.00%

62129 4.70%

13.8% 12.8% 12.6%

Agribusiness504

58 11.50%474

40 8.50%394

37 9.40%8.8% 8.9% 8.0%

Total 5,703 634 11.10% 5,330 605 11.40% 4,930 604 12.30%

Table 05: Segment-wise Industry Analysis

In Rs. bHY16 2015 2014

Advances NPLs Gross Infection



Corporate 3,794 448 11.8% 3,534 434 12.3% 3,289 429 13.0%SME 310 82 26.5% 318 83 26.1% 299 91 30.5%Agriculture 297 46 15.5% 291 38 13.0% 264 33 12.4%Consumer 350 34 9.8% 336 29 8.7% 294 34 11.6%Commodity 698 4 0.6% 594 7 1.2% 549 5 1.0%Others 254 20 7.9% 257 15 5.7% 234 11 4.8%Total 5,703 634 11.1% 5,330 605 11.4% 4,930 604 12.3%

• Intermsofsectoralexposures,growthinfinancinghasbeendrivenbyenergy,powerandinfrastructureprojects.Productionandtransmissionofenergyisnowthelargestsectoralexposureforbanks.Lendingtotextilesectorhaswitnessedadeclineasaconsequenceofcautiousapproachadoptedbybanksgiventheweaksectoraldynamics.

• Corporatelendingcontinuestoremainthemainstayofbank’slendingoperationsrepresentingtwo-thirdofgrossadvances.

• Regulatoryconcernshaveimpactedcreditdisbursementinsomelargeprivatesectorpowerandinfrastructureprojects(largelyowingtocurrencyconcerns).SBPhasbeenmandatingcompaniestoarrangeforeigncurrencyfinancingforprojectstolimitdollaroutflow.Similarly,localbanksareexpectedtofacechallengesinfinancingCPECprojectsinforeigncurrency.

• Withdeclineininterestrates,consumerfinancinghaswitnessednoticeableincreaseasbanksre-focusonhighmarginsegments.Withinconsumerfinancing,growthhasbeenmanifestedinauto,mortgageandpersonalloans.

• Largepower,infrastructureandCPECrelatedprojectsareexpectedtoresultinhighercreditoff-takegoingforward.SupportingindustriesthatwillmakeCPEC’sexecutionpossibleincludingcement,steelandcontractingwillbeothersectorswherethebankswilllooktoincreasefinancingportfolio.

Asset Quality

Table 06: Banking Industry Credit Portfolio6M16 2015 2014 2013

GrossInfection 11.1% 11.4% 12.3% 13.3%NetInfection 2.2% 1.9% 2.7% 3.4%ProvisioningCoverage(Total) 82.4% 84.9% 79.8% 77.1%

• WhileoverallNPLshaveincreased,growthingrossadvanceshasbeenfasterwiththesameincreasingfromRs.4.9trillionatend-2014toRs.5.7trillionatend-HY16,thereforeresultinginalowergrossinfectionindicator

• Assetqualityofdomesticloanbookisimprovingonthebackofrecoveriesandgrowthinloanbookwhileoverseasassetqualityindicatorshaveweakened.

• IncreaseinoverseasNPLsoflargebankshasbeennotedduring2015andintheongoingyear.Riskoffurthernon-performingloansintheoverseasportfolioremains(particularlyinMENAregion)giventhebackdropofloweroilpricesandincreasedpoliticaluncertainty.

