Research Analyst
Dec 29 - Jan 04, 2009

Banking sector plays an important role in the Pakistan economy. In 2008, the Banking system of Pakistan is made up of 53 banks, which include 30 commercial banks, four specialized banks, six Islamic banks, seven development financial institutions and six micro-finance banks. The 5 largest commercial banks account for 55% of system assets, while eight second-tier banks account for a further 35% indicating moderate concentration.


Considering the political and economic situation of the country, the performance of the banking sector for 2008 is giving mix response. The growth of advances in the banking system has jumped by 20% YoY in FY08 to date fueled by the borrowing from agriculture and power sectors while overall deposits to the banks fell to Rs 3.67 trillion compared to Rs 3.77 trillion, decreasing by approx 2.7 % during the period under consideration. Of the 23 commercial banks the earnings for the three quarters of FY08 have been 4% less as compared to same period last year and the profits of these banks declined by Rs 2.3 bn to Rs 55.3 bn as against Rs 57.6 bn in FY07.

The domestic banks disbursed Rs 128 bn from July 1 to Nov 08, 2008 against Rs 72.8 bn disbursed during the same period last year. The banking sector's spread continues its rising trend after witnessing a dip to the level of 6.78% in June 2008 that was being taken as an after effect of minimum profit payment of 5% on saving accounts. In the month of Sep 2008, spread of the banking sector recorded at 7.49%, cumulating an average three months (3Q2008) spread of 7.3%. Interestingly, Sep 2008 banking sector spread is at two year high level. Currently the banks are facing multiple challenges including restricted liquidity, higher NPLs, strong competition and above all slow economic growth of the country. The lack of investor confidence has led to flight of approx $10 bn in the past months. The government borrowing for budgetary support from banking sector has gone up by 352% to Rs 461.28 bn during FY08. Moreover, rumor of freezing of foreign currency accounts and bank lockers fueled the capital flight further and has also increased the dollar demand. Advances to deposit ratio of 76.5% showed an increase of 20% from June 08 and has also resulted in an even tighter liquidity position for the banks.

To ease liquidity crisis prevailing in the banking sector, SBP has decreased Cash Reserve Requirement ratio, which bank keeps with the State Bank as reserve money, on all deposits of up to 1 year maturity twice; reduced by 2% with immediate effect and further by another 1%. Accordingly, the National Savings experienced an inflow of Rs 60 bn in the last two months. This had pushed banks to raise deposit rates as high as 12 to 14% for a year's term deposits up to 18% on a longer term deposits thus adding a part to the cost of funds. Commercial banks in their half yearly reports have shown an addition of Rs 26 bn as NPL's pushing the banking sector's total NPL's to Rs 194 bn. As a matter of fact more than 80% of the bank's lending are based on KIBOR this bench mark rate has been rising in past few months and is likely to stay on a steep rise thus, further confirming NPL growth in future.

HY' 08 HY' 07 HY' 08 HY' 07
Allied Bank 2,508 2,752 3.88 4.26 -8.8%
Arif Habib Bank 213 15 0.47 0.03 1311.4%
Askari Bank 409 1,491 1.01 3.67 -72.6%
Atlas Bank (197) 3 (0.39) 0.01 n/m
Bank Alfalah 1,819 1,230 2.28 1.54 47.8%
Bank Al-Habib 1,249 1,128 2.61 2.36 10.8%
Bank Islami (10) (37) (0.02) (0.09) 73.4%
Bank of Khyber 107 166 0.27 0.41 -35.6%
Bank of Punjab (2,629) 1,825 (4.97) 3.45 -244.0%
Cresent Bank (128) (370) (0.15) (0.42) -65.4%
Faysal Bank 746 1,296 1.41 2.45 -42.4%
Habib Bank 6,357 6,576 8.37 8.66 -3.3%
Habib Metro Bank 1,565 1,171 2.60 1.94 33.7%
JS Bank 160 35 0.31 0.07 362.1%
KASB Bank 78 205 0.19 0.51 -62.1%
MCB 7,677 7,663 12.22 12.20 0.2%
Meezan Bank 443 431 0.98 0.95 2.8%
My Bank 431 441 1.02 1.04 -2.1%
NBP 7,881 9,013 8.79 10.05 -12.6%
NIB Bank 659 103 0.23 0.04 541.2%
Royal Bank of Scotland 83 324 0.06 0.24 -74.3%
Saudi Pak (771) 103 (1.54) 0.21 n/m
Soneri Bank 465 498 1.13 1.21 -6.6%
Standard Chartered 1,341 2,569 0.35 0.66 -47.8%
United Bank 5,594 5,631 5.53 5.57 -0.7%
Various sources


A fresh wave of mergers and acquisition was already expected after the State Bank recently announced new paid up capital requirements for next five years.

Dec-2008 Rs 5 bn
Dec -2009 Rs 6 bn
Dec -2010 Rs 10 bn
Dec -2011 Rs 15 bn
Dec -2012 Rs 19 bn
Dec -2013 Rs 23 bn
Various sources

Those with small and medium sized banks, which cannot meet State Bank requirements, will have no option other than looking for mergers or acquisitions. SBP has been encouraging mergers and acquisitions in the banking industry for last few years. As a result of it, there have been major mergers and acquisition during last three years. First, Standard Chartered acquired 95.37% interest in Union Bank for a sum of $487 mn in FY06. ABN Amro acquired 93.3% shares of Prime Bank for $227 mn and merged. NIB Bank, a subsidiary of Singapore state investor Temasek Holdings, acquired 56% of PICIC, which controlled PICIC Commercial Bank, for about $300 mn and recently the KASB bank merged with Atlas bank.


The global economic conditions had a trickled down affect on Pakistani economy too. The financial sector is facing lows and may take a few months to recover as the corrective measures take an affect. To restore macroeconomic stability and improve credit supply, SBP took a number of measures in phases and relaxed the statutory cash and liquidity reserves requirements thus injecting sum of Rs 270 bn and the government has also started to address the imbalances by reducing subsidies on oil and electricity. According to SBP's data the banking spread has been hovering around 7% which is comparatively low with previous years but still high in the region. Therefore, the factors affecting banking give a mixed trend of profitability.