COMMENT: Financing flood reconstruction —Muhammad Aftab

Out of 21 banks, 12 recorded an increase on the back of higher fee income and a 39 percent decline to Rs 19 billion in loan losses. The banks failed to control their management and administrative expenses, which were up 13 percent to Rs 71 billion

As the floods recede, the country is a picture of destruction. Now comes the hard task: of reconstruction; helping farmers, industry and business to put them back on their feet. Whatever the cost of reconstruction is going to be, the financing task is unusual and enormous. Extraordinary steps will be needed.

I suggest the State Bank of Pakistan (SBP) create a new Flood Financing Facility (FFF), like the Export Financing Facility (EFF), to provide discounted credit to banks and institutions for re-lending. There should be stiff lending criteria for loans for genuine needs and to genuine borrowers. No throwing away the money as in the past. Commercial banks should also cut credit cost significantly for reconstruction and bringing farms and businesses back on track. I propose this plan to provide discounted credit, taking advantage of the fact that commercial banks’ profits have risen sharply in the first half of calendar year (CY) 2010, after two comparatively less attractive years.

The six-month combined profits of 25 listed commercial banks rose 33 percent by June 30, the first half of Current Year (CY) 2010, the results unveiled this week show. Their profits rose to Rs 35.512 billion, an increase of Rs 8.88 billion up from Rs 26.630 billion in the first half of CY 2009. The ‘big five’, out of the total amount, enjoyed 80 percent of the amount of the profit.

What will be the state of profitability in the second half of CY 2010? The SBP is a bit apprehensive that the profits can be adversely affected in case the non-performing loans (NPLs) rise or there is repayment default by the customers in the wake of the huge flood devastation.

The floods have hit the economy on the back of a comparatively good business period in the first half of CY 2010, which had seen a slowdown in NPLs, and a reduced provisioning for bad loans by banks. The banks enjoyed a stable net interest income (NII) between January and June 30. This analysis is based on the results of 21 out of 25 banks that, together, have 93 percent of the market capitalisation, and 95 percent of the advances and deposits of the listed sector clients. Future profitability will considerably depend on the amount of provisioning the banks will have to make on account of NPLs. The first half saw the banks make 39 percent less provisioning for NPLs. Reduced provisioning was reported by 19 out of 21 banks. The only exceptions were Habib Metropolitan and Soneri. The provision for loan losses after the decline was Rs 19.9 billion. NPLs for all banks rose by Rs 2.6 billion to reach an overall total of Rs 460 billion — a significant decline in accretions to the previous two quarters.

The good news is that the first half of CY 2010 saw the banks’ net interest income rise seven percent to Rs 120 billion on the back of investments and expanding earnings assets. The increase was more than projected earlier. The NII went up despite the fact that the Karachi Inter Bank Offered Rate (KIBOR) in June was down 135 basis points. The increase in NII accrued from a significant growth in deposits and increase in earning assets, and importantly from investment. Strong spreads were yet another element contributing to this increase. Among the big five, Allied Bank saw its NII rise 22 percent. United Bank, Habib Bank and National Bank reported an NII growth of 6-9 percent. Muslim Commercial Bank, however, reported a two percent decline.

The non-net interest income (N-NII), however, was down three percent on a year-to-year basis, despite the banks’ fee income rising and there were larger gains on selling securities in most cases. It is attributable to decline in incomes reported by Allied Bank, United Bank and Royal Bank of Scotland. Out of 21 banks, 12 recorded an increase on the back of higher fee income and a 39 percent decline to Rs 19 billion in loan losses. The banks failed to control their management and administrative expenses, which were up 13 percent to Rs 71 billion. Their reason: inflation boosted their expenses. If these had been controlled, profits would have been higher. As the country struggles to come out of the flood devastation, the quantum of reconstruction work and the available foreign and domestic funding for this huge task will determine the business volume and profitability of the banks during the second half of CY 2010 and beyond. But, I am sure, even lending under FFF discounting should not take the lustre of their balance sheets away.

The writer is an Islamabad-based journalist and former Director General of APP