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Table 07: Overseas Performance NBP vs. HBL vs. UBL

In Rs. mNBP HBL UBL

HY16 CY15 CY14 HY16 CY15 CY14 HY16 CY15 CY14Profit n/a (3,662) (11,227) n/a 423 4,633 n/a 4,266 5,198TotalAssets n/a 142,993 97,757 n/a 305,274 286,853 n/a 292,884 254,160OverseasNPLs 31,718 31,896 30,186 16,802 14,092 9,289 11,842 10,910 9,268Overseas Provisioning n/a 30,033 21,557 13,914 13,355 9,080 7,978 6,719 5,968

Table 08: Banking Industry Credit Portfolio

Large Banks Medium Banks Small Banks Total

2015 2014 2015 2014 2015 2014 2015 2014Advancesasa%ofAssets 32.4% 37.7% 27.1% 38.2% 40.0% 44.8% 34.1% 36.7%

GrossInfection 7.9% 9.1% 13.8% 14.3% 9.6% 9.0% 11.4% 12.3%NetInfection 1.1% 1.9% 1.7% 2.1% 2.6% 2.4% 1.9% 2.7%

• Withadditionalliquiditygeneratedbywayofanincreasingdepositbasedeployedingovernmentpaper,advancesasaproportionoftotalassetshaswitnessedadeclineforlarge,mediumandsmallbanks.Advancesasaproportionoftotalassetsishighestforsmallbanksandlowestformediumbanks.Withinmediumsizedbanks,SCBandHabibMetrohavethelowestadvancestototalassetratiowhileBoPandFaysalhavethehighestadvancestototalassetratio.

• LargebanksparticularlyHBLandUBLarewellpositionedtobenefitfromadvancesgrowthfrominfrastructureprojectsgivenlargeperpartylimits,presenceinChina&collaborationwithinternationalbankstotaplendingopportunitiesarisingfromCPEC.

• Large Banks:AssetqualityindicatorsofAlfalah,MCBandABLcomparefavorablyvis-à-vispeers.

Fig. 1: Large Banks Infection levels 2015

Commercial Banks6


• Medium Banks:AssetqualityindicatorsofMeezanBankandBankAlHabibcomparefavorablytootherpeerswithremainingbanksinthemediumsizedcategoryreportingdoubledigitgrossinfectionasatyear-end’2015.

Fig. 2: Medium Banks Infection levels 2015

• Small Banks:Bankswithlimitedoperatinghistoryandrecentgrowthinfinancingportfoliohaveassetqualityindicatorsthatcomparefavorablytoothersmallbanks(JSBank,Sindh,Samba&DIB).Infectionlevelsintheportfoliowillbeevidentasportfoliomatures.AssetqualityindicatorsofSummit,NIB,FirstWomenandBankIslamiareweakervis-à-visothersmallbanks.

Table 09: Small Banks Infection levels 2015Bank Gross Infection Net Infection

Albaraka 8.0% 2.4%BoK 12.8% 4.0%BankIslami 18.3% 2.6%Burj 7.5% 0.2%DIB 2.1% 0.6%FirstWomen 20.5% 7.7%JSBank 3.8% 0.4%NIB 20.9% 3.6%Samba 7.5% 0.2%SILK 12.7% 5.0%Sindh 0.6% 0.5%Soneri 9.6% 2.7%Summit 20.7% 6.6%

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Capitalization• OverallcapitalizationindicatorsofthebankingsectorarehealthywithaTier-1Capitalto

RWAsreportedat13%(2015:14.4%;2014:14.3%)whileoverallCARwasreportedat12.5%(2015:13.1%;2014:12.9%)atend-June’2016.

• Tier-1andCARrequirementforend-Dec’2015was7.75%and10.25%,respectivelyandwillincreaseto10%and12.5%atend-2019.

• DeclineinTier-1andoverallCARatend-June’2016vis-à-visend-December’2015isonaccountofgrowthinriskweightedassets(duetoincreaseinprivatesectorlending)beinghigherthaninternalcapitalgeneration.

• Inthebackdropofincreasingcapitalrequirements,anumberofbankshavealreadyissuedBasel3Tier2instrumentswhileanumberofotherbanksalsoplantoissuethesameintheongoingyearand2017.JCR-VISexpectsincreasedissuancesofBasel3Tier2capitalinstrumentsinthebackdropofadditionalregulatoryCARrequirementsandhigherriskchargeonunratedexposures.

