The growth momentum of the banking industry in the second quarter of 2017 was supplemented by favorable macroeconomic conditions i.e. low interest rates, strengthening aggregate demand, uptick of industrial activity and positive outlook as CPEC related projects gain steam. However, low interest rates and build-up of low yielding stock of short-term government bonds has moderated the profitability of the banking sector. The profitability of the banking sector is expected to see some recovery given anticipated increase in both advances and investments. From solvency standpoint, banks are well positioned as the prevailing CAR is well above the minimum required level of 10.65 per cent.
The banking sector continues its steady expansion as both investments and advances are showing growth. Interestingly, Islamic banking industry took the lead inflow of credit with consumer finance following suit. All categories of consumer finance (credit cards, auto finance, mortgage finance, personal loans) have seen positive growth. Auto financing has been on the rise since last few years and its share in consumer financing has been increasing as well. This higher growth in auto financing is due to added interest of banks in secured financing where margins are relatively higher. In the backdrop of declining interest rate environment, it is attractive for consumers too. Similarly, mortgage financing portfolio is continuously growing since third quarter 2014 and there is no coming back since then. The mortgage financing, nevertheless, provides immense opportunities to banks and it is imperative that they take measures for enhancing its share in the overall loan portfolio.
The investments are expected to rise given that government has announced auction targets both for PIBs and MTBs. However, it may remain modest given the shift of banks from long maturity high-yielding bonds towards short maturity low-yielding ones. Moreover, government’s development outlays are expected to gain momentum towards the end of the fiscal year.
The deposits of the banking sector have gone up while banks’ borrowing from SBP has also grown owing to liquidity needs to sustain asset growth. On the funding side, deposit growth was largely determined by both the anticipated withdrawals due to Eidul Fitr and the growth of advances. Apart from deposits, borrowings from financial institutions provided the funding necessary for asset expansion.
The banking sector continues to invest heavily in infrastructure which is reflected in the absorption of new employees, development of mobile apps, a rise in Point of Sales (POS) machines and ATMs cards etc. FY 2016-17 was also a year of mergers and acquisitions as Bank al Baraka acquired BurjBank whereas mergers of Sindh Bank with Summit Bank and MCB-NIB merger is on the cards.
Based on the above, if one does a SWOT analysis of the banking industry in Pakistan, it will be as follows:
1- Source of employment & GDP growth: There is a consensus among economists that development of the financial system contributes to economic growth. Financial development creates enabling conditions for growth through either a supply-leading (financial development spurs growth) or a demand-following. It is this industry which continuously works to secure financial stability, facilitate international trade, promote employment, & reduce poverty around the world.
2- Hedge from risk: Whether it is natural calamity or man-made calamity banks mitigate the after effect of the destruction by providing financial support to the victims to stand –up & lead a peaceful life again.
3- Diversified services: Banking industry offers services from CASA to insurance, to loan, to investment.
4- Connecting People: With the advent of new age technological advancement, banks have made the life of the common man easier. People can transact on real time basis in many places.
5- Changing from mere savings & loan facilitator role: Top priorities of banks now days include regulatory compliance, improving asset quality, enhancing customer centricity, focusing on digital convergence, and tackling competition from non-banks. Banks are therefore making business and technology investments to change their business models.
1- Lack of coordination: The global banking industry faces short-term uncertainty due to the debt crises that challenge several major economies. Volatility in different market/Currencies has created problems for the banks in order to work properly across the borders.
2- Vulnerable to risk: Since this sector deals with finances, it is the most risky sector which can change the fate of any business/Industry.
3- High NPA’s: Rise in retail &corporate NPA’s (Non-performing assets) is the single major issue this sector is going through worldwide.
4- Can’t reach under-penetrated market: Due to several conflicting objectives of government & banks which goes hand in hand, rural areas of developing nations are still not in the shadow of banks. Although efforts are being made for promoting financial inclusion in the country.
5- Structural weaknesses: Such as a fragmented industry structure, restrictions on capital availability and deployment, lack of institutional support infrastructure, restrictive labor laws, weak corporate governance, political pressure and ineffective regulations.
1- Expansion: Penetrating to the rural markets & bringing the rural masses under the purview of organized banking will be the objective of the banks in decades to come.
2- Changing socio-cultural & demographic factors: Given the demographic shifts resulting from changes in age profile and household income, consumers will increasingly demand enhanced institutional capabilities and service levels from banks.
3- Rise in private sector banking: Banking industry across the world is highly regulated &lead by their respective central banks. With the advent of private sector banks this sector is going through structural & functional changes mainly due to the adaptation of the advanced technologies & increased competition thereby benefiting the end customers.
1- Recession: It is one of the major threats to the financial system of the nation. Traumatic shock of economic crises & collapse of several businesses can affect the banks and vice-versa.
2- Stability of the system: Failure of some weak banks has often threatened the stability of the system.
3- Competition: Competition from NBFC’s (Non-banking financial companies) like insurance companies & mutual fund companies can affect the business of banks.