Dec 21 - 27, 2009

Lately, banking scrips have attracted attention of the investors. It was mainly because the concern over quality of assets, which was a major concern, subsided to a large extent with micro indicators improving and loads of non-performing loans easing.

A report by IGI Securities of the quarterly data of banks in its universe reveals sequential easing in fresh NPL accumulation as growth tumbled to 4.8% or Rs9.3 billion in September this year as compared to average quarterly buildup of 8%.

Despite decline in buildup in NPLs, the NPL/gross advances ratio increased to 12.3% on account of seasonal contraction in loans during third quarter. The analysts believe NPLs trajectory continues to improve on high base effect, improving fundamentals and pulling down interest rates.

The report says four quarters' earnings were hit by sharp rise in credit costs and impairment losses on equity investment. The burden on both accounts has fallen substantially in third quarter CY09, as total provisions declined while provisions/gross advances ratio eased considerably.

Foreseeing reduced stress on asset quality analysts believe provision charges should move in line with improving assets quality. Additional forced sale value (FSV) benefit and upgrade of NPLs on restructuring will further cushion credit provisions. On top of this, absence of additional impairment losses on available for sale (ASF) securities will further decrease provisioning requirements in the coming quarters.

According to the report, last quarters of 2007 and 2008 were nightmare for banks because of freefall of profitability. In 2007 the withdrawal of FSV benefit and in 2008 staggering increase in NPLs coupled with the massive 60-70 percent decline in market value of banks and AFS equity investment portfolio, required banks to recognize record provisions.

Since bulk of the provisions was attributable to diminution in value of AFS, investment is no longer a concern. The recent NPL growth has slowed down and the regulator has further eased effective provisioning requirements. With no impairment charge expected and reduced provisions banking sector is likely to post strong growth in the last quarter of 2009.

Pakistan's banking sector has enjoyed substantial return on equity due to embedded high net interest margin (NIM). This is mainly driven by the access to low cost deposits and high lending rates. The banking sector has been able to pretty much neutralize the SBP's directive regarding payment of at least 5% return on deposits, which is possibly a testament to the sustainability of high NIM levels.

No doubt, profitability has been affected in 2008 and 2009, but that was mainly due to high provisioning and impairment loses.

According to a report by Invest & Finance Securities, despite all that has gone in the economy: 1) falling inflation helping in mildly reduced interest rates, 2) demand for private sector credit drying up, 3) GDP growth at historically low levels, and 4) SBP placing a floor on savings/deposit rates, loan-deposit spread has been on a steady footing in the 7-7.5% range. It seems as if banks and SBP both wean on the net interest margin. An examination of loan-deposit spreads shows that pressures on banks to continue to fund their balance sheets through high-cost deposits has gradually subsided.


The wave of mergers and acquisitions has swallowed some of the small banks leaving no option for them but to realize that their existence under the current circumstances is no more possible.

A consortium led by Hussain Lawai finalized a deal with Mybank. The same consortium had signed a MoU to acquire up to 50 per cent shares of Arif Habib Bank for Rs4.5 billion.

The small and medium-sized banks have been in the grip of fear since the enhancement of minimum capital requirement (MCR) by the State Bank. In August, the SBP raised the MCR to $300 million and asked all banks to attain the target till 2013 in phases. By December 2009, banks are bound to achieve MCR of Rs6 billion. The quantum jump was beyond the financial capacity of small- and medium-sized and these banks were looking for opportunity to leave the field for large banks.

The central bank has been supporting mergers and acquisition in the banking sector. The policy is part of its 10-year Financial Sector Vision and Strategy. SBP has been working towards catalyzing a new wave of mergers and acquisitions across the banking sector which is aimed at consolidating the sector by reducing the number of players.

Anticipating more mergers and acquisitions, the then SBP Governor Dr Shamshad Akhtar had said that the central bank was working round-the-clock to help generate such partnerships and would work closely with concerned parties to conclude such transactions smoothly and speedily. The merger and acquisitions are being pursued to make the financial sector of Pakistan more vibrant, robust and resilient so that it could meet the financial needs of all sectors and segments of the society in the country.

However, the process has been slowed to a great extent because after the global financial crisis the central bank changed its phased plan of enhancing minimum paid up capital requirement for the commercial banks. While one may not agree with the central bank on the policy of enhancing capital requirement for the commercial banks, it is necessary to bridge the gap between 'Big Five' and the smaller banks.