Aug 24 - 30, 2009

Pakistan's banking sector is not only considered one of the best sectors in the country but also the best performing sector in the region.

The country's banking sector is the biggest success story of Pakistan's economy as this sector plays a key role in supporting real sector development.

Total deposits of Pakistan's banking system rose from Rs1341 billion in 2000 to Rs3202 billion in 2006. The advances during the same period also rose from Rs1020 billion to Rs2526 billion. The total assets of the banking system, which stood at Rs 1808 billion in 2000, rose to Rs4282 billion in 2006. Pre-tax profit of the banking system rose from a mere Rs4.5 billion in 2000 to Rs123.6 billion in 2006.

Pakistan's banking sector has remained remarkably strong and resilient, despite facing pressures emanating from weakening macroeconomic environment since late 2007.

Financial experts told Pakistan and Gulf Economists (PAGE) that the country's banking system is on strong footing and has long-term potential - a feature that has served to attract a substantial amount of FDI in the sector, with established global financial institutions now active participants in the domestic financial sector.

With strong regulatory oversight, there has been a significant enhancement of capital and risk-weighted capital adequacy, supported by high provisioning requirements, which were tightened in 2007, they said adding there are stringent regulations and adequate policies in place to help the banking system manage its risks.

According to them, capital adequacy of the country's banking system is strong, 12.1% at end-June 2008, well above the internationally acceptable minimum requirement of 8.0%. Core capital constitutes about 80% of the total capital, and Tier 1 to risk weighted assets ratio of the banking system is at 9.7%. This strong capital base is accompanied by adequate reserves on the back of stringent provisioning requirements against classified assets.

However, the depositors are not satisfied over poor returns on their savings by different banks. They say banks need to focus on bringing new products for the satisfaction of their depositors apart from enhancing profits on their savings.

On the other hand, bankers have expressed their apprehension about the rising non-performing loans that crossed over Rs100 billion.

According to them, the fiscal year 2008-09 proved critical for banks, as their profits and deposits fell. Bankers and analysts see no chance of recovery of economy and banks' profits during the new fiscal year since demand is falling and NPLs are rising.

According to a spokesman of Pakistan Banks Association (PBA), "we are expecting that year 2009-10 would be year of low demand and poor performance for the banking sector as well as economy. Banks will remain under pressure during this fiscal year as demand is at very low level."

He said the law and order situation is a serious source of concern for the economy, which slashes demands. Buyers prefer to go to India and Bangladesh, instead of coming to Pakistan due to security concerns, he added.

Moreover, analysts and bankers were of the opinion that the year 2009-10 would see the negative impacts of low economic growth with high inflation, rising foreign debts, and prevailing global recession. 'Banks can not grow under the depressive economic conditions. Banks don't grow in isolation,' said a banker.

However, the most painful issue for bankers is the rising NPLs that slashed their profitability and could further hamper the banks' performance. NPLs increase when economy slumps.

Statistics show that year 2008-09 witnessed a government borrowing of Rs600 billion, which was Rs98 billion higher than last year. The private sector's net borrowing set a new low record during the fiscal, as it fell to minus Rs3 billion, which means net withdrawals. Bankers said it was the impact of high interest rate, slow economic activity, and global recession.

According to latest figures, the banking sector spread has declined by 12bps in April 2009 over the previous month to 7.54 percent. On the other hand, year-on-year basis, this is still 39bps higher in April 2009 than the level observed in April 2008. In the first four months of 2009, average spread was recorded at 7.65 percent - up by 56bps over the corresponding period of least year. This also depicted improvement in Net Interest Income (NII) of the banking sector during the first quarter of 2009. "As domestic economy is passing through a declining interest rate scenario, after a tight monetary stance by the SBP, lending rate has also come down to the level of 14.14 percent in line with KIBOR after posting a peak level of 14.66 percent in the month of January 2009," an analyst said.

According to him, more than 80 percent of the advances carry floating rates and are mainly linked with KIBOR. Lending rates track the reference rate (KIBOR) with the lag of 1-2 months and any changes in KIBOR is considered as a bellwether of lending rates.

On the other hand, in April 2009 deposits' rates of the banking industry recorded at 6.6 percent or 12bps lower as against 6.72 percent in the preceding month. Most of the banks have lowered their interest rates on the fresh deposits in anticipation of a monetary easing. According to him, the deposit rates are expected to remain downward sticky in the shorter period. The banks would not be able to abridge the cost of funds substantially in months to come because of minimum 5 percent return requirement on saving accounts (35 percent of the deposit mix). In addition to this, more than 25 percent of the term deposits (30 percent of the deposits mix) have a maturity of more than 3 months. Besides this, prevailing liquidity crunch and competitive pressure will restrict the banks to reduce the share of term deposits in the existing overall deposit mix. "We expect 5-6 percent growth in advances and stagnant growth in interest and non-interest income," he said.

Over Rs119 bn loans written off in last five years

According to Minister of State for Finance and Revenue Hina Rabbani Khar, the banks including Zarai Taraqiati Bank Limited have written off loans worth above Rs 119 billion during the last five years.

Rs 7,418 million loans were written off in 2004, Rs 31,077 in 2005, Rs 21,006 in 2006, Rs 25874 million in 2007 and Rs 33,643 million in 2008.