Research Analyst
May 2 - 15, 2011

The macro-environment is tenuous for the last three years. A host of factors i.e. slackened economic activities, power shortages, security issues, and higher inflation have squeezed profit margins in the banking sector of Pakistan as well as the repayment capacity of borrowers. Moreover, the fiscal situation also deteriorated and the public sector borrowed heavily from the banks for budgetary support, financing needs of public sector enterprises (PSEs) and commodity operations.

There was a shift in the banks' asset-mix to the public sector along with increased preference for top rated corporations over small and medium enterprises (SME) and consumers are were generally less resilient to economic slowdown and fragility in the operating environment.

The heightened credit risk is reflected in a noticeable and persistent increase in non-performing loans (NPLs) doubling over two years by the end of CY09.

The growth in NPLs, which decelerated during the first two quarters of CY10, grew by 7.4 per cent during the quarter under review reaching Rs494 billion. This coupled with over-the-quarter decline in lending portfolio exacerbated the deterioration in infection ratios. However, since these fresh NPLs required only partial provisioning coverage, the system's baseline earning indicators remained positive.

Going forward, the increased credit risk will remain a major challenge for banks. There is a need for banks to devise ingenious strategies for dealing with the high level of NPLs so that promising businesses, facing transitory difficulties only due to a constrained macro environment, continue to contribute in economic growth and service their obligations in an orderly manner. SBP has responded to the changed and challenging circumstances and rationalized its regulatory requirements on loan loss recognition in respect of advances in flood-affected areas.

In addition, persistent macro-environment issues will pose a stiff challenge for some banks to enhance their MCR to Rs7 billion by the end of CY10. During the quarter under review, the lending portfolio of banks registered a decline of two per cent vis-a-vis a 2.1 per cent decline in deposits. Moreover, banks holding of government papers, which have been continually increasing since last quarter of CY08, also slightly came down.

Deposits base of the banking system declined by 2.1 per cent (YoY growth of 12 per cent). This decline was mainly caused by contraction in interbank deposits while customer deposits were also reduced. Loans/advances of the banking system decreased by two per cent (1.4 per cent on gross basis) during the quarter under review. However, this contraction mainly resulted from retirement of commodity finance that contributed more than 90 per cent decline in advances as the public and private sector disposed off a part of their wheat and other commodity holdings. Lending to both private and public sectors saw a proportionate decline during the quarter, which kept their share in overall lending portfolio unchanged.


Even in the face of tenuous economic environment and heightened credit risk, Islamic banking continued to grow, though there was some decline in overall performance indicators. The share of Islamic banking increased by another 30 bps to 6.4 per cent, as there was 3.2 per cent growth in its assets compared to a decline in asset base of conventional banks. The branch network of Islamic banking also increased by 5.4 per cent - most of the increase was contributed by Islamic banking divisions of conventional banks (YoY growth 27.8 per cent).

However, the payment systems infrastructure has retained an overall growing trend for the second quarter of FY11 as 172 ATMs were added to the e-banking infrastructure bringing the number of ATMs in the country to the highest ever level of 4,734 while 309 more bank branches have been upgraded to real time online branches (RTOBs). Now 7,036 bank branches are offering real time online banking out of total 9,483 bank branches existing in Pakistan. The number of plastic cards (i.e. ATM, debit and credit cards) has also increased by 19.21 per cent compared to the previous quarter. At the quarter end, there were 13.19 million plastic cards in circulation.

The volume and value of overall e-banking transactions in the country during the quarter under review reached 56.42 million and Rs5.5 trillion respectively showing an increase of 7.30 per cent in volume and 17.47 per cent in value compared to the previous quarter. ATM, being the largest channel for e-banking transactions, showed 5.6 per cent increase in number of transactions and 9.5 per cent increase in value which resulted in average value of Rs8,804 per ATM transaction. All other channels of e-banking, except call centers, also witnessed growth, but their share in the e-banking infrastructure composition was comparatively insignificant. This increasing trend was also witnessed in the large value payments settled through Pakistan Real-time Interbank Settlement Mechanism (PRISM), which increased by 12.73 per cent in volume and 13.49 per cent in value of transactions compared to the previous quarter. The contribution of paper-based payments in total retail payment transactions was 61.06 per cent in terms of volume and 87.73 per cent in terms of value. The rest of the transactions originated from e-banking.


Banking sector has been undergoing a complex but comprehensive phase of restructuring since many years, with a view to make it sound, efficient, and at the same time forging its links firmly with the real economic sector for the promotion of savings, investment and growth. Although a complete turnaround in banking sector performance is not expected until the completion of reforms, signs of improvement are visible.