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Banking sector in a healthier position

Although the banks have made less profit than last year even then they are healthier in all respects. The balance sheets have built up, except for, the lone HBL affair that led to some weakness in solid indicators and equity base. Less than normal seasonal fall in advances along with improved liquidity and strong solvency well above the minimum benchmark, are the key highlights of the banking sector in the third quarter of calendar year 2017, according to the Quarterly Performance Review (QPR) of the banking sector for the quarter ended 30th September 2017, released by State Bank of Pakistan (SBP).

The commodity financing and sugar sector, the overall gross advances domestic to private sector have declined barely; importantly lesser than the established third quarter financing downward slope. Advances demand from textile and other sectors (agriculture, automobiles, electronics etc) have been encouraging. Apparently, the share of fixed investment (long-term) advances in overall advances is ardently rising.

Banks have continued to invest in short term MTBs while investment in PIBs and Sukuk have declined. The deposit mobilization has remained correct, pre dominantly on the back of growth in saving and fixed deposits.

Asset quality has improved as non-performing loans (NPLs) to gross advances (infection) ratio has moved down to 9.2 percent as of end September 2017 against 9.3 percent as of end June 2017. Profitability has lessened further with the banking sector earning profit (before tax) of PKR 195.3 billion during Jan-Sept 2017 (ROA of 1.6 percent and ROE of 19.1 percent).

Favorably, Net Interest Income (NII) has improved (year-on-year basis) because of rising interest earned on advances. Capital Adequacy Ratio of the banking sector at 15.4 percent is well above the minimum required level of 10.65 percent. This advocates that banks have enough buffers available to meet additional financing need of the market.

The Quarterly Performance Review of the banking system released by the State Bank of Pakistan observes things are seeking on most accounts. Banks are certainly doing more of what they are supposed to be doing, for example core banking activity of lending money to a borrower that is not government. The net advances of the banking sector grew by a significant 21 percent year-on-year.


Not alarmingly, the growth story of late has been the increase in Islamic banking, as Islamic banking institutions witnessed a huge 51 percent year-on-year rise in advances. This converts into one-third share of the advances growth. The volume of it is down to growing preference of consumers for Islamic banking solutions for consumer products. Consumer financing in almost has continued a stable growth design, particularly owing to increased interest in car loans, obvious from record high production and imports of vehicles of late.

The banking sector ADR has suddenly jumped to the decade old levels but there is a noticeable pattern. Investments continue to form the biggest part of the asset base, but advances are slowly but surely picking up, as the ADR now stands at 48.3 percent, up 170 bps from calendar20 16. After almost ten year of higher year-on-year growth in investments, advances have for the first time in ten years grown at a higher rate than investments.

Improved macroeconomic indicators, low interest rates, dip in yields on government papers are reasons, but the trend is encouraging. Investments on the other hand, seem to have shifted from long-term to short-term, as seen from a great increase in T-bills versus a large decline in PIBs.

Pakistan is still far off from excellent level, as the credit to GDP ratio is less than half of what it is in India and Sri Lanka. On the liability side deposits have slowed down barely, having endured double digit growth for most of the last year. It could also be put down to banks’ relentless efforts earlier to improve the deposit mix and only invite the low cost deposits.

The Islamic deposit growth again stands out, and it increasingly becomes evident that Islamic banking will sooner or later become a major driver of the industry. On-forth of the quarterly deposit flows were contributed by Islamic banks during the period, in full contrast to silent growth at commercial banks. The NPLs have remained in control, and are adequately provided for. SMEs continue to be the neglected sector, as the advances to SMEs have reduced further.

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