Nov 10 - 16, 2008

In all, 25 banks are listed at the Karachi Stock Exchange, of which 23 commercial banks earnings in 9 months, Jan-Sep, of 2008 declined by 4 percent as compared to the same period of 2007. Profits of these banks declined by Rs2.3 billion to Rs55.3 billion as against Rs57.6 billion in 2007.

The banks that earn profits said that their earnings have fallen. For instance NBP profit fell by 14 percent and ABL profit fell by 10 percent. There has been a double digit growth during the last few years. Banking was one of the sectors that boomed during the period in office of General Pervez Musharraf. The SBP also claimed, in early 2007, that banking sector in Pakistan is the best performing sector in the region and it is the biggest success story of Pakistan's economy.

But since January 2008 the profit of banks started declining primarily due to high rate of non performing loans carried out during the period. Total amount increased to Rs32.6 billion as against Rs11.9 billion, showing a growth of 129 percent.

If this factor excluded, net profit before tax and provisions was Rs126 billion, 14 percent higher than previous period. This growth attributed to the interest income that rose by 17 percent, Rs151.3 billion. Moreover, non interest income also increased by 25 percent, to Rs61 billion and helped to wipe out the impact of the heavy provisioning of NPLs to some extent.

During the same period, Bank of Punjab showed huge loss of about Rs4.32 billion. It was followed by Saudi Pak Bank which showed a loss of Rs1.399 billion, Samba Bank showed a loss of Rs333 million, Atlas Bank's loss was Rs330 million and Royal Bank of Scotland posed a loss of Rs260 million while Bank Alfalah has not yet announced its results. These figures indicated the declining health of the country's banking sector.

In the days of Shaukat Aziz and Pervez Musharraf the banking sector was earning quite good amount of profits in spite of very low interest rates. The banks are now facing liquidity problem due to slow down in economy and tight monetary policy adopted by SBP. Although expatriates are sending money through banks but position is deteriorating. The banks are discouraging financing consumer items like cars, ACs and other home appliances and diversified their lending into a new area of financing housing sector, especially big projects.

The situation is worsening because the banks are finding it difficult to recover the loans that they have generously offered during the last few years. Number of default cases is rising due to the very high interest rates, besides food and fuel inflation reached 25 to 32 percent that left little money to pay installments. People's income has not increased accordingly that makes them poorer.

Liquidity crunch further aggravated due to the economic imbalances like increasing trade deficit, declining foreign reserves, low foreign inflows and capital flight especially from stock exchanges has shaken the investors' confidence, which hampered liquidity in the system. The lack of confidence among the investors has translated into disinvestment and flight of capital from the country, causing economic slowdown. It is estimated that around $10 billion have gone abroad during the last 18 months.

Due to slow foreign inflows and rising expenses the borrowing by the government, for budgetary support , from SBP has reached Rs226 billion, a rise of about 2000 percent during the current fiscal year despite the central bank's request for reduction and retirement of the loan.

SBP figures indicated that government borrowing from it had gone up by 2334 percent to Rs266.633 billion from July 1 to October 18, i.e. about 16 weeks, as compared to Rs 10.951 billion from July 1 to October 20 of last year. This depicted an increase of Rs255.682 billion. The government borrowing for budgetary support from banking sector has gone up by 352 percent to Rs 461.280 billion during the fiscal year 2008.

Moreover, rumor of freezing of foreign currency accounts and bank lockers fueled the capital flight further and increased the dollar demand. Advances to deposit ratio of 76.5 percent showed an increase of 20 percent 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 on all deposits of up to 1 year maturity twice. This would help in injecting liquidity in the system to the tune of 74 billion.

The SBP has launched legislative reforms indicating that the government is committed to net zero borrowing from SBP from November 1 and the Cabinet has also approved in principle its proposal for significant amendments in the Banking Companies Ordinance (BCO) 1962 to mitigate potential risks. It would enable the central bank to supervise banks, groups and financial holding companies in line with international trends. SBP said that "this is a timely move in the wake of potential risks arising from complex structures of financial groups and emergent supervisory challenges".

The private analysis show that the banks will be short of liquidity in future because they would be under pressure and are being forced to increase rates on the deposits.

However, the official bankers believe that despite political and financial ups and downs that the country faced in the last 18 months and the crisis in global financial system, which created great trouble in recent days, the banking sector in the country are stable and the current situation is not too alarming. There was no bankruptcy even among smaller banks.

No doubt banks succeeded in absorbing the shocks but the decline in economic growth rate which might fall to 3.5 percent has been 6 percent during the last many years. It would certainly affect this sector in near future. Banking is run on trust and confidence presently. Pakistani banks still maintain public trust. However, bankers believe that slow down in the economic growth in the days ahead could reduce their profit margins, but they do not foresee any collapse.

In spite of these claims, the impact of the 18 month political uncertainty has now started showing results in different shapes like massive flight of capital, real estate slowdown, collapse of the stocks business, severe liquidity problems in the banking sector and the record high interbank money rates etc. If corrective measures are not taken by the private banks they would be in great trouble in the coming days.