COST OF PROVISIONING SIGNALS PRESSURE FOR BANKING INDUSTRY IN NEXT YEAR
TARIQ AHMED SAEEDI - email@example.com
Dec 29 - Jan 04, 2009
The recurrence of rise in discount rate aimed at to control inflation and failed to do so in every interim policy announcements over a period of time has not only increased the cost of working capital required for industries but also pulled up the cost of provisioning for banks. High advance mark-up inspires likelihood of non-performing loans. “The cost incurred on recovery of bed debts will exert a tremendous pressure on banking industry in the first quarter of next calendar year,” said Sirajuddin Aziz CEO Bank Alfalah while talking to PAGE. But, he is hopeful of resilience and buoyancy of banking industry of Pakistan.
“As such there is no financial issue threatening the country despite that appreciation in lending rate, which is highest in the region, has left banks accommodating provisioning cost spurred by non-performing loans during this year. Export slowdown may lower demand of banking advances. Apart from this, global economic meltdown or financial crisis will not unleash any consequence for banking industry in Pakistan.” That is mere a public misapprehension that global financial tumult would be transmitted into Pakistan for unlike crises hotbeds where unregulated derivative markets were originally catalysts Pakistan has no such derivatives, said Siraj.
Interest rate rise increases price of banking assets and makes them expensive and inconspicuous, he commented on the question that why do banks not like up in lending rate that even though indicates high interest income for them? “Most importantly this increases the risk of loan default. This is what have banks in Pakistan been exposed to. As a result of policy rate increment, not only banks experienced contraction in loan demands but they recorded huge bad debts. On one hand, their profitability started to shift source owing to fallout in interest payment to non-interest earning and cost of provisioning assumed highest proportion on the other”, explained Siraj. Non interest income coming from for example property rent or selling was good during the year.
Rise in interest rate affects the asset quality of banking industry as well. So minimizing non- performing loans will be the biggest challenge for banking in Pakistan in year 2009, he replied when asked about prospective challenges to the industry. “Nevertheless, I am hopeful that discount rate would be loosened,” he added. On two grounds his expectation is based. One: he thinks if government is successful in making policy that shows viability of tax to GDP expansion ratio then it would be in a position to contend cut in discount rate before IMF. Second: trim in government bank borrowing to shorten budgetary deficit and moderation in non development expenditures would assign central bank mandate to revise discount rate downward.
“Maybe it happens in the start of next month,” he expected. “The temporary stop in bank lending is due to yearend hullabaloo for balance sheet finalization. It has nothing to do with recent upward revision in mark-up on advances. Slowly and in piecemeal impact of discount rate is reflected on interest rate.” The affects of previous monetary tightening measures were apparent throughout financial year 2008. According to State bank, total Rs. 54 billion non-performing loans were recorded during FY08. Of that corporate sector including textile, cement, and automobile posted highest default amount of Rs. 47.3 billion. In total NPLs, consumer loan volume of which declined had Rs. 7.4 billion share. The difference was complemented by SME.
Two private local banks that were aggressively involved in consumer financing faced the real magnitude of bed debts according to SBP. Reports that linked global financial crisis with local banking operation led drawdown of liquidity from banks, imperilling liquidity crunch in banks. “Although we have been able to re-equip everything the rumours with sinister design in past had rendered us 10 to 12 percent deposit loss,” he told PAGE. With malignant intention the rumours were spread to damage image of foreign banks in Pakistan. “They failed however. Now Bank Alfalah has liquidity in excess that also thanks to reduction in cash reserve requirement”, said Siraj. “Overall Rs. 300 billion liquidity has come back in the market.”
During the nine month ended September 30, 2008 profit after taxation of Bank Alfalah was Rs. 2.45 billion while it was Rs. 3.00 billion in the corresponding period last calendar year. The earning per share was Rs. 3.07 as compared to Rs. 3.76 earlier. Recently, the bank planned to issue right share at par with an aggregate value of Rs. 4 billion. “It has a good break up value.” He said: “Bank Alfalah continues to strengthen its position in the market and is operating right now through over 233 branches,” that include 33 Islamic banking branches and foreign branches in Bangladesh, Afghanistan, and Bahrain. “By end 2009, we plan to expand our branch network to 280 branches. SME finance will be the special focus area,” he stated.
For upcoming year we have designed numbers of resolutions to enable ourselves to meet with the emerging challenges, he responded when asked how the bank would insulate itself against tremendous pressure in 1QCY09. “Consolidation and internal control improvement will be the right starter in that direction.” By consolidation, I don’t mean that the bank will be going into merger and acquisition hassles, instantly he clarified and added but, it implies realignment of pricing in conjunction to market dynamics. “The current situation has changed net interest margin that is not like what was in the past. To keep the profitability intact we need to rationalize price structure.”
For banks cost of resource mobilization has increased significantly following the increase in rate of returns on deposits. While, amalgamation does invigorate paid-up capital strength of financial institution it is not easy to be managed, he believes. “Hand shakes between institutions are very difficult to manage,” he said while explaining about his restraint to M&A. “Bank Alfalah believes on organic growth.”
In future the bank will be acquiring assets through financial inclusion programme in small and medium enterprises sector, he concludes.