ISLAMABAD: Pakistani banks report strong 2020 profit growth, despite pandemic and rising provisions, but pressure on 2021 profitability amid narrower net interest margins and ongoing asset quality deterioration is expected, says Moody’s Investors Services (Moody’s).

Moody’s in its latest report on Pakistan stated that as of 22 February, three of Pakistan's large banks had reported their 2020 results, with MCB Bank Limited (B3 stable, b31), Allied Bank Limited (B3 stable, b3) and Habib Bank Ltd (B3 stable, caa1) each reporting higher profitability and capital buffers than in 2019, and robust liquidity.

The results are credit positive for the banks and reflect containment of the pandemic’s adverse effects.

However, we expect pressure on 2021 profitability amid narrower net interest margins and ongoing asset quality deterioration, it added.

Profitability for the MCB in 2020 increased 23 percent to Rs29.6 billion, translating to a return on assets (ROA) of 1.6 percent; Allied Bank’s profitability rose 27 percent to Rs18.4 billion for an ROA of 1.2 percent; and Habib Bank’s profitability rose 99 percent to Rs30.9 billion for an ROA of 0.8 percent.

These results reflect robust net interest income and strong balance-sheet growth facilitated by increased deposits and good treasury positioning, despite a cumulative 625-basis-point cut in interest rates since July 2019.

A significant increase in gains on securities to Rs14 billion from losses of Rs65 million in 2019 also supported the three banks’ bottom-line profitability.

Growth in income more than compensated for the MCB’s provisioning charge increase to Rs7.3 billion from Rs2.7 billion in 2019, and Habib Bank’s increase to Rs12.2 billion (including Rs6.4 billion of general provisions) from Rs3.3 billion over the same period.

Allied Bank’s provisioning charge only marginally increased to Rs844 million from Rs547 million, partly reflecting its best-in-class asset quality, with non-performing loans (NPLs) accounting for 2.8 percent of gross loans.

The MCB reported an NPL ratio of 10 percent, up from 9.2 percent in 2019, while Habib Bank’s NPL ratio fell to 6.3 percent from 6.6 percent in 2019.

“For 2021 we expect profitability to remain at 2020 levels mainly because of a squeeze in net interest margins after the interest rate cuts. This was not visible during 2020 because Pakistani banks held a high proportion of Pakistani investment bonds (PIBs) purchased in previous years and they carry high yields that protected margins from the interest rate cut,” it added.

However, when these PIBs are repaid, new issuances will carry lower yields (three-year PIB yields fell to 8.2 percent in December 2020 from 14.2 percent in August 2019; yields on 12-month treasury bills fell to 7.3 percent from 13.1 percent during 2020).

“We also expect provisioning costs to remain elevated in 2021 because we anticipate that NPLs will increase with the gradual withdrawal of Covid-19-related support measures,” Moody’s added.

Pakistani banks have also yet to introduce IFRS9, which requires more forward looking risk provisioning; once implemented (likely in 2021, according to the State Bank of Pakistan circular), this will potentially lead to higher provisioning requirements that will directly affect banks’ capital.

All three banks increased their capital buffers in 2020.

The capital adequacy ratio (CAR) at Habib Bank increased to 17.2 percent from 15.4 percent in 2019, while the MCB’s CAR rose to 21 percent from 18.9 percent and Allied Bank’s CAR rose to 25.4 percent from 21.8 percent.

Lower dividend payouts (following the State Bank of Pakistan’s request to suspend dividend payments for two quarters) supported the increased CARs, as did strong profitability and modest increases in the loan book and in risk-weighted assets.

The banks maintain robust liquidity buffers, supported by inflows of deposits and strong remittances.

Core liquidity (cash and interbank balances) accounted for around nine percent of the MCB’s total assets, 10 percent for Allied Bank, and 12 percent for Habib Bank.

In addition, investments (mainly in government bonds) comprised 55 percent of MCB’s total assets, 52 percent of Allied Bank’s, and 51 percent of Habib Bank’s.