Dec 21 - 27, 2009

Before 9/11, banking sector of Pakistan was struggling in the era of sagging equity values. The economic opportunities created after 9/11 saw banks flourish in prominence. The banking sector grew due mainly to a favorable environment created partly by global events and partly by the regulating bodies which allowed the banks to operate on their own terms, in total disregard of the canons of international financial system.

Banks' profitability increased manifold therefore, and that was at the cost of their main stakeholders, the depositors. State Bank's persistent failure to discipline them made the cartelized commercial banks intractable and spineless - ever ready to short-change their depositors. Carrying around 25 per cent of total market capitalization weight, this segment of financial sector seems shell-shocked by the developments that ensued in the wake of global financial sector upheaval and domestic political and economic mismanagement. The huge capital outflow engendered by these developments put the banking sector in a severe liquidity crunch position. Having few economic and financial linkages with the global markets, Pakistan's economy in general and its banking sector in particular managed to keep out of big-harm's way.

The changed conditions prodded SBP authorities to assume tight monitory stance at a juncture when the country was passing through the worst phase of inflation. Interest rates were raised to control money supply and credit expansion. Interest rate hikes made the banks suffer on deposits front as they failed to raise deposit rates in line with the market and subsequently their customers, already fed-up with their draconian attitude, took their money to National Savings Schemes that offered competitive profit rates.

With the each upward revision of discount rate, the banks not only raised future lending rates but also scaled up their rates for then existing borrowers, taking advantage of the floating rate system. A corresponding and equivalent increase in the rate of return for the depositors never took place. The suspension of new loans and an ever increasing borrowing rate made the borrowers default.

Non-performing loans started to rise to put further pressure on banks' liquidity as well as profitability. Continuously enhanced inflow of workers' remittances has kept the banking sector from going to dogs. On deposits front, they are still growing, albeit at a slower pace.


Particulars 2003 2004 2005 2006 2007 2008 2009 (Dec-05)
Deposits 1,793 2,161 2,662 3,000 3,566 3,801 4,243
Y-o-Y % Change - 20.5 23.2 12.7 18.9 6.6 11.6
Advances 1,170 1,590 2,044 2,410 2,651 3,141 3,237
Y-o-Y % Change - 35.9 28.6 17.9 10.0 18.5 3.1
% Adv. to Dep. 65.3 73.6 76.8 80.3 74.34 82.6 76.3

Notebly, average deposit growth rate of 18.8 percent during the years 2003-06 suddenly tapered down to just 6.6 percent during 2008 as this was the period when the banking sector underwent serious shocks, both external and internal. The resilience of the sector was amply demonstrated in 2009 when the deposit growth rate again picked up to 11.6 percent.

The timely IMF assistance and sustained remittance inflows have been the main forces behind this slow yet steady turnaround. Our economic history of consumption-led growth is still fresh in minds and the credit expansion graph should not hide any analytical surprises for anyone.

The years 2004 and 2005 were the credit boom years when credit was not hard to come by for every Tom, Dick and Harry. The following years 2006, 2007, and 2008 were marked with the advent and culmination of interest-rate-hike era. The year 2008 was also marked for high government borrowings from the banking system. The current CY has recorded a meager credit expansion of 3.1 percent. The growth could well have been negative but for the - not so high but still substantial - government borrowings.

Till mid November, the government had borrowed just 17 billion from the State Bank, but a hefty 140 billion from the banks. During 2006 and 2008, the banks lent 80 to 83 percent of their deposits, which was on a high side in comparison to the international benchmark of 75 percent. The over invested position of banks was normalized to a greater extent during the current CY.

The imprudent and aggressive credit policies during the low interest rate period coupled with the strained liquidity and continuously rising interest rates have expanded the non-performing loan portfolio of the banks which stood at 11.5 percent of the total loan portfolio as of June 2009. This factor alongside the ensuing credit crunch situation has made a big dent in the profitability of the banks. This places them in a double-squeeze position.

Opening the shutters on the credit-starved private sector will need excess liquidity on one hand and will raise the specter of new loan defaults on the other. Having already committed themselves to 76.3 percent of the deposits, they will have to explore new avenues of deposits and revitalize the existing ones to generate additional liquidity. The recent concessions allowed by the SBP for calculating actual bad portion of non performing loans might appear a welcome step to some. But, given the mercenary approach of bankers they have shown during the last six or seven years, there is every possibility that the concessions will be unethically used to extract extra liquidity for private sector lending.

The State Bank will have to closely monitor the use of these concessions. Lastly, a word on the performance of commercial banks on the stock exchange. The stock market crash gradually but surely eroded bank stock values. This did have its own adverse effects on the overall economy in general and the financial sector in particular.

In Table -2, Dec 2008 figures show that the fall in banks' market capitalization value was much higher than the fall of KSE-100 index as well as the fall in total market capitalization value. This shows that the bank shares always traded at worked-up higher prices.


  DEC. 11, 2009 DEC. 23, 2008 MARCH 18, 2008
KSE 100 Index 9,037 6,924 14,727
Comparative % increase / (decrease) 30.5 (53.0) -
Banks' Mkt. Capitalization (billion Rs) 651 516 1,432
Comparative % increase / (decrease) 26.2 (64.0) -
Total Market Capitalization (billion Rs) 2,603 2,156 4,511
Comparative % increase / (decrease) 20.7 (52.2) -