May 17 - 23, 2010

Banking sector performance in Pakistan during the current decade has been robust barring a slowdown phase that had its roots in the Fy-08 global financial crisis.


Deposits 2,161 2,662 3,000 3,566 3,801 4,120 4,325 4,430
Change 20.5 23.2 12.7 18.9 6.6 8.4 5.0 2.8
Advances 1,590 2,044 2,410 2,651 3,141 3,169 3,272 3,276
% Change 35.9 28.6 17.9 10.0 18.5 3.1 3.3 0.1
% Adv to Dep. 73.6 76.8 80.3 74.34 82.6 76.3 75.7 73.9

The average deposit growth rate of 18.8 per cent recorded during the four years (2004-07) suddenly dropped down to just 6.6 per cent 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 CY-09 when the deposit growth rate again picked up to 13.8 per cent. The timely IMF assistance and sustained remittance inflows had been the main forces behind that recovery. Unfortunately, during the first 10 months of FY-10, the deposit growth rate has again dropped down to 7.5 per cent. Upon breakup the growth turns out to be 5 per cent during the first half year and 2.8 per cent during the next four months. A high policy rate and the resultant credit contraction, tight liquidity position owing to the delay in the release of IMF tranche of $1.2 billion as well as the delay in the release of coalition support funds, and banks insistence to maintain a high bank spread have been the main reasons behind the drop in the banks' deposit growth rate. The recent release of $468 million by US under CSF program has brought some relief to our economic and finance managers. But the uncertainty looming over the release of 5th IMF tranche of $1.2 billion is still a big hurdle in the way of liquidity relief so urgently needed by the banking sector. The overall bank deposits' growth during the current financial is sure to remain well under 10 per cent.

Pakistan's economic history of consumption-led growth is still fresh in minds. The demolition of that era is also history now. The spikes in the bank advances graph should not hide any analytical surprises for anyone. The years 2004, 2005, and 2006 were the credit boom years when banks' advances grew at an average growth rate of 27.5 per cent. The next year saw a modest bank advances growth of 10 per cent. The year 2008 was government's borrowing year when it borrowed huge sums from the banking system pushing the banks advances up by 18.5 per cent. The current financial year recorded a meager growth of 3.4 per cent in the banks advances. The banking sector during the first nine months lent Rs298 billion to the government against a modest Rs128 billion to the private sector. With the ever increasing government appetite for bank credit, the private sector remains susceptible to the crowding-out effect. In this scenario, the banks have become somewhat averse to risk taking - as government borrowing is fully secured - and the private sector and the economy are suffering in consequence. The overall credit contraction is reflected in the constantly dropping advances to deposits ratio.


Capital adequacy ratio 14.8 14.1 23.6 14.6 (2.1) 14.1 12.3
NPLs to total loans 16.4 10.7 6.5 11.7 25.4 12.2 10.5
NPLs provision 69.0 72.3 72.4 71.4 66.3 71.0 69.6
Net NPLs to net loans 5.7 3.2 1.9 3.7 10.3 3.9 3.4
Net NPLs to capital 26.2 15.9 4.8 17.4 - 18.9 19.4
Return on assets-BT* 1.5 1.6 (0.3) 1.5 2.5 1.5 1.2
Return on assets-AT* 0.9 1.0 (0.3) 0.9 0.6 0.9 0.8
Return on equity-BT* 13.2 15.2 (2.1) 13.9 - 14.5 11.4
Return on equity-AT* 8.0 9.4 (2.0) 8.5 - 8.6 7.8
Cost/Income ratio 49.3 50.5 77.5 51.5 55.4 51.6 50.3
Liquid assets to capital 29.8 32.2 54.7 32.6 19.0 32.3 28.6
Liquid assets to deposits 38.4 43.4 82.2 43.7 155.3 44.1 38.2
BT = before tax; AT = after tax

The financial soundness indicators of the banking system, barring two negative developments, registered an overall improvement during the first half of the current financial. Capital adequacy ratio, earning ratios and liquidity ratios, of all banks taken together, recorded improvements on year-on-year basis. This showcases the innate strength of the banking system. The first negative development was the increase in cost to income ratio. One might attribute it to the two 150 bps cuts in the SBP rate during the first half of the current financial resulting in depressed interest income for the banks. But, this might well be an erroneous conclusion as banks have managed to maintain the (seven-plus) banking spread during the period.

The second negative development was a substantial increase of 1.7 per cent in the non-performing loans to total loans ratio. It was due to the higher provisions for NPLs during the period that the net NPLs to net loans ratio recorded an increase of 0.5 per cent only. We all know that NPLs tend to increase according to the size of the political loans that are never intended to be repaid. Since the banks have emerged as a strong cartel power, it now remains to be seen how they use their clout to resist new political loans and recover the existing ones. The imprudent and aggressive credit policies during the low interest rate era coupled with the strained liquidity and a high SBP interest rate have expanded the non-performing loan portfolio of the banks which stood at 12.2 per cent of the total loan portfolio as of December 2009. This factor alongside the rising government borrowings places them in a double-squeeze position. Opening up the shutters on the credit-starved private sector will require excess liquidity on one hand and will raise the specter of new loan defaults on the other.