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Performance review of the banking sector

According to the latest Quarterly Performance Review (QPR) of the banking sector for the quarter ended 31st December, 2017, released by the State Bank of Pakistan, improving asset quality, stable liquidity, robust solvency and slow pick-up in private sector advances were the key developments during the last quarter of calendar year 2017.

Asset base of the banking sector has expanded by 4.5 percent in the quarter of calendar 2017. The promising demand from textile and cement sectors have improved gross advances (domestic) to private sector despite retirements in chemical and pharmaceuticals.

Banks have mostly invested in short-term MTBs while investments in PIBs and Sukuk have declined. Moderate growth in deposits and higher inter-bank borrowings has supported the funding needs of the banks.

Some of the sectors like external sector of the country are in a very poor shape; the financial sector of the economy is doing exceptionally well.

Strong demand from textile and cement sectors had improved gross advances to private sector by 7.3 percent on a quarterly basis and 16.4 percent on a yearly basis despite retirement of credit in chemical and pharmaceutical sectors.

Besides, banks had mostly invested in short-term MTBs while investment in PIBs and Sukuk had declined.

Moderate growth in deposits and higher inter-bank borrowings had supported the funding needs of banks.

The risk profile of the banking sector had remained satisfactory and moderation in profitability and asset quality had improved as NPLs to gross loans (infection) rate was recorded at only 8.4 percent at the end of December, 2017, touching the lowest level in a decade.

The banking sector earned profits (before tax) of Rs266.8 billion during October-December, 2017, with an ROA of 1.6 percent and an ROE of 19.5 percent. Net Interest Income (NII) had improved due to high growth in advances during the last few years while Capital Adequacy Ratio (CAR) of the banking sector had gone up to 15.8 percent which is well above the minimum required CAR of 11.275 percent.

Almost all the indicators of the banking sector are showing a robust performance is a very healthy sign for the economy of the country.

This is so because the banking sector plays a critical role in mobilizing savings from households spread all over the country and placing them at the disposal of entrepreneurs.

On the funding side, deposits have witnessed growth of 3.2 percent during the reviewed quarter. However, on year on year basis, deposit growth has moderated to 10.3 percent. Resultantly, banks’ borrowing has increased by 9.8 percent.

The efficiency with which it could play the role of financial intermediation between savers and investors would determine the rate of economic growth of a country and its employment generating potential.

Efforts have also been made in Pakistan to make the banking system more inclusive and focus its lending activities on the SMEs and agriculture sector, which is the need of the hour.

 

A well above the minimum prescribed ratio CAR and a very satisfactory risk profile constitute developments that are also worthy of note. This will ensure that the banks in the country would continue to remain solvent, giving added confidence to the savers that, unlike in some other countries, the banks in Pakistan would not default and their savings would continue to be safe.

Positive development is that Pakistan’s banking system is not far behind the developed countries’ in promoting innovative techniques and upgrading skill level within the banking system. Efforts have also been made in Pakistan to make the banking system more inclusive and focus its lending activities on the SMEs and agriculture sector, which is the need of the hour.

A well above the minimum prescribed ratio CAR and a very satisfactory risk profile constitute developments that are also worthy of note.

This will ensure that the banks in the country would continue to remain solvent, giving added confidence to the savers that, unlike in some other countries.

The banks in Pakistan would not default and their savings would continue to be safe. It may, be mentioned that savings and investments in the country are low because of lower saving potential of the households due to lower per capita income and not due to poor quality of banking services in Pakistan.

There are two areas which need to be attended to urgently by the banking authorities to increase the development prospects of the country.

Spreads between the deposit and lending rates need to be reduced and profits on deposits may be particularly increased so as to encourage the depositors to save more rather than consume.

Investment in gilt-edged securities like MTBs, PIBs and Sukuk need to be substantially reduced in order to advance more credit to the private sector to accelerate economic growth.

In the first quarter of a calendar year, private sector advances usually follow seasonal moderation. Weekly data on advances for the first two months of 2018 suggests surprise pick-up. Therefore, advances to private sector in first quarter calendar 2018 are likely to rise. The recent increase in SBP policy rate will take some time to influence the demand for advances.

Given the likely higher cost of production due to rising oil prices and exchange rate depreciation, the working capital needs of the firms may rise, however.

Banking sector is likely to maintain high investment concentration in MTBs given the interest rate expectations.

On the funding side, deposit generation is expected to remain moderate on account of external sector pressures.

However, likely increase in advances may have a positive impact on deposit mobilization.

Profitability of the banking sector will depend on momentum of advances, developments in the foreign exchange market, and performance of the capital market.

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