BANKING SECTOR IN PAKISTAN

S.KAMAL HAYDER KAZMI,
Research Analyst
, PAGE

Sep 8 - 14, 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. However, the banking sector has witnessed huge investments, mergers & acquisitions during FY 2007-08.

INVESTMENTS AND TRANSACTIONS OF BANKS

The most highlighted investment during FY2007-08 is the entry of Barclays in Pakistan as it will not only strengthen the banking system of the country but will also bring a significant amount of foreign direct investment and technology to launch innovative financial products. Barclays will be established in Pakistan as a foreign banking company and operate in branch mode with a capital of US$100 mn and will initially set up 10 branches in various cities of the country. The issuance of license to Barclays will add to the presence of foreign banks. In the meantime, Upcoming transactions in process include Noor Islamic Bank of Dubai will acquire Emirates Global Islamic Bank. In July, 2008, the ABN AMRO Pakistan is acquired by Royal Bank of Scotland and renamed as Royal Bank of Scotland Pakistan. BNP Paribas is also likely to start operation in Pakistan and is evaluating possibilities to do so. Qatar Islamic Bank is looking to expand its operation in Pakistan in the cities of Karachi, Lahore and Islamabad. Maybank of Malaysia also acquired 15% shares of MCB Bank during 2008.

PRIVATIZED TRANSACTION
(RS MILLION)

BANKING AND FINANCE

SR. NO

UNIT NAME

SALE PRICE

DATE OF TRANSFER

BUYER NAME

1

United Bank Ltd. (51%) -1549465680

12,350.00

Oct-02

Consortium of Bestway & Abu Dhabi Group

2

Bank Alfalah (30%)(22,500,000)

620

Dec-02

Abu Dhabi Group

3

Habib Bank (51%)

22,409.00

Dec-03

Agha Khan Fund for Economic Development

4

Allied bank limited (51%)

971.6

Feb-91

EMG

5

Muslim Commercial Bank (75%)

2,420.0

Apri-91

National group

6

Banker's equity (51%)

618.7

Jun-96

LTV Group

7

Habib Credit and Exchange (70%) (52,50000,000)

1,633.9

Jul-97

Sh. Nahyan Bin Mubarik Al-Nahyan

Source: Privatization Commission


LIST OF PRIVATIZATION TRANSACTIONS CURRENTLY INCLUDED IN THE PRIVATIZATION PROGRAM OF PRIVATIZATION COMMISSION (AS ON 18-03-2008)

S. NO.

TRANSACTIONS/UNITS

.

Banking, Finance & Insurance

1

National Investment Trust Limited (NITL)

2

Small and Medium Enterprises (SME) Bank

3

First Women Bank

4

United Bank Limited

5

Habib Bank Limited

6

National Bank of Pakistan

7

National Insurance Corporation

8

Pakistan Insurance Corporation

9

State Life Insurance Corporation

Source: Privatization Commission

CHALLENGES

The banking industry is facing multifaceted challenges as a consequence of ever tightening monetary stances by the central bank, high level of defaults with the two best customers i.e. textile and consumers, huge write offs, colossal raise in salaries and perquisites of the directors of the banks. High spread and negative return to the depositors have fallen short to further elevate the profitability of the banks. The efficiency of the banks was actually veiled in making record profits at the cost of depositor's money. SBP has recently announced raise in discount rate by 1.5% which not only jolted the foundations of the banking system but also took its toll on already deteriorating capital markets. Hike in CRR, SLR and fixation of minimum slab for rate of return on deposits have nudged the whole financial market.

NON-PERFORMING LOANS

The Non-Performing Loans (NPLs) kept mounting and rose to Rs 170 bn in 2007 compared to Rs 141 bn in 2006, hence showing an increase of over 20% during the year ended on Dec 31, 2007. Conventionally the bad debts used to be denoted as the outcome of the influential hands. But now that 90% of the banks are being operated in private sector this clearly reveals the inefficiency of banks to channelise deposits and maximize depositor's return. Textile sector has come up with huge non payments and sudden collapse with largest contribution of 30% in the overall NPLs. The textile sector added Rs 10.4 bn in NPL's during 2007. In consumer finance total NPLs are Rs 18.6 bn in 2007 as compared to Rs 8.8 bn in 2006 thereby exhibiting an upsurge of 111%. Auto sector has also been the major contributor amongst these defaults.

SLOW GROWTH IN DEPOSITS

The deposit base experienced record growth of over 19% during 2007 which was in the backdrop of high growth in money supply and strong foreign inflows. But with the start of 2008 the deposit growth has also slowed down and in first quarter as it slid down to just 1.8% with total deposits reaching Rs 3.63 trillion. Main reason behind slow growth in deposits can be attributed to money supply growth, which increased by just Rs 79.9 bn or1.9% in 1Q08.

SLOW GROWTH IN ADVANCES

The profitability of the banks was hurt during 2007 primarily because of lesser non interest income caused by slower growth in advances. Banking sector's advances depicted a growth of 6.1% in 1Q08. This is mainly attributable to government's heavy borrowing from banks. During 2007, the banking sector's advances growth of 17% was lower than the last 4 year average of 28%. Growth in banks advances fell by 60% in 2007 compared to average growth of last four years reflecting slowdown in economy.

CONCLUSION

SBP has made a new policy in maintaining the bank equity of Rs 6bn. In this way the banks with strong financial backgrounds have the opportunity to acquire smaller banks and invest further in this sector. Mean while the smaller banks will find difficulty in surviving their business as this new deadline ends in 2009. The banking sector is also expected to witness a high foreign investment in the near future as we can expect more mergers & acquisitions during this new financial year.