Barclays Plc, the U.K.’s second-largest lender by assets, expects its Pakistan unit to post record profit this year as cost cutting measures help it weather interest rates at a seven-year low.
After closing its retail asset business in Pakistan about three years ago, the London-based bank is focused on multinational companies, large corporations, financial institutions and high net worth individuals in the country, said Shazad Dada, chief executive officer of the lender’s local unit. He declined to elaborate on this year’s profit forecast.
Banks in South Asia’s second-biggest economy after India face tighter loan margins after the government on June 21 unexpectedly cut interest rates to stimulate an economy battered by blackouts and a Taliban insurgency on its northwest border with Afghanistan. Since opening operations in Pakistan in July 2008, Barclays has pared its headcount and cut branches there by almost half.
“We have cut down costs by half in the past few years,” Dada, 47, said in an interview in Karachi. “Sometimes you need to shrink to expand. You need to reset in view of the economic environment.”
The bank has reduced its branch network to eight outlets from 15. Existing branches serve customers in Pakistan’s largest cities: Lahore, Islamabad, Karachi and Rawalpindi.
Dada sees business potential in trade and foreign direct investment where being an overseas bank will give Barclays an advantage. Nestle SA, the world’s biggest food company, is among the Pakistan unit’s largest corporate customers, he said.
“There is a lot more potential within this segment,” he said. “We have most business groups we had targeted. The next phase is deepening those relationships.”
Barclays Pakistan reported a net loss of 1.15 billion rupees ($11.2 million) last year after posting its first net income of 445 million rupees in 2011, according to financial statements.
Net income at the unit rose eightfold to 107.6 million rupees in the quarter ended March 31. Only four of 17 listed- banks on Karachi’s benchmark stock index reported a rise in the quarter, according to data compiled by Bloomberg.
“They are small in size and only cater top-tier of corporate sector,” said Raza Jafri, head of research at AKD Securities Ltd. by phone in Karachi. “Most banks may not see growth in 2013 compared with last year due to declining interest rates. This year will be poor for the banking sector.”
State Bank of Pakistan on June 21 lowered the discount rate to 9 percent from 9.5 percent after cutting the benchmark interest rate by 2.5 percentage points last year. Five out of seven economists in a Bloomberg News survey expect the rate to remain unchanged at the next decision due this month.
Barclays Chief Executive Officer Antony Jenkins in February pledged to cut costs, close businesses that hurt the bank’s reputation or weren’t profitable, mend relations with regulators and pay more of its profits to shareholders. The restructuring includes shedding 1.7 billion pounds ($2.7 billion) in annual expenses by 2015, eliminating 3,700 jobs and reducing costs to about 55 percent of income from 71 percent in the first quarter.
Pakistan bank earnings “will be a tale of two cities,” said Dada, who started his career in the U.S. and headed Deutsche Bank AG’s local operations. “Only banks that have their strategy right will succeed this year with declining interest rates.”