‘The Review’ of SBP: Timely realization of IMF lending to help revive inflows

KARACHI: The State Bank of Pakistan (SBP) Wednesday said the recent upgradation in sovereign credit rating is a positive development for the country and the timely realization of new IMF programme will significantly help revive financial inflows.

According to the SBP’s Mid-Year Performance Review of the Banking Sector (The Review), the performance and resilience of the banking sector remained satisfactory during the first half of the ongoing calendar year (H1CY24).

The review mentioned that encouragingly, macroeconomic environment has been improving with revival in economic activity, receding inflationary pressures, and narrowing current account deficit, resulted, the SBP has cut policy rate by 450 bps, so far.

Most aggressive cut since April 2020: SBP reduces key policy rate by 200bps, brings it down to 17.5%

However, the performance of the banking sector in the second half of CY24 depends on the operating environment and evolving policy stance.

According to SBP, foregoing improvements, coupled with a stable exchange rate, are likely to ease the financial conditions, going forward and the banking sector is expected to continue on the path of steady performance.

The expansion in balance sheet is likely to be driven mainly by investments owing to persistent borrowings needs of the government. Advances are also expected to gain momentum in Q4CY24 due to, inter alia, seasonal factors, the expected recovery in economic activity and easing of financial conditions, the Review projected.

Earnings of the banking sector are likely to remain steady on the back of increase in the volume of earning assets and will likely support the solvency position and a continued economic recovery may enhance both credit need as well as the repayment capacity of the borrowers and further improve the credit risk profiles of the banks. In addition, the banking sector’s exposure to the government is expected to remain high in H2CY24 and it demands earnest measures by the treasury to reduce the reliance on banking sector for fiscal needs.

Nonetheless, the banking sector, due to its capital cushions and buffers, is expected to remain resilient to adverse hypothetical but plausible shocks to key risk factors as well as macroeconomic conditions, the SBP said.

According to The Review, results of the latest macro stress tests also suggest that the banking sector, in general, and the large systemically important banks, in particular, are expected to show resilience and withstand assumed severe macroeconomic shocks over the projected period of two years.

The SBP’s Review also briefly covers the performance of financial markets as well as the results of Systemic Risk Survey (SRS), which represents views of independent experts about key current and potential risks to the financial stability.

The Review highlights that the balance sheet footing of the banking sector expanded by 11.5 percent in H1CY24, which was mainly driven by investments in government securities as the government demand for bank credit remained high.

Advances, however, posted a contained growth due to the net retirements by the private sector, although long-term financing to SMEs showed some revival. Nonetheless, the decline in private sector advances was significantly lower as compared to H1CY23.

On funding side, deposits increased by 11.7 percent in H1CY24 with a major impetus from saving and current deposits. The higher pace of assets growth however necessitated additional funding, which kept banks’ reliance on borrowing intact.

The Review notes that the asset quality profile of the sector remained satisfactory, as gross NPLs witnessed subdued increase.

Moreover, the total provisioning coverage against NPLs further improved to 105.3 percent by end June-2024, as with the application of IFRS-9, the banks also started to provide general loan loss allowances for performing loans. Earnings, nonetheless, slowed down owing to declaration in return on advances and contraction in net interest margin.

Non-interest income such as fee income and trading gains on government securities, however, supported profitability. The performance indicators such as Return on Asset (ROA) and Return on Equity (ROE) thus declined to 1.2 percent (1.5 percent in June-2023) and 20.4 percent (26.0 percent in June-2023), respectively.

The solvency position of the banking sector remained strong as Capital Adequacy Ratio improved to 20.0 percent (17.8 percent in June-2023) and was well above the minimum regulatory environment.

The Review reveals that in the wake of gradual improvement in macroeconomic conditions, domestic financial markets witnessed relatively lower stress during H1CY24.

As per the results of 14th wave of SRS (July-2024), top three prevailing risks highlighted by the independent participants of the survey include “energy crisis” followed by “volatility in commodity prices” and “foreign exchange risk.” The respondents, nevertheless, expressed confidence in the stability of the financial system and the oversight ability of the regulators.

Copyright Business Recorder, 2024