Changing the life style

June 26 - July 02, 2006

In the not so distant past, it was the advertising that helped creating the demand for purchasing commodities but the in thing today is consumer financing. Right from the buying of mundane products such as washing machine to the more luxury items such as latest mobile phones TV, AC, motorcars and the never ending demand list wriggling its way up to the dream house or scaling continents and time zones to travel for a dream holiday. Everything is just possible with consumer financing and the competition here too is tough as every bank tries to amass as many customers it can net through attractive and lucrative business strategies.

The outcome of such massive invasion is that though the customer gets hooked and ends up being a victim of default payment in most cases with the seizure of all his finances paid up to that limit along with the belonging with which he had set about the entire procedure. It creates an unnecessary want of product which one may or may not even require to begin with. The monthly expenditure no longer remains within the confines of one's monthly salary knowing very well that the purchasing power has got the better of most strata of our society.

"The volley of imported cars plying on the roads these days are due to excessive financing from banks and other financial institutions, will the consumer maintain the paying stream going forward, the interest rate will decide", said a market observer. But one thing is sure that per capita income has increased. Few linked the rising income due to sharp rise in capital market as well as real estate business. The gains made by about million investors in the recent past have now had some trickled down effect, but on the other front poverty is rising. According to former governor of State Bank of Pakistan, Dr. Ishrat Hussain, "if the country could sustain an economic growth of 7 percent or above for next five years, then we would see some trimming in poverty".

Though, we are not able to get statistics for the current fiscal on consumer loans. But analysts were of the view that consumer finance continued to grow at slower pace compared with robust velocity during the last fiscal year when expansion in this sector ballooned to Rs 84.7 billion compared with a growth of Rs 45.9 billion during FY04. It is expected that unlike FY04, when the growth in consumer finance was led by personal loans, during the current fiscal auto loans and housing finance have also contributed significantly in the growth in consumer finance. This is because as the demand in the automobiles and housing sector increased, the corporate financing also increased to meet the borrowing needs for increasing production in these sectors.

The boom in housing industry in recent years has also been one of the factors in speeding up activities in the construction sector. Looking forward, the credit growth in the construction industry is likely to continue given the increasing emphasis on the role of private sector in undertaking infrastructure projects and the infrastructure financing in the country.

Muhammad Imran Khan, research analyst at Jahangir Siddiqui Capital Markets Ltd., said that consumer financing has been developing in Pakistan from last couple of years as banks are willing to lend in this area due to attractive rate of returns as compared to other lending avenues. At the end of February 2006, consumer finance represented 14 percent or Rs 264 billion of the overall outstanding banks' advances. Out of which major chunk of Rs 110 billion or 43 percent was the share of personal loans followed by autos Rs 87 billion or 32 percent and house financing Rs 33 billion or 13 percent.

Despite increased lending in consumer financing overall (non performing loans) NPLs of the banking sector are declining. This shows that currently the delinquency ratio in consumer financing is low. NPLs of the banking sector, which was Rs 211 billion at the end of Dec 2004, has now been reduced to Rs195bn at the end of Dec 2005. Due to current risk management system of banks and central bank's reform (formation of CIB etc), we do not foresee consumer finance to show higher bad loans. Nevertheless, an upward movement of interest rates from current levels might hurt loan repayment capacity of individuals and may result in increase NPLs. Moreover it may negatively effect the growth of consumer financing in the country.

Commercial banks went profitable in the year 2002. The very next year i.e. 2003, banks posted a healthy growth of 94 percent on the back of capital gain income on bond portfolio (due to declining interest rate scenario). In the year 2004 banks posted a growth of mere 22 percent in their bottom line due to higher base established in 2003 and the absence of one-time capital gains on bond portfolio. The trend of higher contribution from interest based income continued in 2005, where the profitability of the banking sector surged up by 80 percent to Rs 64.5 billion. The positive element in the profitability growth of 2005 was the increased contribution from interest based activities of the banks; net interest income was the major contributor in it. During last 4-years (2002-2005) net interest income (NII) of the commercial banks has doubled to Rs 133 billion in 2005 from Rs 56bn in 2001, a 4-year compound annual growth rate (CAGR) of 24 percent.

The profitability growth momentum of commercial banks has not over yet. An evidence of this is the 1Q2006 results of listed banks. Based on the analysis of listed banks' 1Q2006 results, profitability of the banking sector grew by 57 percent on YoY basis, which was 106 percent a year earlier. By historically analyzing the 1Q profitability of the banking sector we found out that in 2004 listed banks earnings were 18 percent of full year and in 2005 it was 19 percent. There are 21 listed banks in the country (excluding Bank Islami) representing a share of 77 percent in advances and 89% in the deposits of commercial banks as on Dec 31, 2005. Moreover their share in profitability was 74 percent in the year 2005. The growth momentum is likely to continue but at a slower pace mainly due to higher base effect. Net interest income, on the back of rising credit (as mentioned earlier that GDP/credit ratio in Pakistan is low and increasing gradually) remains the mainstay, where as, among non interest income, fee income is expected to remain the major contributor on the back of rising trade activities in the country.

Faisal Shaji, head of research at Capital One Equities said that interest rates has climbed up slightly, where in last two auction, six month treasury bills rate rose 19 basis points which may ostensibly impede credit growth. However, we still foresee yield on advances of the banking sector to remain in the band of 9% at least up to CY07. The big banks would like to take advantage of the assets build up and their weighted average lending rates is expected to rise albeit gradual decline in the growth of core assets.

Some of the aggressive growing banks may like to seize the advantage of increasing their core assets at the time of the monetary tightening, in the wake of their branch expansion. This phenomenon is quite reminiscent of early 2000 when interest rates were in the higher territory yet growing banks had the cushion to increase their market share mainly due to their strong trade finance function arm.