Pakistan's banking industry witnessed a 5.4 percent growth in its asset base which rose to Rs 6,782 billion during the April-June quarter of FY10 compared with a contraction of 1.4 percent in the January-March quarter of FY10. According to the State Bank of Pakistan's Quarterly Performance Review of the Banking System for the quarter ended June 30, 2010 released on Wednesday.
The increase in asset base, which was well supported by growth in deposits, mainly occurred in banks' balances, interbank lending, government papers and public sector commodity finance. Banking industry's deposits rose to Rs 5,128 billion in April-June quarter compared with overall deposits of Rs 4,774 billion in January-March quarter of FY10.
The report pointed out that the banking system witnessed a letup in the inflow of fresh non-performing loans (NPLs) during the quarter under review that has been a leading challenge for the last two years or so. The NPLs of banks registered a marginal growth of 0.6 percent to Rs 460 billion in April-June 2010 quarter (Rs 457 billion in March-10) as compared to average quarterly growth of 9.7 percent. Due to contained increase in NPLs that was adequately covered by loan loss provisioning, the provision coverage ratio of NPLs improved to 73.2 percent (70.9 percent in March-10) and net NPLs to loans ratio declined to 3.8 percent (4.2 percent in March-10). The contained provisioning charges preserved the profitability of the system from any significant deterioration and earnings remained in satisfactory range with pre-tax Return on Assets of 1.8 percent (1.3 percent for CY09). The earnings of individual banks also showed some improvement as the number of loss-making banks remained lower than CY09 statistics, the report added.
The SBP report said due to shift in asset-mix of banks towards less risky assets, the risk-based capital adequacy ratio of the system improved to 13.9 percent (13.7 percent in March-10) as compared to the minimum regulatory standard of 10 percent. Moreover, due to contained growth in NPLs and improvement in provisioning coverage, the risk to banks' solvency from impairment in asset quality also lowered.
However, the report pointed out that recent floods are likely to influence the banks' performance in the coming quarters. "Though their impacts and economic losses are yet to be precisely assessed, the floods could cause additional NPLs mainly in agriculture sector and affect credit activities in sectors allied to Kharif crop," it said and added that it may also result in increase in the government demand for bank credit.
"The inflow of donations, grants and assistance and expenditures on the rescue of flood victims and rehabilitation of infrastructure are likely to accelerate the growth of monetary aggregates and banks' fund base," the report said. The report said the results of the stress tests also indicate that banking system has adequate capacity to withstand unusual shocks in the major risk factors and avert the emergence of any systemic crisis from any such shocks.
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