BANKING SECTOR ON THE BACK FOOT

SHAMSUL GHANI (shams_ghani@hotmail.com)
Dec 29 - Jan 04, 2009

In the wake of a falling SBP policy rate, Pakistan’s banking sector minted huge money by short-changing the bank depositors. Ironically, the ill gotten profits provided the banking sector dubious strength to stand tall amidst the global financial meltdown. A few bruises here and there were all that this sector got during the global free-for-all. Unfortunately, it was the home grown crisis that put Pakistani banks under severe strain.

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 $7.6 billion stand-by-arrangement program 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 has made the banks to have a taste of their own medicine. In the face of spiking policy rate, the banks are finding it difficult to stand their ground as depositors are taking their money back to the generous NSS coffers. Having under-fed the depositors for a number of years with as little return as 2 to 5 per cent, the banks now find hard to compete with the National Savings Schemes that offer as high return as 16.8 per cent. A Dawn news item reads as follows:

"Banks deposits have started shifting fast towards National Savings Schemes (NSS) adding frustration to the already shaking banking industry in the country"

During the first four months of FY09, NSS has attracted $35 billion. Although it is a tiny amount in comparison to the total bank deposits of Rs.3.7 trillion, yet the scenario spells a sort of doom for the banks from long term perspective. To compete with NSS, the banks have to price their loans at 20 plus which in turn increases the cost of doing business for the industry. This stifles the already struggling industrial and commercial sectors besides making the economic slowdown almost a certainty. This vicious circle seems to have sucked in the banking sector, the industry and the economy in one go. To add insult to the injury, Moody has revised four Pakistani banks’ outlook to negative. According to Business Recorder, Moody’s Investors Service confirmed, with a negative outlook, the B3 long term foreign currency deposit ratings of four banks namely National bank of Pakistan, Habib Bank Limited, United Bank Limited and MCB Bank. Incidentally, these are the leading banks in the financial sector.

TABLE-1 (SCHEDULED BANKS POSITION)
. . . . MARCH END 15-NOV
(Rs.Million) 2004 2005 2006 2007 2008 2008
1. Demand Deposits 1,014,947 1,211,674 1,350,011 2,889,589 3,139,258 .
2. Time Deposits 1,026,919 1,231,745 1,490,182 512,565 474,671 .
3. Total Deposits (1+2) 2,041,866 2,443,419 2,840,193 3,402,154 3,613,929 3,682,250
4. Total Advances 1,358,009 1,801,161 2,214,980 2,524,932 2,850,891 3,111,840
5. Total Investment 781,383 729,334 755,227 1,065,753 1,070,059 865,682
6. Capital & Reserves 131,225 190,652 315,414 484,296 561,557 .
7. Total Assets 3,003,025 3,624,387 3,884,057 4,785,167 5,102,867 4,983,439

STOCK MARKET MAULED BY THE BANKING SECTOR

The CY08 witnessed the worst of the stock market debacles when the KSE-100 index recorded the incredible high and low of 15,538 and 6,924. The year still a bit away from closure, we might see the low taking further dip. In the face of a sixty six per cent erosion in the equity values of commercial banks, our claims to the robustness of our banking sector seem misplaced, if not hollow. The equity vales of investment banks have also reduced to half. Their woes, however, are much deep rooted as their high-leverage operations in an expensive and tight credit market have become a sure loosing proposition. It has also become difficult for them to maintain asset quality in the wake of increasing defaults. Pakistan Credit rating Agency (Pacra) has assigned a "negative outlook" to IGI, Trust and Dawood investment banks. Besides, Orix Investment Bank has been placed on rating watch. Their Japanese sponsors might well go into a huddle before deciding on a bailout support.

TABLE-2 (BANKING SECTOR MARKET CAPITALIZATION)
DATE KSE-100 INDEX %AGE FALL SINCE 24-DEC-07 COMMERCIAL BANKS' MKT. CAPITALIZATION MILLION RS. %AGE FALL SINCE 24-DEC-07 INVESTMENT 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-08 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 9,181 37.93 742,684 50.79 146,575 35.85
23-Oct-08 9,183 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 53.19 516,102 65.80 112,746 50.66

The banking sector’s robustness myth was exploded when a 27 per cent decrease was recorded in the market capitalization of commercial banks and a corresponding 20 per cent decrease in the market capitalization of investment banks, during just seven sessions after the removal of floor. With the fundamentals still very weak and no signs of turnaround on any front, one may like to pray for some divine help. The yesteryears’ strong and buoyant sector is caught up between a rising policy rate and a reeling stock market.