The banking sector in Pakistan is expected to post a 10% year-on-year (YoY) and 24% quarter-on-quarter (QoQ) decline in earnings for the fourth quarter of 2024, according to a detailed review by Topline Securities. The decline is attributed to a higher effective tax rate, despite growth in key income streams.
The government recently abolished the additional tax of 10-16% on banks with low Advances-to-Deposits Ratios (ADR). However, it increased the standard income tax rate for banks from 49% to 54%, which includes a 10% super tax, for the fiscal year ending December 31, 2024.
Despite the projected decline in earnings, the sector’s profit before tax is expected to grow by 9% YoY, driven by higher Net Interest Income (NII) and Non-Interest Income. NII for banks in the Topline portfolio is forecasted to rise by 7% YoY to Rs. 314 billion, supported by volumetric growth. However, the impact of the 200 basis points (bps) reduction in the policy rate announced at the end of 4Q2024 will only be reflected in the first quarter of 2025.
Topline Securities also highlighted that banks in its portfolio are likely to post a 16% YoY growth in 4Q2024, primarily due to an increase in Fee & Commission Income and Capital Gains. Provision expenses for the sector are expected to decline significantly, down 52% YoY to Rs. 6.1 billion, driven by lower provisions from Bank Al Habib (BAHL) and Habib Bank Limited (HBL).
On a QoQ basis, profit before tax for the banking sector is expected to increase by 1%, despite the policy rate cut. This growth is attributed to a favorable asset repricing gap, volumetric growth, and reduced provision expenses.
For the full year, Topline Securities projects the sector’s earnings to reach Rs. 371 billion, reflecting an 11% YoY increase. Profit before tax is expected to grow by 18% YoY to Rs. 806 billion.
Among individual banks, Meezan Bank (MEBL) is forecasted to record the highest earnings growth of 21% YoY in 2024, followed by United Bank Limited (UBL) at 20% and Bank Alfalah (BAFL) at 15% YoY. The report also noted that banks with comfortable capital adequacy buffers and robust profitability are likely to maintain higher dividend payouts in 2024.
Topline Securities maintains a market-weight stance on the banking sector, with Meezan Bank (MEBL) and Habib Bank Limited (HBL) highlighted as key players. The report underscores the sector’s resilience despite challenges posed by higher taxes and policy rate adjustments, with growth in income streams and lower provision expenses providing some relief.
