The performance of banking industry in Pakistan continues to be sound. According to the Quarterly Performance Review of the Banking Sector for the quarter ended 31st December, 2016, gross advances to the private sector surged by Rs 410 billion or 10.6 percent during this quarter as against the rise of 7.7 percent in the corresponding period of last year. The increase was largely attributed to the textile sector followed by energy and sugar sectors. The solvency profile of the banking sector remained robust as Capital Adequacy Ratio (CAR) of 16.17 percent at the close of December, 2016 was well above the minimum required level of 10.65 percent. Return on Assets (RoA) fell from 2.5 percent in CY15 to 2.1 percent in CY16 while Net Interest Margin (NIM) declined from 4.4 percent to 3.7 percent in the same period. Asset growth during CY16 was recorded at 11.9 percent to reach Rs 15.831 trillion compared with 16.8 percent last year. Banks' investments, however, came down by 1.5 percent to Rs 7.509 trillion during CY16 mainly due to a decline in investments in government securities. Deposits, the key funding source of the banking sector, grew by 13.6 percent in the Calendar Year 2016 to reach Rs 11.798 trillion mark. Addition in overall deposits was contributed by non-remunerative current deposits followed by fixed deposits and saving deposits. Profitability of the banking sector declined from Rs 199 billion (profit after tax) in CY15 to Rs 190 billion in CY16. As a result, return on assets (RoA) fell from 2.5 percent in CY15 to 2.1 percent during CY16. The asset quality of the banking sector also improved with the decline in NPLs and pick-up in advances.
Most of the above developments are in line with the evolving state of the economy and reflect a positive trend in the monetary and banking sector. The most important development was a substantial rise in bank credit to the private sector which could prove to be a catalyst in stimulating investment and growth. The surge in credit may be due to a variety of factors, including the lagged effect of a consistent easy monetary policy. It may be mentioned that SBP had reduced the policy rate by as much as 425 basis points (bps) since November, 2014 which was translated into a 373 bps reduction in weighted average lending rate. In addition, better economic conditions, financing for the China Pakistan Economic Corridor (CPEC) and improved security and energy supplies may have contributed to higher private sector financing. Banks' reduction in investment in government securities and higher growth in deposits also created the space for higher private sector lending. Obviously, it would have been much better if a reduction in government securities held with the commercial banks was brought about by a decline in budget deficit. Since this was not possible due to a weak fiscal position, the government reduced the borrowings from commercial banks by resorting to higher borrowings from the SBP which could stoke inflationary pressures in the economy. Profitability of the banking sector came under pressure due to lower interest rate environment, receding investments in PIBs and T-Bills and maturity of high yielding long-term bonds. It is good to see that deposit mobilisation has picked up pace which was an improvement, considering stagnation in deposits in the last couple of years. Also, the solvency of the banking sector remains robust and the financial intermediation seems to have improved over the year. As for the prospects in the medium-term, a lot will depend on the monetary policy formulated by the State Bank of Pakistan (SBP), fiscal position of the government, financing sources to meet the budgetary deficit and overall economic environment in the country. Another issue could be the possibility and timing of negotiating another programme with the International Monetary Fund (IMF). Obviously, the IMF would like to shift a large part of government borrowings from the SBP to commercial banks and other sources and this will disturb the status quo.