By most indications, performance of banking sector in Pakistan continues to be sound. According to the latest Quarterly Performance Review (QPR) of banking sector released by the State Bank of Pakistan, broad-based and robust growth has been witnessed in advances to private sector during the second quarter of CY17, supported by consistent monetary easing and positive prospects of real economy. The asset base of banking sector expanded by 8.3 percent in the second quarter of 2017 which was the highest growth rate recorded in the corresponding quarters since 2008. The relatively high growth of advances at 9.2 percent pushed the advance-to-deposit ratio up to 48.7 percent in April-June 2017 from 47 percent in the second quarter of 2016. Key financing demand came from chemical and pharmaceutical, production and transmission of energy and agri-business sectors. The deposits of banking sector increased by 6.5 percent (Rs 764.3 billion) in the second quarter of 2017 compared with a growth of 6.8 percent in the corresponding period a year earlier.
Profitability of banking sector declined during January-June, 2017. Pre-tax earnings of Rs 150.4 billion were 7.3 percent lower than the profits recorded during the same period a year ago. The decline was mainly attributable to a 7.1 percent increase in administrative expenditures, 13.4 percent decline in other income and 1.1 percent drop in interest income. The asset quality of banking sector has improved further. Gross Non-Performing Loans (NPLs) ratio has fallen to 9.3 percent as of end June, 2017 from 9.9 percent as of end March, 2017 and 11.1 percent a year earlier. Investments have increased by 5.6 percent and a continuous rise in the holdings of government securities has strengthened liquidity position of banking sector. Capital Adequacy Ratio (CAR) at 15.6 percent was also well above the minimum required level of 10.65 percent.
The latest QPR shows that most of the indicators of banking industry are in good shape and have behaved according to the exigency of situation. Gross advances to private sector have increased reasonably well and this seems to be well connected with economic activity as growth in major segments of LSM coincides with increased borrowings by the relevant sectors of economy. The current momentum of growth in advances may also be due to a low interest rate environment. However, the present quarter was expected to witness a slack growth in bank advances amidst seasonal net retirement from major sectors such as sugar and textiles. It was also good to see that most of the borrowing requirements were financed by the rise in deposits. This means that banks are making some serious efforts towards mobilizing deposits. Deposits may grow further in the next quarter as households have no attractive avenues of investment. Profits of banking sector have somehow declined and are expected to remain modest in near future. This may not be a cause of worry as banks were generally earning abnormal profits in the past. CAR is also still at a comfortable level which means that banks have enough buffers to meet any eventualities.
However, while major indicators of banking sector indicate a generally healthy trend, some low-to-moderate level risks are appearing on the horizon. The obvious weakness is the failure of bigger banks to lend to private sector according to the size of their deposit resources and the tendency of investing more in government securities. For instance, advances-to-deposit ratio of five largest banks was 42.6 percent, sixth to 10th largest banks was 54.9 percent and that of the 11th to 20th largest banks was 50 percent. The smallest eight banks had an advance to deposit ratio of 77.6 percent. This shows that smaller banks are more willing to extend credit to private sector as opposed to their larger counterparts. The reliance of bigger banks to earn their profits from government papers is not conducive to either economic growth or their own long-term prospects. Besides, as the review indicates, administrative expenses of this sector have increased markedly which need to be contained at a reasonable level. Lastly, the latest unfortunate episode at the New York branch of HBL was a reflection of ineffective control and supervision and poor management by the Pakistani authorities. Although there is now a sigh of relief in the financial circles due to an out-of-court settlement, the episode is enough to show that regulatory and supervisory frameworks of banks operating abroad need to be improved a lot to maintain the prestige and credibility of our financial institutions.
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