Table 10: Classification-wise Capitalization Indicators

SBP Benchmarks

Large Banks Medium Banks Small Banks

2016 2015 2014 2015 2014 2015 2014Tier-1CAR 8.15% 12.7% 12.4% 10.7% 10.9% 11.7% 11.8%CAR 10.65% 16.8% 16.2% 13.9% 13.0% 14.5% 14.2%NetNPLstoTier-1Equity NA 7.2% 10.8% 8.6% 12.2% 16.4% 12.7%Leverage 3.0% 4.75% 5.31% 4.18% 3.99% 6.19% 5.50%

Large Banks• Mediancapitalizationoflargebankscomparesfavorablytothatofmediumandsmallbanks.

Withinlargebanks,capitalizationindicatorsofUBLandAlfalahcomparelessfavorablytootherBankswhileMCBandABLarethemostwellcapitalizedBanks.

Fig. 03: Large Banks 2015 Tier-1 CAR and Net NPLs to Tier-1 Equity

• Anumberoflargebanksmayfaceadditionalcapitalrequirementsifsurchargeisimposedonsystematicallyimportantfinancialinstitutions(SIFIs).Internationally,SIFIsurchargehasrangedfrom0.8%to3%.StateBankofPakistanisintheprocessofidentificationofSIFIs.

Commercial Banks8


Medium Banks• Giventhehealthyinternalcapitalgenerationduring2015,capitalizationindicatorsofmedium

bankshaveimprovedonatimelinebasisasreflectedinahigherCARandleverageratioandreductioninnetNPLstotier-1equity.

• Increasedprovisionsandhighertier-1equityhastranslatedintosignificantlylowermediannetNPLstoTier-1equityformediumsizedbanks.NetNPLstoTier-1EquityofBoPissignificantlyhighwithinmedium-sizedbanksat147.9%atend-December’2015.

• Whilecurrentlybeingcompliantwithregulatoryrequirement,twobanks(AskariandBoP)withinmediumsizedpeergrouparecurrentlyshortoftheTier-1CARrequirementforend-December’2019.CapitalizationindicatorsofSCBandHabibMetrocomparefavorablyvis-à-visotherbanksinthepeergroup.

Fig. 04: Medium Banks 2015 Tier-1 CAR vs. Total CAR

• Withrapidbranchexpansionbeingpursuedbyanumberofmediumsizedbanks,capitalizationindicatorsmayneedtobemonitoredcloselygiventhelimitedgrowthinprofitability(lowspreadsandhighoverheads)andincreaseinRWAsonaccountofvolumetricgrowthandlendingtounratedclients.

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Small Banks• Forsmallbanks,capitalizationindicatorsvaryacrossdifferentbanks.Bankswithrelatively

shorterhistoryandlimitedlendingportfolioshavehealthycapitalizationlevels.ThesebanksincludeSamba,SindhandBoK.

• However,anumberofsmallbanksarefacingchallengesonthecapitalizationfront.ThesebanksincludeSummit,NIB,BankIslamiandDIB.

Table 11: Small Banks 2015 Tier-1 CAR vs. Total CARBank Tier-1 CAR Total CAR

Al-Baraka 11.7% 14.5%BoK 21.6% 23.7%BankIslami 9.2% 12.3%Burj 17.9% 18.1%DIB 9.7% 11.1%FirstWomen 39.8% 41.2%JSBank 11.5% 12.5%NIB 9.1% 11.9%Samba 29.7% 30.3%SILK 12.6% 13.8%Sindh 18.5% 20.1%Soneri 11.7% 15.4%Summit 8.7% 10.0%

• Challengesonthecapitalizationfrontareonaccountofrapidgrowthinfinancingportfolio,deductionofDeferredTaxAssetfromCommonEquityTier-1,reductionineligibleamountofsub-ordinateddebttobecountedasTier-2capital,higherriskchargeonunratedexposuresandweakassetqualityofperformingportfolio.

Profitability• ProfitbeforetaxofthebankingsectorhasdoubledoverthelasttwoyearsincreasingtoRs.

