Allied Bank Limited (ABL) has reported a notable decline in earnings for the first quarter of 2025, driven by a combination of lower average interest rates, rising tax obligations, and a substantial contraction in its loan portfolio. Alongside its financial results, the bank announced an interim cash dividend of Rs4 per share, maintaining its payout policy despite profitability pressures.
The first quarter marked a reversal from the credit-driven growth seen in the final quarter of 2024. Unlike 4QCY24, which saw banks pushing advances to mitigate tax penalties associated with the Advance-to-Deposit Ratio (ADR), the urgency faded in early 2025. As a result, ABL’s ADR dropped sharply by 12 percentage points from December 2024, landing at 40%—its lowest level in over ten quarters. This steep decline followed a brief eight-point surge the previous quarter, underscoring the temporary nature of the lending spree.
In numerical terms, ABL’s loan book shrank by Rs39 billion during the first quarter, erasing much of the Rs204 billion increase recorded in Q4 2024. This 23% quarter-on-quarter contraction in advances marks one of the steepest in ABL’s recent history. The decline is steeper than the overall industry trend, which saw a 15% drop in advances, bringing the banking sector’s total credit volume down to Rs15 trillion. Interestingly, Non-Bank Financial Institutions (NBFIs)—despite holding just 8% of total sector loans—accounted for nearly one-third of the Rs2.4 trillion drop, highlighting the widespread impact of temporary lending incentives.
With credit growth cooling, ABL, like many of its peers, redirected its strategy towards safer investment avenues. The bank increased its holdings in government securities by Rs366 billion during the quarter, marking a 32% rise in its investment portfolio. This far outpaced the banking industry’s average investment growth of 11%. The bulk of these allocations went into Pakistan Investment Bonds (PIBs) and Islamic Sukuks, which helped lift ABL’s Investment-to-Deposit Ratio (IDR) into the 70% range—its highest level in six quarters.
On the deposit side, ABL’s growth remained subdued, with a modest 2% increase from December 2024, bringing its deposit base to Rs2 trillion. This lags behind the broader industry’s 5% growth over the same period. Nevertheless, the composition of deposits improved, with the bank reporting a stronger Current Account and Savings Account (CASA) ratio year-on-year.
Non-markup income provided a buffer to the bottom line. Fee and commission income remained robust, while capital gains more than doubled compared to the same period last year. Gains on Eurobonds and federal securities played a key role in boosting this revenue stream. However, these gains were offset by a sharp uptick in operating expenses. Administrative costs surged 15% year-on-year—well above the quarter’s average inflation rate of just 1.5%. As a result, ABL’s cost-to-income ratio deteriorated significantly, surpassing the 45% mark.
Despite some headline stability in macroeconomic indicators—including inflation, the current account, and exchange rates—the real economy continues to show signs of weakness. Both the agriculture and large-scale manufacturing (LSM) sectors remain under pressure, casting doubt on a robust rebound in private sector credit demand for the remainder of 2025. Unless regulatory pressures—such as the ADR tax floor—return unexpectedly, banks may continue to favour government securities over commercial lending.
ABL’s performance in Q1 2025 reflects the broader recalibration underway in the banking sector. With an eye on macroeconomic caution and policy headwinds, banks appear to be bracing for a slow credit environment while safeguarding profitability through strategic investments.