Banks are making lesser profits than they were last year. Yet, they are healthier than last year. The balance sheets have strengthened, save for, the one-off HBL episode that led to some erosion in soundness indicators and equity base. The Quarterly Performance Review of the banking system released by the State Bank of Pakistan shows things are looking up on most accounts.

Banks are surely doing more of what they are supposed to be doing, i.e. core banking activity of lending money to a borrower that is not government. The net advances of the banking sector grew by a significant 21 percent year-on-year. Unsurprisingly, the growth story of late has been the surge in Islamic banking, as Islamic banking institutions witnessed a massive 51 percent year-on-year rise in advances. This translates into one-third share of the advances growth.

And the bulk of it is down to growing preference of consumers for Islamic banking solutions for consumer products. Consumer financing in general has continued a steady growth pattern, primarily owing to increased interest in car loans, evident from record high production and imports of vehicles of late.

Not that the banking sector ADR has suddenly jumped to the decade old levels but there is a visible pattern. Investments continue to form the biggest chunk of the asset base, but advances are slowly but surely picking up, as the ADR now stands at 48.3 percent, up 170 bps from CY16.

After almost ten year of higher year-on-year growth in investments, advances have for the first time in ten years grown at a higher rate than investments. Improved macroeconomic indicators, low interest rates, dip in yields on government papers are reasons, but the trend is encouraging. Investments on the other hand, seem to have shifted from long-term to short-term, as evident from a massive increase in T-bills versus a sizeable decline in PIBs.

That said, Pakistan is still far off from optimal level, as the credit to GDP ratio is less than half of what it is in India and Sri Lanka, let alone the developed world. The need for financial deepening cannot be overstressed.

The story on the liability side is a bit different as deposits have slowed down marginally, having undergone double digit growth for most of the last year. It could also be put down to banks’ relentless efforts earlier to improve the deposit mix and only invite the low cost deposits. The Islamic deposit growth again stands out, and it increasingly becomes evident that Islamic banking will sooner or later become a major driver of the industry. On-forth of the quarterly deposit flows were contributed by Islamic banks during the period, in sharp contrast to muted growth at commercial banks.

The NPLs have remained in control, and are adequately provided for. SMEs continue to be the neglected sector, as the advances to SMEs have reduced further. The financial soundless indicators stand comfortably above the regulatory requirements.

Banks seem well poised and possess enough excess liquidity to alter the asset mix, should the rates improve or genuine credit demands arise.