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Healthier Banking Sector In Two Years

The banking sector showed a robust growth in advances to the private sector in the quarter ended June 30, 2017, according to the Quarterly Performance Review of the Banking Sector released by the State Bank of Pakistan (SBP). The growth in advances is also the prime reason behind an 8.3 percent increase widening the highest among corresponding quarters since 2008 in the asset base. Gross advances (domestic) to the private sector increased 6.1 percent in April-June 2017 in comparison to the 4 percent growth recorded in the corresponding period of previous year.

Besides seasonal financing needs for commodity procurement, the financing demand has come from various sectors including chemical/pharmaceutical, production and transmission of energy, agri-business, food and allied products, construction, transport, storage, etc. The continued growth in auto financing pushed consumer financing up, which surged 5.5 percent during the April-June quarter compared to 5.3 percent in the same quarter of previous year. Major growth in the overall consumer financing portfolio was driven by the growth in auto loans which soared 9.4 percent.

The banking sector earned profit (before tax) of Rs150.4 billion with strong return on assets (ROA) of 1.8 percent and return on equity (ROE) of 22 percent. Interest earnings (year to date) increased 1 percent in the second quarter of calendar year 2017 against 8.6 percent decline during the same period of last year on account of income on advances.

The surge in advances may be attributed to enabling macroeconomic conditions such as monetary easing, which has lowered the cost of borrowing and positive feedback from the real economy particularly consistent activity in large-scale manufacturing. The asset quality of the banking sector improved further as gross non-performing loans (NPLs) ratio went down to 9.3 percent as of end-June 2017 from 9.9 percent as of end-March 2017 (and 11.1 percent as of end-June 2016).

Investments increased 5.6 percent and government papers remained the prime attraction. There was a change in investment pattern, though, as banks mostly invested in short-term Market Treasury Bills (MTBs). A continuous rise in investment in government securities further strengthened the already comfortable liquidity position of the banking system, the SBP’s review said. Deposit base of the banking sector widened 6.5 percent slightly lesser than 6.8 percent in the second quarter of calendar year 2016.

The deceleration in the deposit growth was mainly caused by a dip in financial institutions’ deposits which are transitory in nature. On the other hand, customer deposits a relatively more stable funding source and comprising 96.5 percent of the overall deposit base surged 7.7 percent, higher than 6 percent during the corresponding period of previous year.

STRONG BANKING SECTOR PERFORMANCE LAST YEAR

Performance of banking industry in Pakistan continues to be sound. According to the Quarterly Performance Review of the Banking Sector for the quarter ended 31st December, 2016, gross advances to the private sector surged by Rs 410 billion or 10.6 percent during this quarter as against the rise of 7.7 percent in the corresponding period of last year.

The increase was largely attributed to the textile sector followed by energy and sugar sectors. The solvency profile of the banking sector remained robust as Capital Adequacy Ratio (CAR) of 16.17 percent at the close of December, 2016 was well above the minimum required level of 10.65 percent.

Return on Assets (RoA) fell from 2.5 percent in calendar year 2015 to 2.1 percent in calendar year 2016 while Net Interest Margin (NIM) declined from 4.4 percent to 3.7 percent in the same period. Asset growth during calendar was recorded at 11.9 percent to reach Rs 15.831 trillion compared with 16.8 percent last year.

Banks’ investments, however, came down by 1.5 percent to Rs7.509 trillion during calendar 2016 mainly due to a decline in investments in government securities. Deposits, the key funding source of the banking sector, grew by 13.6 percent in the Calendar Year 2016 to reach Rs11.798 trillion mark. Addition in overall deposits was contributed by non-remunerative current deposits followed by fixed deposits and saving deposits.

Profitability of the banking sector declined from Rs199 billion (profit-after-tax) in calendar 2015 to Rs190 billion in calendar year 2016. Return on assets (RoA) fell from 2.5 percent in calendar 2015 to 2.1 percent during calendar. The asset quality of the banking sector also improved with the decline in NPLs and pick-up in advances.

Most of the above developments are in line with the evolving state of the economy and reflect a positive trend in the monetary and banking sector. The most important development was a substantial rise in bank credit to the private sector which could prove to be a catalyst in stimulating investment and growth. The surge in credit may be due to a variety of factors, including the lagged effect of a consistent easy monetary policy.

It may be mentioned that SBP had reduced the policy rate by as much as 425 basis points (bps) since November, 2014 which was translated into a 373 bps reduction in weighted average lending rate. In addition, better economic conditions, financing for the China-Pakistan Economic Corridor (CPEC) and improved security and energy supplies may have contributed to higher private sector financing. Banks’ reduction in investment in government securities and higher growth in deposits also created the space for higher private sector lending.

It would have been much better if a reduction in government securities held with the commercial banks was brought about by a decline in budget deficit. Since this was not possible due to a weak fiscal position, the government reduced the borrowings from commercial banks by resorting to higher borrowings from the SBP which could stoke inflationary pressures in the economy. Profitability of the banking sector came under pressure due to lower interest rate environment, receding investments in PIBs and T-Bills and maturity of high yielding long-term bonds.

It is good to see that deposit mobilization has picked up pace which was an improvement, considering stagnation in deposits in the last couple of years. Also, the solvency of the banking sector remains robust and the financial intermediation seems to have improved over the year. For the prospects in the medium-term, a lot will depend on the monetary policy formulated by the State Bank of Pakistan (SBP), fiscal position of the government, financing sources to meet the budgetary deficit and overall economic environment in the country.

Another issue could be the possibility and timing of negotiating another programme with the International Monetary Fund (IMF). The IMF would like to shift a large part of government borrowings from the SBP to commercial banks and other sources and this will disturb the status quo. Deposits of the banking sector increased 20.4 percent in 2016, which is significantly higher than the growth rate observed in recent years.

In its latest statement of position of all scheduled banks, the State Bank of Pakistan (SBP) said deposits and other accounts of all scheduled banks on Dec 30 amounted to Rs11.2 trillion. 20.4 percent growth in the deposits of the banking sector is significantly higher than the average growth of 12 percent in the last three years. The benchmark interest rate is at a record-low level, which means parking funds in government securities is not as profitable for banks as it used to be in the recent past.

Investments of the banking sector went up only 7.5 percent to Rs7.2 trillion in 2016. In contrast, investments grew 32 percent and 26 percent in the preceding two calendar years. Deposits, gross advances of the banking sector also grew at a faster than usual pace in 2016. Data compiled by Topline Securities shows the average annual growth rate of gross advances of the banking sector in the last three years was 7 percent. Improvements in advances growth also indicate increased credit demand, initiation of CPEC projects and improved macro indicators. Banks are also focusing on high-yielding consumer growth to support their margins and profitability.

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