329b(2014:Rs.247b;2013:Rs.162b)in2015.

• GrowthinsectorprofitabilitywasonaccountofvolumetricgrowthinearningassetsandincreaseinexposuretohighyieldingPIBsbyaround4.5xoverthelasttwoyears(2013-2015)toRs.3.37trillionatend-December’2015.

• Reductioninpolicyrateby375bpssincethemonetaryeasingcyclecommencedhasexertedpressureonspreadsofthesector.Averagebankingsectorspreaddeclinedto5.56%in2015versus5.99%inCY14,down43bpsandisthelowestaverageinlast11-years.

• Withdecliningbenchmarkrates,averagespreadsduring7MCY16declinedto5.17%versus5.71%in7MCY15.Resultantly,profitbeforetaxhaswitnessedadeclinetoRs.162b(1HCY15:Rs.171b)despitevolumetricgrowthinearningassetsandlowerprovisioningcharges.

• SignificanthighyieldingPIBshavematuredinJuly’2016.MaturityofPIBsisexpectedtoresultinfurtherpressureonspreadsifthelowinterestrateenvironmentpersists.Volumetricgrowthinearningassets,furtherreductionincostofdepositsandfocusonnon-coreincomeisbeingtargetedbymostbankstooffsettheimpactonprofitability.

Commercial Banks10


Table 12: Classification-wise Profitability Indicators

Large Banks Medium Banks Small Banks2015 2014 2015 2014 2015 2014

Efficiency 44.5% 47.7% 60.4% 61.4% 91.9% 91.8%ROAA 1.7% 1.9% 1.1% 1.2% 0.6% 0.5%ROAE 23.2% 22.9% 24.6% 20.2% 5.6% 3.9%

Large Banks• LargebankspostedsignificantincreaseinprofitabilityduetoincreaseinexposuretoPIBs,

volumetricgrowthinearningassets,reductionincostofdepositsandcapitalgainonsaleofsecurities.

• ImpactofdeclineinspreadswillvaryacrosslargebanksandwilldependonreinvestmentriskonmaturingPIBportfolio,abilitytoreducecostofdeposits,rationalizeexpensebaseandenhanceancillarysourcesofincome.

• MCB,ABLandAlfalahhavewitnessedadeclineinoperatingprofitduring1H16vis-à-vis1H15.MCB,despiteexpansionintheirassetbase,wastheonlybankinthepeergrouptowitnessadeclineinnetinterestincomeduring1H16ascomparedtothecorrespondingperiodlastyear.Intermsofre-investmentrisk,UBListhemostwellpositionedamongstlargebankswithmostsizeablePIBportfolio(well-structuredmaturities)havingthehighestaverageyieldwhileMCBandABLhadsignificantPIBportfolios(outstandingatend-December’2015)maturingintheongoingyear.

Table 13: Large Banks Net Interest Income & Operating Profit comparison (Rs. M)

Net Interest Operating Profit

6M16 6M15 % change 6M16 6M15 % changeHBL 40,456 38,197 5.90% 26,789 26,335 1.70%UBL 29,330 27,287 7.50% 21,915 21,903 0.10%NBP 28,127 25,250 11.40% 15,053 13,168 14.30%MCB 23,397 24,934 -6.20% 17,790 19,547 -9.00%ABL 17,705 17,385 1.80% 12,857 13,130 -2.10%Alfalah 14,654 13,907 5.40% 6,412 6,752 -5.00%

• MCBhasthehighestCASAindepositmixat94%atend-June’2016andhencethelowestcostofdeposit.Withdeclininginterestrates(resultinginre-pricingofsavingdeposits)andincreasingproportionofcurrentaccountsindepositmix,costofdepositsforlargebanks(particularlyUBLandHBL)hasreducedsignificantlyintheongoingyear.

• Largebanksalsobenefitintermsofdiversifiedrevenuestreamwithsignificantcontributionoftrade,bancassurance,remittanceandbranchlessbankingtooverallrevenues.UBL,HBLandNBPstandoutinthisregard.

