The State Bank of Pakistan (SBP) urged banks to calibrate the changing macroeconomic environment in their business models to capitalize the emerging opportunities from CPEC and economic growth.
According to SBP's Quarterly Performance Review (QPR) of the Banking Sector for the quarter ended 30th September, 2017 (Q3CY17), issued on Tuesday, the overall risk profile of the banking sector remains within tolerable bounds during the period under review characterized by high capital adequacy ratio, improving asset quality and favourable liquidity conditions.
"In order to deliver better performance, banks need to calibrate the changing macroeconomic environment in their business models to capitalize the emerging opportunities as arising from, generally, growth in the economy and, particularly, from the China Pakistan Economic Corridor (CPEC), SBP urged.
SBP is expecting that the seasonal pattern along with a robust growth in Large Scale Manufacturing Index (LSM) observed during Jul-Sep 2017 suggests that advances to private sector will rise in Q4CY17.
In addition, the core funding source of the banks ie deposits are likely to improve in the upcoming quarter for two reasons. First, banks would proactively seek to mobilize deposits in order to meet the anticipated rise in private sector advances. Second, the expected increase in advances would further improve deposits base due to the feedback effect.
According to report, the risks to the resilience of the banking sector are likely to remain muted in Q4CY16. Despite narrowing return margins and anticipated rise in risk weighted assets (due to expected uptick in advances), Capital Adequacy Ratio (CAR) is expected to remain well above the minimum regulatory requirement.
The interest income from advances is likely to further rise (quantum impact of expected increase in advances) which in turn will compensate the reduced earnings from low yielding government bonds, the report predicted.
According to SBP, the performance of the banking sector, both on QoQ and YoY basis, has remained quite satisfactory during Q3CY17. Banking sector's asset base has expanded marginally during Q3CY17, though, on YoY basis, the growth has been quite robust (16.0 percent). Financing has observed a minor dip over the quarter in line with the seasonal pattern of the credit cycle.
Encouragingly, share of fixed investment (long-term) loans in total loans continues to rise, indicating improved business confidence. The funding needs of the system are met by a nominal growth in deposits and interbank borrowings. The rising long-term advances and declining share of fixed deposits is widening the assets-liabilities mismatch against which the banks need to remain vigilant, the report said.
According to SBP, earnings of the banking sector, however, have moderated due to low interest rates and increased administrative expenses, in addition to one-off settlement payment made by a large bank. Nevertheless, Capital Adequacy Ratio (CAR) at 15.4 percent remains well above the minimum regulatory required level of 10.65 percent.
As highlighted in the report, less than normal seasonal fall in advances along with improved liquidity and strong solvency - well above the minimum benchmark - are the key highlights of the 3rd quarter of CY17.
Despite the seasonal net retirements in commodity financing and sugar sector, the overall gross advances (domestic) to private sector have declined marginally; significantly lesser than the established 3rd quarter financing dip.
Gross advances (domestic) to private sector have declined by Rs 5.4 billion during Q3CY17; significantly lower than the contraction of PKR 112.2 billion in the same period of last year. The sector-wise analysis reveals that the broad based advances disbursement to various sectors (agriculture, textiles, automobiles, and electronics) has resisted the overall fall in financing during the reviewed quarter. This is despite a notable decline in advances to the energy sector; attributed mainly to retirement by one of the public sector oil companies.
Noticeably, the share of fixed investment (long-term) advances in overall advances is persistently rising. Banks have continued to invest in short term MTBs while investment in PIBs and Sukuk have declined. The deposit mobilization has remained on track, primarily, on the back of growth in saving and fixed deposits.
Asset quality has improved as Non Performing Loans (NPLs) to gross advances (infection) ratio has moved down to 9.2 percent as of end September 2017 from 9.3 percent as of end June 2017.
However, profitability has moderated further with the banking sector earning profit (before tax) of Rs 195.3 billion during Jan-Sep, 2017 (ROA of 1.6 percent and ROE of 19.1 percent). Encouragingly, Net Interest Income (NII) has improved (Year-on-Year basis) on account of rising interest earned on advances.
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