BANKING SECTOR REMAINS UNDER PRESSURE

KANWAL SALEEM
June 8 - 14, 2009

Banks have posted a massive decline of 23 percent in profitability during the first quarter of calendar year 2009 due to the slow credit off take amid poor economic activities.

All commercial banks' profit after tax has declined to Rs 16.455 billion in first quarter (January-March) of current calendar year 2009 as compared to Rs 21.417 billion in the corresponding period of year 2008, depicting a huge decline of Rs 4.962 billion in first three months of current year 2009.

Year-on-Year basis massive decline has been witnessed in the profitability of the foreign banks, while local banks have also posted some 19 percent decline in profit in first quarter. With a decline of 97-percent, foreign banks' profit after tax stood at Rs 38 million in January-March of CY 2009 as compared to Rs 1.219 billion in same period of last calendar year. In addition, local banks' profit after tax has declined to Rs 16.417 billion in first quarter of CY 2009 over the profit of Rs 20.198 billion in correspondent period of CY 2008, depicting a decrease of Rs 3.781 billion.

Financial experts told PAGE that the country's banking sector remained under pressure during first quarter mainly due to the economic slowdown and tight monetary policy. Although, the SBP has cut interest rate by 100 bps, it is still at high level. Slow credit growth, huge losses in the equity market and slow economic activities have badly hurt the banks' profitability, which is expected to further decrease in coming months, they said.

The restricted liquidity, particularly through foreign inflows coupled with government borrowing through commercial banks, resulted in credit creation of commercial banks, they added. The major hurdle in deposit mobilization is the captive credit demand due to higher interest rates as demand for credit remained weak with private sector credit growth remaining low at 3.4 percent till March 2009 compared to last year's 13 percent, they said.

According to them, rising non-performing loans (NPLs) and their provisioning is also a major reason of depleting profit of the banks. NPLs of banks have also mounted to Rs 313.661 billion by the end of March 2009 as against Rs 293.313 billion in corresponding last year. Similarly, cost to income ratio has also enhanced to 47 percent from 43-percent and interest expanses have surged by 61 percent to Rs 701.456 billion in March 2009. It previously stood at Rs 43.697 billion.

Moreover, the Pakistan Economy Watch (PEW) said consumer banking in Pakistan needs to be watched independently for improvement, awareness, and protection of consumer rights. Pakistan lacks non-profit and voluntary organizations as well as forums that can guide masses and help them live a decent life.

Similarly, the consumer banking has been attracting a lot of criticism from various quarters, said Dr. Murtaza Mughal, President PEW. An increasingly marketing-oriented approach aimed at urban consumer base needs to be monitored carefully by independent observers, he said.

He said foreign banks had the knowledge and funds to become first to introduce products and services. He said the question of ethics has been raised on many forums, which has dented reputation of some local and foreign depository financial institutions.

Aggressive advertising, misleading sales promotion techniques, and weakening customer relationship are the areas that need special care, as it is affecting customer's loyalty. Growth in personal loans, mortgage, credit cards and car leasing, etc has been decelerating sharply after record expansion partly due to the objectionable role of banks, he added.

The number of people approaching the banks for consumer financing has reduced substantially due to lack of trust, runaway inflation and eroded paying ability of the fast-shrinking middle class, he said. In this scenario, banks should come up with new plans to attract borrowers to remain in the consumer financing business, he added. Plastic card and service users will find such forums very effective where they would be able to share their experiences, he said.