Major banks may take earning hit from pension liabilities

KARACHI: Major commercial banks could face earnings hit this year amid high pension liabilities following the apex court’s decision to increase payments to their former employees, analysts said on Tuesday.

The Supreme Court of Pakistan announced its detailed verdict on the pension case relating to the Allied Bank Limited (ABL), Habib Bank Limited (HBL) and United Bank Limited (UBL) on the same day.

As per the judgment, the above banks must pay at least Rs8,000/month to any pensioner (including their widows, where applicable), along with an annual increment of five percent in the aforesaid pension, that was effective immediately.

The Chief Justice of Supreme Court of Pakistan took suo motu action citing the exorbitant disparity in the wages of bank executives and the pensions paid to the former employees of ABL, HBL and UBL.

Many analysts agreed that banks have to book the expenses relating to the judgment's prospective application.

“Though, it’s premature, but the impacts of Supreme Court’s verdict are likely to be seen on the books of these three major banks in 2018,” said an analyst. “The negative effects could be felt in the form of lower profits in 2018 due to expected increase in pension liabilities.”

Taurus Securities Limited in its report based on UBL’s recent financial statement said the bank could face a possible impact in the range of Rs3.4 billion to Rs5.9 billion. The profit after tax of UBL stood at Rs25.421 billion in the year ended December 31, 2017, compared with Rs27.730 billion earned in the same period in 2016.

For ABL, the brokerage said, “Based on the latest number of employees, we estimate the pre-tax impact to be quite minimal ranging between Rs0.07 to Rs0.09/share on the ABL.”

The earnings of ABL came at Rs12.734 billion in 2017 as against Rs14.427 billion during 2016.

An analyst at First Capital Equities Limited said, “We expect HBL to book substantially lower charge since pensioners for HBL stand at 2,743 as against UBL’s 6,798.”

The analyst said HBL’s board meeting was due to be announced and “the bank can possibly, following prudence, account for the increase in pension liability in CY17 results.” Analysts said with pension case concluded, banks could now return to limelight with interest rate hikes of 75 basis points during the rest of 2018 and macro theme supporting loan growth.

The magnitude of interest rate hikes clubbed with currency devaluation is unlikely to affect non-performing loan accretion. Further, capital raising exercise by banks (through other than capital dilution) should address concerns on profitability growth and dividend payments.

It is worth noting that the National Bank of Pakistan (NBP) skipped cash dividend in its 2017 results on concerns of the expected outcome from huge pension liability.

The NBP has filed review petition against the judgment of the Supreme Court of Pakistan in the pension case and has also moved an application for constitution of a larger bench which has been accepted.

The revised pension will be paid to pensioners linked to the basic pay ‘frozen’ category in the past years for all the three banks. However, in case of UBL the judgment will also apply to its retrenched employees, including those who had served for more than ten years on the date of retrenchment, according to the Supreme Court’s judgment.

Pensioners who have taken the benefit of Voluntary Separation Scheme or Golden Handshake Scheme will not benefit from the above judgment.

from The News International - Business http://ift.tt/2oDZlqf