BANKING SYSTEM UNDER CONSOLIDATION

SHAMSUL GHANI (shams_ghani@hotmail.com)
Aug 24 - 30, 2009

Banking sector, during the last 20 months or so, has gone through traumatic changes. The drubbing it has received on stock exchange has belied the tall claims about the strength of the sector on one hand and wreaked visible dents in the investor's confidence on the other. The nerve tingling erosion in market capitalization should have ruined the sector but its incredible survival followed by gradual recovery has raised some serious questions about the systemic faults. A major portion of losses has been ironically passed on to the stock investors and bank customers.

The CY08 was said to have witnessed one of the worst stock market debacles when the KSE-100 index recorded the incredible high and low of 15,538 and 6,924. The first month of the current year brought with it more tremors to have plunged the KSE 100 further to below-5,000 level. In the backdrop of 77 per cent erosion in the equity values of commercial banks and 82 per cent erosion in the equity values of investment banks, claims about the robustness of our banking sector sound euphoric, if not hollow.

The woes of investment banks emanate from their high-leverage operations in an expensive and tight credit market. It has also become difficult for them to maintain asset quality in the wake of increasing defaults.

BANKING SECTOR MARKET CAPITALIZATION

DATE KSE-100 INDEX %AGE FALL SINCE 24-DEC-07 COMMERCIAL BANKS' MKT CAPITALIZATION MILLION RS. INVESTMENT %AGE FALL SINCE 24-DEC-07 BANKS' MKT CAPITALIZATION MILLION RS. %AGE FALL SINCE 24-DEC-07
24-Dec-07 14,792 - 1,509,085 - 228,498 -
18-Mar-08 14,727 0.44 1,431,903 5.11 258,981 (13.34)
15-Apr-08 15,538 (5.04) 1,481,659 1.82 280,248 (22.65)
6-May-08 14,409 2.59 1,328,374 11.97 232,641 (1.81)
28-May-08 12,255 17.15 1,053,119 30.21 205,611 10.02
7-Jul-0 11,878 19.70 972,533 35.55 205,464 10.08
4-Aug-08 9,853 33.39 814,956 46.00 159,721 30.10
16-Sep-08 9,224 37.64 752,665 50.12 147,560 35.42
7-Oct-08 9,18 37.92 743,398 50.74 146,561 35.86
25-Nov-08 9,187 37.89 740,517 50.93 146,561 35.86
15-Dec-08 8,817 40.39 705,513 53.25 140,420 38.55
23-Dec-08 6,924 59.09 443,248 70.62 72,797 68.14
23-Jan-09 4,930 66.67 343,487 77.24 60,843 73.37
06-Mar-09 5,748 61.14 444,663 70.53 49,292 78.43
26-Jun-09 7,163 51.58 512,991 66.00 45,589 80.05
17-Jul-09 7,764 47.51 561,825 62.77 40,942 82.08
13-Aug-09 8,011 45.84 571,574 62.12 48,593 78.73

Banking sector derived its strength during the falling SBP interest rate regime. Flush with excessive liquidity generated in the aftermath of 9/11, the banking sector aggressively penetrated in to consumer market on one hand and short-changed the bank depositors by offering them a meager return on the other.

The balance sheets of banking sector started bulging with windfall profits and banks' stock values went sky-rocketing. Unfortunately, it was the home grown crisis more than the global financial meltdown that put Pakistani banks under duress.

The uncalled for political destabilization and the resultant uncertainty triggered a historically unprecedented dollar-flight which badly squeezed our external account position on one hand and domestic liquidity on the other. A number of SBP measures, both popular and unpopular, stemmed the rot to some extent. The IMF $11.3 billion stand by arrangement programs provided further breathing space.

Though still on vent, the economy has mustered some strength to fight for survival. The sudden transformation of the domestic as well as the global situation made the banks to have a taste of their own medicine. In the face of spiking policy rate, the banks found it difficult to stand their ground as depositors started taking their money back to the generous NSS coffers.

Having underfed the depositors for a number of years with as little return as 2 to 5 per cent, the banks found it hard to compete with the National Savings Schemes that offered as high return as 16.8 per cent. liquidity position deteriorated owing to both internal and external pressures on one hand and mounting non-performing loans on the other. Shrinking investment and high interest rate stymied the economy.

The reversal process has now begun. Interest rate brought down by 100 bps - from 14 to 13 per cent -, external account position improved through IMF assistance program and curtailed import costs, liquidity improved from sustained flow of foreign remittances and subsiding domestic pressures.

Scheduled total deposits during the first eight months of the current calendar year have gone up from Rs.3.801 trillion to Rs.4.114 trillion, recording an increase of 8.3 per cent. Total advances, on the other hand, have come down from Rs.3.141 trillion to Rs.3.133 trillion. Total bank assets have also improved during the same period from Rs.5.103 trillion to Rs.5.598.

The trend suggest that the banking sector, after witnessing periods of unprecedented rise and fall has taken to the stabilization course. This is time about the banking sector goes for consolidation and is regulated to provide much needed impetus to the economy.

Interest rate needs to be further brought down. The bank spread needs to be kept within a decent limit through SBP regulations that prescribe a minimum return-to-depositors limit vis--vis a certain policy rate. The improved bank liquidity needs to be diverted to the productive sectors of the economy through prudent credit management. A watchdog has to be appointed to cull black sheep from the business and industry who have developed a habit of using cheap credit for speculative purposes.