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• Efficiencyratio(costtoincomeratio)oflargebankscomparefavorablytomediumandsmallbanksonaccountoflowercostofdepositanddiversifiedrevenuestreams.

Table 14: Large Banks Fee & Commission Income as a % of Recurring Income comparison

Bank 6M16 6M15HBL 17.0% 16.0%UBL 16.7% 17.1%NBP 19.3% 17.8%MCB 13.6% 13.6%ABL 9.7% 9.5%Alfalah 13.2% 12.9%

• Somechallengesaroundmaintaininghistoricalgrowthratesinfeesandcommissionswouldbeduetolowerrebatesfromremittancebusinessanddeclineintraderelatedfeeincomeduetolowercommodityprices.ThisishoweverexpectedtobeoffsetbyhigherinvestmentbankingandFinancialInstitutionGroupfeeduetoparticipationinvariouslargepublicsectorandCPECprojects.

Medium Banks• Medianprofitabilityindicatorsofmediumsizedbankshaveshownsignificantimprovement

duetosizeableincreaseincapitalgains.JumpinROAEduring2015wasmostnotableforAskari,BoPandHabibMetro.

• SCBhasthebestefficiencyratioat43.1%whileAskarihastheweakestefficiencyratioat67.6%.

Table 15: Medium Banks Efficiency ratio comparisonBank 2015 2014

Askari 67.6% 74.8%BoP 61.3% 61.4%Faysal 60.4% 70.6%HabibMetro 45.8% 50.1%Meezan 60.8% 62.1%SCB 43.1% 45.1%Al-Habib 51.7% 54.8%

• WithanumberofbanksinthiscategoryhavingalreadyrealizedgainsonPIBportfolioandalsoundergoingaggressivebranchexpansion,profitabilitypressuresformediumsizedbankswillbemorepronouncedascomparedtolargebanks.

Small Banks• Medianprofitabilityindicatorsofsmallsizedbankscomparelessfavorablytomediumand

largesizedbanks.Giventhesmallerbranchnetworkandhencelowermarketshare,costofdepositsandspreadsarelowerforsmallsizedbanks.Resultantly,medianefficiencyratioisveryhigh.

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• EfficiencyratiovariessignificantlyinthegroupwithBoKhavingthebestefficiencyratioat57.3%whileBurjBankhadtheweakestefficiencyratioof151.6%

Table 16: Small Banks Efficiency ratio comparisonBank 2015 2014

Albaraka 91.9% 91.8%BoK 57.3% 60.0%BankIslami 119.7% 119.7%Burj 151.6% 146.1%DIB 84.7% 79.2%FirstWomen’s 106.9% 106.9%JSBank 68.1% 77.5%NIB 93.9% 91.9%Samba 87.1% 83.6%SILK 122.6% 102.6%Sindh 68.9% 70.9%Soneri 62.4% 66.8%Summit 105.3% 119.8%

• Weakerassetqualityasreflectedinahighergrossandnetinfectionhasalsocreateddragonprofitabilityofsmallsizedbanksintermsofhigherprovisioningrequirements.

Liquidity• Theliquidityofthebankingindustryisdrivenbyenhanceddeposittakingpotentialacrossthe

sectorasbankstargetsystematicbranchnetworkgrowthandpenetrationinthebranchlessbankingsegment.

• Totalbankingsectorbranchesincreasedfrom11,174branchesatend-2014(includingsub-branches/windowsetc.)to12,102atend-2015.

• Totaldepositsheldbycommercialbanksgrewby9.3%fromRs.9,375batend-2014toRs.10,243b.ThesameamountedtoRs.11,024batend-HY16.

• CASAgrowthwhichisakeydriverforprofitabilityofbankswillbechallenginginthebackdropofadvancetaximposedonbankingtransactions.

