The State Bank of Pakistan (SBP) said Wednesday that despite seasonal effects and a shift in the government's borrowing pattern, the banking sector remained sound and stable with steady performance during the third quarter (July-Sept) of this calendar year (CY16). According to SBP' Quarterly Performance Review (QPR) of the Banking Sector for the quarter ended 30th September, 2016 (Q3CY16), the stability and resilience of the banking system remains at a comfortable level, on aggregate basis and the solvency profile of the banking sector has further strengthened during Q3CY16 as Capital Adequacy Ratio (CAR) has improved to 16.8 percent as of end-September, 2016 from 16.1 percent as of end-June, 2016, well above the local minimum requirement of 10.25 percent and international benchmark of 8.625 percent.
The Year-to-Date (YTD) profitability after tax of the banking sector has narrowed by 6 percent due to lower interest margins and lower non-markup income and profit after tax has stood at Rs 139 billion for the first nine months of CY 2016 compared to Rs 148 billion in the same period of CY15. Return on assets has declined to 2.1 percent as compared to 2.2 percent in Q2CY16 and 2.6 percent in Q3CY15. The asset quality of the sector has slightly deteriorated compared with the previous quarter and assets of the banking sector declined by 1.6 percent to Rs 15.134 trillion during Q3CY16 compared to 2.1 percent rise during Q3CY15. The dip in assets has been driven by seasonal decline in advances by private sector and commodity operation financing along with reduction in banks' investments in government securities. On the funding side, borrowings from financial institutions, mostly from SBP, has seen 12.7 percent decline while deposits have observed a nominal growth of 0.6 percent.
The reviewed quarter is marked with decline in gross advances by 2.3 percent to Rs 5.052 trillion on account of net retirement by private sector and commodity operation financing. Textile, sugar, cement, agribusiness, and chemical and pharmaceutical sectors have observed net retirement while production and transmission of energy sector has revealed positive financing demand.
During the period under review, investments have fallen by 2.5 percent Rs 7.625 trillion due to shifting of government's borrowing from commercial banks to central bank. As the government shifted its borrowing from commercial banks to SBP, the need for liquidity injections declined - hence the fall in repo borrowings from SBP.
On the funding side, deposits have inched up by 0.6 percent to Rs 11.092 trillion during Q3CY16 compared to previous quarter mainly due to lower decline in current deposits and higher growth in saving and fixed deposits, which is in contrast to seasonal fall of deposits usually seen in the third quarter. Post Eid-ul-Azha reversals, government borrowing from central bank, which, may partially remained parked at banks, and reported slow down in real estate activity might have resisted deposit withdrawals.
During the reviewed quarter, Non-Performing Loans (NPLs) have observed marginal decline, though, NPLs to gross advances ratio has slightly increased. The ratio has inched up by 20 bps to 11.3 percent as of September 30, 2016 but entirely on account of decline in seasonal financing activity. The coverage ratio, provisions to NPLs, has, on the other hand, improved by 30 bps to reach 82.7 percent as of September 30, 2016.
The SMEs finance has picked up by 9.2 percent during the reviewed quarter which is in sharp contrast to seasonal decline in third quarter. The rise has been broad based working capital, fixed investment and trade finance. Banks' holding of government securities has decreased by 3.2 percent during Q3CY16 to reach Rs 7.0 trillion.
According to SBP, the banking sector has continued to invest in infrastructure which is reflected in expansion of branch network, absorption of fresh employees, and rise in ATMs, credit cards etc.
The fund based liquidity has remained comfortable as asset mix on the banks' balance sheet remains tilted towards treasury investments. The investments to deposits ratio (IDR) stands at 69.2 percent as of end September, 2016 compared with the end June 2016 level of 71.4 percent.
The decline in IDR reflects a QoQ drop of 3.2 percent in investments in government securities and a slight uptick in deposits. At the same time, the seasonal decline in advances also brought the already low Advances to Deposit Ratio (ADR) down to 46 percent in Q3CY16 from 47 percent in Q2CY16.
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