Gold’s lost lustre takes shine off bank profits

gold numbersFalling global gold prices have hit financial institutions with significant portfolios of gold-backed loans, or pawning advances. Rating agencies had warned that the drop in gold prices could be painful for financial institutions like banks which encouraged pawning when the metal had a bull run.
Now, as predicted, bad loans and impairment provisions are on the rise, as shown by the third quarter results of Sampath Bank and Hatton National Bank (HNB) analysed by CT Smith Stockbrokers.
Gold prices have fallen 8% since 30 September 2013 and “is anticipated to fall further on tapering of the US Federal Reserve’s monetary stimulus”, CT Smith Stockbrokers said in a report. The brokers forecast the gold price to hit US$1,200 per ounce by end-2013 and further fall to US$1,000 per ounce at end-2014.
A “significant portion” of Sampath Bank’s loans and advances is gold pawning, the brokers said. Gold pawning accounted for 22% of total loans of Sampath as at September 30, 2013 while at Hatton National Bank (HNB) pawning advances accounted for 14.9% of gross loans.Sampath Bank reported a 2013 third quarter net profit of Rs859 million, down 19% from a year ago.
“The drop in profit is mainly attributable to the continued additional impairment provisions made on pawning advances during the period as a result of soft gold prices,” CT Smith Stockbrokers said. HNB posted a net profit of Rs2,350 million for 3Q2013, up 21% from the year before. Sampath Bank’s Loan Loss Impairments (LLI) rose to Rs1,327 million in 3Q2013 (compared with an impairment reversal of Rs213 million the previous year), resulting in a total impairment loss of Rs2,887 million in the three quarters to September 2013.
This was “largely attributed to the impairment provision of Rs1,054 million made against pawning advances due to reduction in gold prices and increase in Non-Performing Assets (NPAs)”, the brokers said.
Sampath Bank’s impairment provisions for pawning covers about 3.5% of the total gold portfolio.
HNB reported a loan loss impairment cover of 47% on its pawning NPAs, which stood at Rs1.5 billion or three percent of the total pawning book as at 30 September 2013.
HNB’s Loan Loss Impairments in the three quarters to September 2013 were up 40% to Rs2,826 million from the year before. Impairment on pawning accounted for Rs720 million as at 30 September 2013.
Despite the pawning problems at both banks, CT Smith Stockbrokers said it expects their shares “to find favour amongst value-oriented medium-term investors.”