Table 17: Classification-wise Liquidity Indicators

Large Banks Medium Banks Small Banks2015 2014 2015 2014 2015 2014

CASA* 69.5% 72.0% 70.6% 70.3% 59.3% 61.0%IndividualDeposits 39.8% 41.5% 38.3% 36.4% 46.7% 45.8%ADR 45.6% 47.5% 42.9% 45.3% 62.6% 67.7%LiquidAssetstoDeposits&Borrowings 65.3% 57.7% 57.1% 56.6% 40.7% 43.6%

Investmentsasa%ofAssets 52.9% 47.7% 50.0% 46.8% 39.3% 31.0%* Includes Overseas deposits

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Large Banks• Growthinthedepositbaseoflargebanksaccountedforthelionshare,67%growth,intotal

depositsheldbycommercialbanks.HBLandNBPaccountforaround27.3%ofthemarketshareindomesticdepositswhileUBLhasbeenpursuingamarketshareacquisitionstrategywiththesameincreasingtoover8.8%atend-HY16.JCR-VISconsidersmarketsharetobeakeyratingdriver.

• MCBcontinuestoremainthestrongestperformeramongstlargebanksmaintaininganimpressiveCASAratioof90.4%(2014:89.2%)atend-2015.However,HBLandUBLstandoutintermsofCASAgrowthduring2015andintheongoingyear.OverallCASAratioofbankswithoverseasoperationstendtobelowergiventhewholesalebankingmodeladoptedbymostbanks.Atend-2015,domesticCASAofHBLandUBLwassizeableat86%and84%,respectively.

Fig. 05: Large Banks CASA 2015 vs. 2014

• ApartfromAlfalah,GrossAdvancestoDepositsratio(ADR)hasremainedstableordeclinedforremaininglargebanks.WithlowADRsformostlargebanks,liquidassetsinrelationtodepositsandborrowingsissizeable.Thisalongwithgranulardepositbase(lowdepositorconcentration)hasresultedinstrongliquidityprofileformostlargebanks.

Fig. 06: Large Banks ADR 2015 vs. 2014

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Medium Banks• Withinmediumsizedbanks,MBL,SCBandAl-Habibstandoutintermsofdepositprofile.

StrongdomesticoperationsandfranchisehasallowedthesebankstobuildasizeableCASAbasewithlowdepositconcentrationandsignificantproportionofretaildeposits.ProportionofCASAislowestforHabibMetrowithinmediumsizedbanks.

• AnumberofmediumsizedbanksarepursuingaggressivebranchexpansiontofurtherstrengthenproportionofCASAindepositmix.

Fig. 07: Medium Banks CASA 2015 vs. 2014

• Whilelowervis-à-vislargebanks,medianliquidassetstodepositsandborrowingsissizeableat57.1%(2014:56.6%)atend-2015.LiquidityprofileofBoPisweakestwithinmediumsizedbankswithhighdepositorconcentrationandlowestliquidassetscarriedonthebalancesheetinrelationtopeers.

• ADRvariessignificantlywithinmediumsizedbankswithBoP,FaysalandAskarihavinghigherGrossADRvis-à-visothermediumsizedbanks.

Fig. 08: Medium Banks ADR 2015 vs. 2014

Small Banks• Depositorprofileofmostsmallbanksremainsweakwithsignificantdepositorconcentrationand

lowproportionofretaildeposits.Resultantly,costofdepositsishighascomparedtomostlargeandmediumsizedbanks.JCR-VISisoftheviewthatliquiditycushion,intheformofliquidassetscarriedonthebalancesheet,forbankswithsignificantdepositorconcentrationshouldbehigher.

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• SmallbankswerethemostimpactedbythemoratoriumimposedonKASBBankwithsignificantdepositwithdrawalsnotedbyJCR-VIS.

• ProportionofCASAforAlbaraka,SummitandFirstWomencomparesfavorablytootherpeerbanks.

Table 18: Small Banks CASA 2015 vs. 2014Bank 2015 2014


• GrossADRofsmallbanksishighervis-à-vismediumandlargesizedbanks.Giventhecostofdeposits,lendingtohighyieldingclients&segmentsisbeingpursuedbyanumberofsmallbanksinordertomanagespreads.Assetqualityimplicationsvarywithunderwritingguidelinesbeingfollowedbyindividualbanks.

