Islamic banks profitability up 58% in Q1FY12

KARACHI: The profit of Islamic banking industry (IBI) reached Rs 8 billion by end of the first quarter of 2011-12, showing growth of over 58 percent, as earning’s growth rate of conventional banks having Islamic banking branches is significantly higher than the growth rate of full-fledged Islamic banks.

The study ‘Islamic Banking Bulletin July-September 2011’ released by the State Bank of Pakistan (SBP) revealed that the share of full-fledged banks in overall profit of IBI though declined marginally over this quarter still constitutes major share (55 percent share) of overall profit of the industry.

The growth in profit during the said quarter is relatively lower than the growth rate of the last quarter (100 percent). However, the significantly higher growth rate of the last quarter can be associated to the base effect.

IBI continued its positive trend of earning as indicated by the rising trend in return on assets (RoA) and return on equity (RoE), both these ratios though didn’t show any significant change over the quarter under review for the overall banking industry.

It is also worth noticing that for IBI ‘net mark-up or profit income to gross income’ indicated a decline while ‘non-mark-up or profit income to gross income’ showed an upward trend, which is in contrast to overall banking industry norms.

As of end September 2011, the total assets of the IBI stood at Rs 568 billion, constituting 7.3 percent share of overall banking industry.The deposits of IBI reached Rs 463 billion during the quarter under review and its share increased to 8 percent of the overall banking industry from 7.6 percent in the last quarter (April-June 2011); the yearly basis growth of the deposits was almost 37 percent.

However, investments growth decelerated while financing witnessed retrenchment compared to the previous quarter. The deceleration in growth of investment can be explained by the non-issuance of any new Sukuk during the quarter while the retrenchment in financing is due to the business cycle of most corporate clients as well as the overall economic conditions of the country.

The industry witnessed rising non-performing financing (NPF) during the period under discussion reaching Rs 15.7 billion from Rs 14.8 billion during the last quarter, even so the IBI continued to achieve higher profit and increase in earnings.

The Islamic banking branches’ network increased to 841 branches from 799 as at the close of the last quarter. By opening 42 branches during the quarter the industry also achieved 62 percent of its planned annual branch expansion plan for 2011.

In line with the past trend these additional branches are more concentrated in Punjab (23) and Sindh, which constitute 78 percent share of overall network of the industry. Among banks, Meezan Bank Limited has remained prominent in expansion of its network with an increase of 20 branches during the said period.

However, the industry still seems reluctant in expanding to second and third-tier cities.The assets of IBI reached Rs 568 billion as compared to Rs 560 billion in the last quarter, registering a growth of 2 percent during the quarter under study; the growth is significantly lower than that of the last quarter, SBP report said.

It is important to note that assets of full-fledged Islamic banks witnessed a decline in growth rate from 10 percent in the last quarter to 3 percent in the quarter ended September 2011, while Islamic banking divisions (IBDs) of conventional banks contracted by 1 percent over the period under study in contrast to 17 percent growth in the last quarter mainly attributable to the category of other assets.

The financing of IBIs retrenched by almost 6 percent as it dropped to Rs 177 billion by end of the quarter under study from Rs 188 billion in the last quarter. This fall in financing is in line with the trend of overall banking industry and also with the usual trend of IBIs.

In general the business cycle of most industries including textile (the major shareholder of financing of IBIs) enable industries to retire major portion of their financing in third quarter (from July to September).

This can also be seen by looking at the sector-wise financing of IBI, as the corporate sector that comprises more than 70 percent of the financing recorded negative growth of more than 5 percent. The decline in financing share of industries like textile, sugar, shoes and leather garments etc also support the premise of drop in financing due to nature of their business cycle.

IBI’s investment reached Rs 236 billion in the quarter ending September 2011 from Rs 231 billion in June 2011, registering a growth of only 2.2 percent in contrast to the growth of 19 percent during the last quarter. The lower growth of investment during the quarter is primarily attributable to non-issuance of government of Pakistan’s Sukuk.

However, the available government’s Sukuk in the market remained the major investment avenue for Islamic banking institutions particularly for IBDs. The asset quality of the industry deteriorated marginally with non-performing financing (NPF) increasing from Rs 14.9 billion to Rs 15.8 billion during the quarter under study. The industry witnessed Rs 0.8 billion increase in the category of substandard while Rs 0.2 billion in category of doubtful.

However, this quarterly rise in NPFs is in line with the quarterly growth of NPLs of the overall banking industry. The yearly basis growth rate of 16.8 percent in NPF is lower than that of last quarter, however, the quarterly growth rate (6 percent) is higher than that of the previous quarter indicated by the rising trend of NPFs to financing as well as the net infection ratio.

However, both mentioned ratios are still below than the overall industry average (almost half) hinting at the cautious approach of Islamic banks.Deposits of the industry reached Rs 463 billion by end of the third quarter (September 2011), increasing from Rs 452 billion by end of the last quarter (June 2011).

However, the growth rate witnessed a decline – both annually and quarterly. It is interesting to note that despite the fall in overall growth rate of deposits the category of fixed deposits of customers witnessed a significant rise in its annual and quarterly growth rates from 31.8 percent to 36.5 percent and from 6.3 percent to 7.5 percent, respectively.