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Brief review of banking sector in Pakistan

Well-organized liquidity management must be the primary focus of any state’s banking sector; however, this has gained presently more importance in Pakistani banking sector. Pakistan’s economists have predicted that further Public Sector Development Program (PSDP) and China-Pakistan Economic Corridor (CPEC) related works would help continue to grow the sector’s performance in future.

The State Bank of Pakistan (SBP) has been playing a crucial role in the over-all growth of banking sector and especially the promotion of Islamic finance has remained a significant component of strategic targets of the central bank while rightly playing dual role of regulator and also a facilitator for the industry.

ISLAMIC BANK BRANCHES (MARCH 31, 2017)
Province/Region
Total Number
Punjab
1,088
Sindh
703
KPK
255
Baluchistan
99
Gilgit Baltistan
9
FATA
9
Federal Capital
118
AJK
36
Total
2,317

As a result, the asset base of the banking sector has enlarged by 2 percent during Q1FY2017; faster than the same period of previous year.

Islamic banking in the country, the second most populous Muslim-majority nation after Indonesia, presently includes 5 full-fledged Islamic banks and 16 conventional banks providing Islamic financial products. Interestingly, the most of the growth is resulted from IBIs (Islamic Banking Institutions) which added Rs102 billion of fresh loans in the quarter under review.

STRUCTURE OF INTEREST RATES IN PAKISTAN (%)
Month
SBP Reverse Repo Rate
SBP Repo Rate
SBP Policy (Target) Rate
8-Oct-12
10.00
7.00
17-Dec-12
9.50
6.50
11-Feb-13
9.50
7.00
24-Jun-13
9.00
6.50
16-Sep-13
9.50
7.00
18-Nov-13
10.00
7.50
17-Nov-14
9.50
7.00
26-Jan-15
8.50
6.00
24-Mar-15
8.00
5.50
25-May-15
7.00
5.00
6.50
14-Sep-15
6.50
4.50
6.00
23-May-16 till date
6.25
4.25
5.75

GROSS ADVANCES: Gross advances have surged by a higher rate of 2.4 percent during Q1FY2017 as compared to 0.78 percent during the same period last year.

FINANCIAL BORROWINGS: Financial borrowings, after identifying a downward trend in the last 2 quarters, has picked up again. However, the banks’ borrowing from financial institutions has grown by 12 percent during Q1FY2017.

ASSET QUALITY: The asset quality of this sector continues to observe improvement. In Q1FY2017, infection ratio (NPLs/total loans) moved down to 9.9 percent; explaining noticeable improvement of 182 bps over the same period last year. This optimistic development has been brought about by a fall of 2.4 percent yearly in NPLs and a strong growth of 15.5 percent yearly in advances.

RETURN ON ASSETS: Return on assets (before tax) has fallen to 1.9 percent during Q1FY2017 from 2.3 percent in Q1FY2016. Since banks investments in federal government securities constitute principal share of total assets, which is almost 45 percent, low policy rate environment has driven down banks earning on low yield securities.

RETURN ON EQUITY: Return on equity (before tax) came down to 21.7 percent during reviewed quarter from 25.1 percent in Q1FY2016. This is mainly on account of increased average equity (by PKR 78.9 billion) during the period under review.

CAPITAL ADEQUACY RATIO: Capital Adequacy Ratio (CAR) has marginally fallen to 15.9 percent during Q1FY2017 from 16.2 percent in Q4FY2016. Banks are, however, well positioned from solvency standpoint as the prevailing CAR is well above the minimum required level of 10.65 percent.

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