Table 19: Small Banks ADR 2015 vs. 2014Bank 2015 2014


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Conclusion• Giventheincreasingcapitalrequirements,higherriskchargeonunratedexposuresandin

ordertofacilitateplannedgrowth,JCR-VISexpectscapitalizationchallengesforanumberofmediumandsmallbanks.IncreasedissuancesofBasel3Tier2instruments,rightsissueandhigherprofitretentionisexpectedinordertomeetchallengesonthecapitalizationfront.

• Anumberoflargebanksmayfaceadditionalcapitalrequirementsifsurchargeisimposedonsystematicallyimportantfinancialinstitutions(SIFIs).Internationally,SIFIsurchargehasrangedfrom0.8%to3%.StateBankofPakistanisintheprocessofidentificationofSIFIs.

• SignificantreductionindiscountratealongwithmaturityofPIBsisexpectedtoresultinpressureonprofitabilitygrowthofthesectorifthecurrentlowinterestrateenvironmentpersists.WithanumberofsmallandmediumsizedbankshavingalreadyrealizedgainsonPIBportfolioandalsoundergoingaggressivebranchexpansion,profitabilitypressuresforsmallandmediumsizedbankswillbemorepronouncedascomparedtolargebanks.

• Whileevensomelargebankshavereporteddeclineinoperatingprofits,largebankswithhighyieldingPIBportfolios,diversifiedincomestreams(highfeecommissioninrelationtoNII/diversifiedoverseasoperations)andlowcostofdepositsareexpectedtomaintainhealthyprofitabilitygrowth.

• Consumerfinancinghasshownanuptickduring2015andintheongoingyearwithgrowthexpectedtocontinueasbankslooktomitigatepressureonspreadsthroughincreaseinexposuretohighyieldingsegments.

• IncreaseintraderelatedfeeincomeisexpectedduetoincreasedopportunitiesarisingfromCPECandlargeinfrastructureprojects.

• Bank’sexposuretocreditriskisexpectedtoincreaseonaccountofexpectedincreaseincreditoff-takefromlargepowerandinfrastructureprojects.Rapidgrowthinfinancingparticularlyinhighyieldingsegments(unsecuredconsumerfinancing)mayhaveassetqualityimplications.

• IncreaseinoverseasNPLsoflargebankshasbeennotedduring2015andintheongoingyear.Riskoffurthernon-performingloansintheoverseasportfolioremains(particularlyinMENAregion)inthebackdropofloweroilpricesandincreasedpoliticaluncertainty.

• Overallliquidityprofileofthesectorishealthywithsizeableliquidassetsinrelationtodepositsandborrowings.Depositorprofileofanumberofsmallbanksfeaturessignificantconcentrationwithlowproportionofretaildeposits.JCR-VISisoftheviewthatliquiditycushion,intheformofliquidassetscarriedonthebalancesheet,forbankswithsignificantdepositorconcentrationshouldbehigher.

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Ratings of Commercial Banks by JCR-VIS Credit Rating Company Limited

Large Banks Medium Banks Small BanksName Rating Name Rating Name Rating

HabibBankLimited AAA/A-1+ MeezanBank

Limited AA/A-1+DubaiIslamicBankPakistanLimited

A+/A-1

NationalBankofPakistan AAA/A-1+ AskariBank

Limited AA/A-1+ TheBankofKhyber A/A-1

UnitedBankLimited AAA/A-1+ FaysalBank

Limited AA/A-1+ SummitBankLimited A-/A-1

SindhBankLimited AA/A-1+

SilkBankLimited A-/A-2

BankAlbaraka(Pakistan)Limited

A/A-1

SambaBankLimited AA/A-1

BurjBankLimited BBB+/A-2

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Analysts Contacts Talha Iqbal [email protected]

Moiz [email protected]

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