Apr 5 - 11, 2010

Review of the annual accounts of the big five indicates some very interesting facts. The big five are 1) Allied Bank, 2) Habib Bank, 3) MCB Bank, 4) National Bank and 5) United Bank. Higher spread enabled these banks to earn higher income but rise in provisioning eroded their bottom-line. Total provisioning of these banks was close to Rs42 billion in 2009 as compared to Rs26 billion for 2008.

The other interesting facts were: 1) profits of big five grew by nearly 8 per cent to over Rs58 billion. Allied Bank registered 34 per cent growth in profit, followed by National Bank of Pakistan. Earnings of Habib Bank dipped whereas MCB Bank profitability remained stagnant. United Bank maintained its growth at 10 per cent.

Interest income reflected excellent growth of 24.58 per cent while interest expenses went up significantly by 34.83 per cent. In general, banks faced liquidity constrained throughout the year. Advances declined due to higher interest rate and reluctance of the banks in extending fresh credit as they chose to invest in risk free but high yielding securities. Deposits showed some increase because of minimum 5 per cent return on saving accounts but also increased cost of funds. Cost of funds during 2009 was slightly more than 6.5 per cent as compared to 5.20 per cent for 2008. Lending rates averaged 13.98 per cent in 2009 as opposed to 12.49 per cent in the preceding year. As a result spreads improved but provisions increased by 28 per cent though slowing gradually.

The performance of the banking industry can be best judged from the latest quarterly report of the State Bank of Pakistan. According to the details growth in agri-credit disbursement slowed to 6.3 per cent during Jul-Jan FY10 compared with 11.5 per cent in the same period last year. This slowdown is largely attributed to a decline in the disbursements. The main factors affecting the pace of growth in agri-credit are: 1) decline in both overall area under cultivation and number of borrowers; 2) rising NPLs in agri-credit and 3) improvement in farm income on the back of bumper crops and better prices of most of the agri-produce in FY09.

Among purpose-wise lending, total production loans increased by 8.5 per cent in Jul-Jan FY10 compared with 7.8 per cent increase seen during the same period last year. This improvement is principally driven by commercial banks as production loans by these institutions grew by a strong 22.7 per cent during Jul-Jan FY10 compared with a rise of 6.7 per cent in the same period last year. The rise in production loans was attributed to higher fertilizer off-take following lower prices and efforts of the farmers to increase yield of wheat.

A sharp jump of 61.9 per cent in developmental loans by the ZTBL was probably due to financing of Benazir Tractor Scheme.

Interestingly, hefty borrowings of Public sector enterprises (PSEs) and lower than expected retirement of commodity finance loans in Q2-FY10 led to a substantial drain of rupee liquidity from the interbank market October 2009 onwards. The liquidity strains became more severe as commercial banks have been investing heavily in government papers since the inception of IMF program in November 2008. All these factors complicated liquidity management by the SBP. Therefore, to reduce volatility in interbank money market rates and avoid the transmission of high interbank rates to retail lending rates, the SBP conducted a number of open market operations (OMOs). The frequent OMO injections reduced excess volatility in the overnight rates and other market rates in line with the reduction in policy rate.

More importantly, in the last few T-bill auctions, banks started to lock in shorter tenor government papers. This behavior possibly reflects: 1) market anticipation for an increase in interest rate in the wake of renewed inflationary pressures, and 2) liquidity constraints.

Moreover, anecdotal evidence suggests that increased biding by commercial banks, particularly for three month papers, also reflect high demand from money market funds.

The PSEs borrowing from commercial banks increased by Rs89.2 billion during Jul-Feb FY10 compared with Rs62 billion in the corresponding period last year. This increase stemmed mainly due to 1) high credit demand from a power holding company in September 2009, 2) a few POL related PSEs have availed the cushion for fresh lending after settlement of part of their outstanding bank credit with the issuance of PPTFCs, and (3) borrowing requirement from a public sector steel mill to finance its unfunded imports of raw material.

The declining trend in private sector credit, visible for twelve consecutive months, reversed from October 2009 onwards representing recovery in aggregate demand in the economy as well as increase in private sector participation in commodity finance (particularly for cotton, rice and sugarcane). Consequently, cumulative credit to private sector grew by 4.7 per cent during Jul- Feb FY10; slightly higher than the growth seen in the corresponding period a year earlier. Most of the credit growth was seen in commerce and trade, cement, construction, power, fertilizer and agriculture machinery.

A look at the advances data suggests that procurement of crops such as rice, sugarcane and cotton mainly increased the seasonal credit demand from private sector in Q2-FY10; the major portion of which is visible in working capital loans. It appears that lower than targeted procurement of rice from PASSCO in FY10 resulted in a rise in procurement by private rice traders which in turn increased their running finance requirements. Moreover, a fall in rice production in India and Philippines resulted in higher imports of rice from Pakistan, which in turn increased the demand for trade related loans, most of which is mainly visible under export financing schemes.

Textile sector demand for advances picked up in Q2-FY10, mainly from spinners and ginners. This was due to a confluence of favorable domestic and external factors: 1) good domestic cotton crop, 2) fall in global production of raw cotton, mainly in the US and China, and 3) recovering demand for textile products in advanced economies. This environment provided an opportunity for Pakistani exporters to increase market share by capitalizing on better cotton crop and explains higher working capital requirements in Q2-FY10.

Despite a considerable fall in incremental deposit returns, the banking industry recorded deposit growth of 4.6 per cent during July-February FY10 in contrast to a marginal contraction in the corresponding period last year.

Monthly data shows an erratic trend in deposit growth September 2009 onwards. While deposits witnessed a sharp increase during September and October 2009 compared with net withdrawals in the same months of 2008 the pace of growth was much lower in November 2009. The unusual development was due to exceptional increase in the month of December 2009. Although, the deposits of the banking system generally experience a sharp rise in the month of December each year followed by withdrawals in the subsequent month, the increase in the deposit base during December 2009 was stronger than the same month in the previous year, as well as the average for December FY06-08. Other factors that explain deposit growth during October-February FY10 include: 1) monetary expansion stimulated mainly by the private sector credit, and 2) a mild recovery in the domestic economy also evident from LSM growth.