950825

20-30pc fall in earnings feared

Investment banks

ache as equity

values depreciate

RECORDER REPORT

KARACHI: Private investment banks appear to be headed for a major shakeout at the stock market after the bearish spell of the last three years as it is feared that their earnings may deplete by nearly 20 to 30 percent in 1995.

Market circles do not expect these institutions would collapse as most of them have, by now, significantly diversified their operations. But what is at a stake is the investor's confidence in their ability to operate in abnormal conditions.

Until the end of 1994, the investment banks performed quite well. Around 15 to 20 percent of their total revenues was generated through capital gains as well as trading activity.

In that year, the net profit of seven investment banks - Fidelity, Cres Bank, Al-Towfeek Bank, Security Investment, Citicorp, First Investment Bank and Atlas Bot - amounted to Rs. 460.947 million as against Rs. 256.579 million of the previous year, indicating a substantial increase of 79 percent.

These banks also showed a significant rise in their investment portfolios, moving up to Rs. 3.949 billion as against Rs. 2.514 billion of the previous year, showing a net rise of 57 percent. On the assets side, these institutions showed a remarkable rise of 20 percent to Rs. 16.951 billion as against Rs. 14.081 billion of the corresponding year.

But the story since the beginning of 1995 is quite different and the KSE-100 Index has slid by 39 percent since its peak in March 1994 (20 percent in 1995). Consequently many investment banks that built up their equity portfolios have seen their market values tumbling from as high as 50 percent above portfolio cost to 50 percent below cost. Although there are bullish signals in the market the chances of a broad-based market rally wiping out the paper losses are slim.

Out of the 10 investment banks, the major laggard in terms of market value is Fidelity Investment Bank which lost almost 50 percent in terms of its portfolio cost. The figure on December 31, 1994 was Rs. 432 million but the decline in the index pulled this down to Rs. 217 million. Citicorp slipped 47 percent to Rs. 10 million, Atlas Bot 49 percent to Rs. 33.1 million, Prudential Investment Bank 39 percent to Rs. 40 million and Islamic Investment Bank 35 percent to Rs. 26 million.

Nauman L. Sheikh, research analyst of Khadim Ali Shah Bukhari said Cres Bank with one of the best portfoilios in comparison to the rest of the sector, has shown only a 2 percent decline in market value. He added that the bank is the largest in Pakistan in terms of assets of Rs. 7.2 billion.

"Al-Faysal Investment Bank, with the largest equity portfolio among the investment banks and a 27 percent decline in the market value, is also in for a hit in terms of after-provisions/tax earnings, if the current market outlook does not change for the better. But the bank's non-interest income comprising 7 percent of total revenue may cover its pitfalls", said Nauman.

Nauman said the budget speech confirmed the steady decline in tax rates to 30 percent by 1997-98 for investment banks. The effective tax rates paid by the investment banking sector in 1994 averaged only 24 percent mainly due to the large tax-free cushion provided by capital gains on equity investments. Some banks, such as Al-Faysal Investment, paid an effective tax rate of just over 10 percent while the others, such as Citicorp, effectively paid 38 percent, given their low dependence on income from capital gains.

The investment banks' average effective tax rate is projected to increase to over 30 percent in 1995 because of the erosion in market values of their portfolios in line with the decline in the KSE-100 by 19 percent and the consequent decline in revenues generated from the capital markets.

Against this backdrop, investment banks have to improve the quality of their earnings by concentrating more on the fee income side of their operations. However, only a handful of them have managed to earn for themselves a reputation of an investment bank in the true, sence, said Nauman. He further said these banks have begun investing in the necessary infrastructure and human resources to be able to offer clients a range of services such as corporate finance, consultancy/advisory, councelling. As the pace of privatization in Pakistan picks up and corporations seeks new avenues for resource mobilization, investment banks will undoubtedly be the major beneficiaries.