How to Analyze Pakistani Banks

Short answer: Analyze a Pakistani bank by checking the quality and cost of its deposits, net interest margin, loan and investment mix, non-performing loans, provisions, capital adequacy, ROA, ROE and dividend capacity. Value banks mainly with price-to-book and sustainable ROE, not with sales, gross margin or industrial-company debt ratios.

Why bank accounts look different

Deposits are a bank's funding source and loans are earning assets, so a large balance sheet is normal. The debt-to-equity ratio used for a cement or manufacturing company is therefore not a good standalone measure for a bank. Banks are regulated through capital, liquidity, provisioning and asset-quality requirements.

Compare banks such as UBL, MCB, HBL, MEBL, BAHL, ABL and FABL over the same period, but do not treat a high historical return or dividend as a recommendation.

The nine numbers to check first

1. Deposits and funding cost

Deposits are not equal. Current accounts generally provide cheaper funding because they are non-remunerative, while savings and term deposits carry a profit or interest cost. Review deposit growth, current-account share, savings mix and concentration among large depositors.

CASA is useful, but current deposits deserve separate attention because savings deposits are still remunerative. Fast deposit growth is only valuable if it does not require an excessive cost.

2. Net interest income and margin

Net interest income is the difference between income earned on loans and investments and the cost paid on deposits and other funding. A stable margin across rate cycles usually shows a strong deposit franchise and disciplined asset pricing.

Do not assume higher policy rates always help every bank. Asset yields may rise, but deposit costs, loan demand and credit losses can also change. Review the repricing profile in the annual-report notes and compare several years.

3. Loans, investments and income quality

Separate advances to customers from investments in government securities. Investments may support earnings and liquidity, while advances can provide stronger spreads but create credit risk. Review sector concentration, consumer exposure, corporate lending, government securities and the advances-to-deposits ratio.

Also check non-funded income such as fees, cards, trade finance, remittances and foreign exchange. Diversified recurring fees can make earnings less dependent on interest-rate movements, but one-off trading gains should not be treated as permanent income.

4. Non-performing loans and provisions

A lower NPL ratio is generally better, but direction and coverage matter. A bank can report low current credit cost while risks are building. Read classified-loan categories, rescheduled loans, sector exposure, specific provisions and general provisions.

5. Capital adequacy and liquidity

Capital adequacy ratio shows the regulatory buffer available to absorb losses. Compare total CAR, Common Equity Tier 1 capital and the minimum requirement disclosed by the bank. A comfortable buffer supports growth and dividends; a thin buffer may require retained earnings or new capital.

6. Profitability and operating efficiency

Sustainable ROE should come from healthy margins, controlled credit losses and operating efficiency, not an unusually thin equity base or one-off gains. Compare digital investment, branch costs, employee costs and cost-to-income over time.

7. Dividends and capital retention

Compare dividend per share, payout ratio and multi-year consistency. A bank may earn strong profit but retain capital to meet regulatory requirements or fund growth. Therefore, estimate dividend capacity only after reviewing CAR, credit losses and management guidance.

8. Value banks with price-to-book and ROE

Book value is central for a bank because the balance sheet drives earnings. Compare price-to-book with sustainable ROE, asset quality, capital and growth. A high-quality bank can deserve a premium to book, while a bank with weak loans or low ROE may deserve a discount.

P/E remains useful, but earnings can be temporarily boosted by the interest-rate cycle or trading gains. Never conclude that the lowest P/B or P/E bank is automatically the cheapest.

A simple comparison example

Bank A has stronger funding, asset quality, capital and ROE, so the market gives it a higher P/B. Bank B's discount is not automatically a bargain; it may be compensation for credit and profitability risk. Estimate whether the weaknesses are temporary and whether the valuation provides enough margin of safety.

Red flags in a bank

• NPLs rising faster than advances, especially with weak coverage.
• Deposit growth dependent on expensive term deposits.
• Capital ratios moving close to regulatory minimums.
• Profit dominated by one-off trading or foreign-exchange gains.
• ROE rising only because equity is unusually low.
• Large exposure to a weak borrower, sector or related party.
• Dividend payments unsupported by capital and recurring earnings.

Conventional and Islamic banks

The same broad questions apply to both, but terminology and product structures differ. For Islamic banks, review financing and investment modes, deposit pools, profit-sharing arrangements, Shariah governance and purification disclosures. Compare like with like and read the bank's Shariah Board report.

Roman Urdu summary

Bank ko factory wali company ki tarah analyze na karein. Dekhein deposits kitni tezi se aur kis cost par barh rahe hain, current accounts ka hissa kitna hai, bad loans aur provisions kya hain, capital buffer kitna hai aur ROE sustainable hai ya temporary. Valuation mein P/B ko ROE aur asset quality ke saath compare karein.

Official data sources

• SBP Financial Stability Review
• SBP non-performing loan data
• PSX Data Portal bank reports and announcements