With the interest rate still at a record high and no break in sight, commercial banks in the country are continuing to make bank off the back of government-backed securities.
Take Bank Alfalah as an example. In their recently released financial results for the year 2023, Bank Alfalah revealed that they had achieved growth in the bottom line of more than 96%. Based on the results, it can be seen that the bank has been able to increase its earnings per share from Rs 10.38 at the end of 2022 to Rs 23.15 in 2023.
The results showed that in 2022, the bank saw a net markup return of 36% which fell to 30% in 2023. This meant that even though markup income almost doubled, the interest expense for the company was much higher leading to a fall in the ratio.
And it isn’t just Bank Alfalah. Most commercial banks in the country can expect rich returns this year. That is because despite a myriad of economic challenges facing the country, the banking sector has thrived amidst challenging economic conditions, with remarkable earnings over the past two years, especially in the current financial year.
Pakistan has seen interest rates at record-high levels since the end of June 2023. The country has been fighting a losing battle with inflation, leading to the State Bank of Pakistan maintaining interest rates at unsustainable levels. One of the conditions set by the IMF also revolves around the fact that as net interest rates are negative, no cut can be expected unless inflation falls below the prevailing rates.
As a result, banks have been investing in government-backed securities which are secure and generate a high rate of return. By lending with minimal risk and earning a favorable spread between borrowing and deposit rates, banks have achieved impressive profits, as reflected in their year-end accounts. If this pattern of high interest rates continues in the upcoming year, banks may further enhance their financial performance, contingent upon the duration of rate stability.
| Consolidated Financial Results for the year ended December 31, 2023 (In thousands) | |||
| FY 2023 | FY 2022 | % Change | |
| Mark-up/return/interest earned | 412,005,030 | 214,106,020 | 92% |
| Mark-up/return/interest expensed | 286,053,140 | 136,933,108 | 109% |
| Net mark-up/interest income | 125,951,890 | 77,172,912 | 63% |
| Non-mark-up/interest income | |||
| Fee and commission income | 15,428,789 | 11,231,877 | 37% |
| Dividend income | 1,022,878 | 1,091,320 | -6% |
| Foreign exchange income | 9,554,818 | 9,218,628 | 4% |
| Gain/(loss) from derivatives | 1,760,669 | 331,578 | 431% |
| Gain/(loss) on sale of securities | 295,743 | -65,024 | – |
| Share of profit from associates | 1,690,573 | 669,831 | 152% |
| Other income | 333,846 | 325,971 | 2% |
| Total non-mark-up/interest income | 30,087,316 | 22,804,181 | 32% |
| Total income | 156,039,206 | 99,977,093 | 56% |
| Non mark-up/interest expenses | |||
| Operating expenses | 64,982,495 | 49,897,939 | 30% |
| Workers welfare fund | 1,714,807 | 907,442 | 89% |
| Other charges | 279,412 | 27,178 | 928% |
| Total non-mark-up/interest expenses | 66,976,715 | 50,832,559 | 32% |
| Profit before provisions | 89,062,492 | 49,144,534 | 81% |
| Provisions and write-offs – net | 10,324,754 | 12,467,133 | -17% |
| Extraordinary/unusual items | – | – | |
| Profit before taxation | 78,737,738 | 36,677,401 | 115% |
| Taxation | 42,651,377 | 18,279,937 | 133% |
| Profit after taxation | 36,086,361 | 18,397,464 | 96% |
| Earnings per share – basic | 23.15 | 10.38 | 123%
|
While the results from other banks are imminent, Alfalah seems to have done quite well for itself. The company saw an increase in its fees and commission income, share of profit from associates and gain from derivatives which showed that total income jumped from Rs 100 billion to Rs 156 billion in 2023.
In terms of expenses, the bank was able to limit its operations which saw expenses increase by 30% overall. Due to the increase in income and decrease in expenses, the bank was able to earn a profit before tax which more than doubled from last year. In 2022, the company saw profit before taxation of Rs 37 billion and increased to Rs 79 billion in 2023.
But that isn’t all. The government will have something to be happy about in all of this. Due to higher profitability and taxes levied on the company, its tax bill is expected to be much higher this year. Regardless of that, the company still saw its profit after taxation more than double this year.
Due to the performance this year, the company announced a dividend of Rs 5 per share which was in addition to the Rs 3 which has already been given in the shape of interim dividend. This is the highest dividend that the bank has given out in its history and it can be expected that, unless rates are revised downward, these results will be replicated or even increase.
The trajectory of the results could be seen long in the past when the company was able to earn Rs 12 per share in just 6 months this year where it had only been able to earn Rs 10.38 for the whole year before that.
