Pakistan Banks Are Likely to See a Decline in Profits

The banking sector is likely to post an earnings decline of 10 percent YoY and 24 percent QoQ in 4Q2024, amid a higher effective tax rate, Topline Securities said in a detailed review. To recall, the government abolished the additional tax of 10-16 percent on banks due to low ADR; however, it increased the standard income tax for banks from 49 percent to 54% (including a super tax of 10 percent) for the year ending on December 31, 2024. Profit before tax of the sector is likely to increase by 9 percent YoY, driven by higher Net Interest Income (NII) and Non-Interest Income. NII of the banks in the Universe is likely to increase by 7 percent YoY to Rs. 314 billion due to an increase in volumetric growth. The impact of the 200bps fall in the Policy Rate announced at the end of the 4Q2024 will be reflected from 1Q2025. The report said banks in the Topline portfolio are also likely to post a growth of 16 percent YoY in 4Q2024, mainly due to an increase in Fee & Commission Income and Capital Gains. Total provision expenses are likely to clock in at Rs. 6.1 billion in 4Q2024, down 52 percent YoY, mainly driven by a decline in the provision expenses of Bank Al Habib (BAHL) and Habib Bank (HBL). On a QoQ basis, despite the decline in the policy rate, profit before tax earnings in the banking universe are expected to increase by 1 percent, driven by a favorable asset repricing gap, volumetric growth, and lower provision expense. For the full year, Topline expects earnings to be Rs. 371 billion, up 11 percent YoY, and profit before tax to be Rs. 806 billion, up 18 percent YoY. Bank-wise, Meezan Bank (MEBL) is likely to show the highest earnings growth of 21 percent YoY in 2024, followed by United Bank (UBL) at 20 percent and Bank Alfalah (BAFL) at 15 percent YoY. Given the comfortable buffers above their respective minimum adequacy levels and robust profitability growth, banks will continue with a higher dividend payout in 402024. The report maintains a market weight stance on the banking sector where Meezan Bank (MEBL), and Habib Bank (HBL).