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Banking sector ends December 2017 quarter on satisfactory note

Experts urge cut in deposit and lending rates and to sever investment in gilt-edged securities

Various banking experts urge that Pakistan’s banking system is not far behind the developed states in promoting innovative techniques and upgrading skill level within the banking system. They however urged that there are two areas which need to be attended immediately by the banking authorities to boost the development prospects in Pakistan. Firstly, spreads between the deposit and lending rates need to be declined and profits on deposits may be chiefly increased so as to encourage the depositors to save more rather than consume. Secondly, the investment in gilt-edged securities such as MTBs, PIBs and Sukuk need to be substantially declined in order to advance more credit to the private sector to accelerate economic growth.

Presently State Bank of Pakistan (SBP) released QPR (Quarterly Performance Review) of the banking sector for the quarter closed 31st December, 2017. The expert calculated in the report, enhancing asset quality, stable liquidity, robust solvency and slow pick-up in private sector advances are the key developments during the 4th quarter of CY2017. As per trend, asset base of the sector has enlarged by 4.5 percent in the quarter under review. The promising demand from textile and cement sectors have enhanced gross advances (domestic) to private sector (by 7.3 percent QoQ and 16.4 percent YoY), despite retirements in chemical and pharmaceuticals. The experts also mentioned that the banks have mostly invested in short-term MTBs while investments in PIBs and Sukuk have declined.

NON-PERFORMING LOANS IN PAKISTAN (Domestic and Overseas Operations) (Rs. in Million)
Net Loans (%)
NPLs Net NPLsNet NPLS to
Net Loans (%)
All Banks & DFIs630,477104,0821.68627,67594,8491.54
All Banks614,816100,1111.64611,81389,9261.48
All Commercial Banks562,47966,9481.12568,85267,4261.13
Public Sector Banks187,58628,4702.49192,65031,7632.84
Local Private Banks371,95638,4880.80373,27535,6710.74
Foreign Banks2,937(10)-0.032,926(8)-0.02
Specialized Banks52,33733,16321.9142,96122,50014.86

Moderate growth in deposits and higher inter-bank borrowings have supported the funding needs of the banks. Besides steady presentation, the risk profile of the sector has stayed satisfactory amid moderation in profitability. Asset quality has also enhanced as NPLs (Non Performing Loans) to gross loans (infection) ratio, registered at 8.4 percent as of close December 2017, has reached the lowest level in a decade. It is also said that the banking sector has earned profits (before tax) of Rs266.8 billion during October-December, 2017 (ROA of 1.6 percent and ROE of 19.5 percent). Encouragingly, Net Interest Income (NII) has enhanced; luckily high growth in advances since the previous few years. However, the Capital Adequacy Ratio (CAR) of the sector has enhanced to 15.8 percent, which is, well above the minimum required CAR of 11.275 percent. State Bank of Pakistan currently has kept the benchmark interest at 6 percent as the central bank predict the inflation to remain under the limits of government assessment. On the other hand, the credit rating agency-Moody’s currently urges that its outlook for banks in Pakistan (B3 stable) is stable over the next 12-18 months, but the economy is susceptible to political unrest.


Moody’s Investors also predicted that the real GDP (Gross Domestic Product) growth at 5.5 percent for FY2017-18 and 5.6 percent for FY2019. It is also said that the banks’ capital ratios with tier-1 at 12.7 percent as of 30 September 2017 — have fallen, but will recover gradually once higher regulatory requirements kick in 2018 and 2019. Capital will be increased by higher profit retention, capital rises and capital optimization measures. However, based on Moody’s adjusted tier-1 ratio — which measured 6.5 percent at 30 September 2017 the banks’ capital buffers are modest. The Moody’s also recorded that the infrastructure investment and solid local demand would prove to be the key drivers of economic growth and will fuel lending growth of 12-15 percent for 2018. The agency said nonperforming loans (NPLs) measured 9.2 percent of gross loans as of 30 September 2017. In addition, the banks’ high exposure to low-rated government securities (44 percent of assets) continues to pose a key risk.

Moody’s urged stable customer deposits and high liquidity levels would stay the banks’ key strengths. It added that customer deposits make up almost 70 percent of total assets and they are predicted to boost by 12-15 percent in 2018, providing plentiful, low-cost funding. Moody’s expects asset quality to improve in the current supportive macroeconomic environment, helped by the banks’ diversified loan portfolios and low corporate debt.

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