The State Bank of Pakistan (SBP) said that the outlook of the financial sector, in the calendar year 2017 (CY17), largely remains positive; though some risks appear on the horizon. According to Financial Stability Review (FSR) for the year 2016 (CY16), the SBP is cognizant of emerging risks and have been taking measures to strengthen its regulatory and monitoring frameworks (including Macro-prudential/Financial Stability), improve the efficiency and security of payments systems, enhance financial consumer protection and reinforce corporate governance regime.
The Review said that moderation of profitability of the banking sector in CY16, after recent exceptional performance, may carry forward to CY17, if the monetary conditions and structure of the balance sheet of the sector follow recent trends. The growth in credit and high provision coverage ratio do provide reasons for some comfort. However, to minimize risk of future defaults and any impact on income, banks need to enhance their credit evaluation and monitoring standards.
In addition, the exposure of the banks to the public sector, in terms of advances, investments, money market activities, off-balance sheet items and revenue generation remain significant. This not only challenges the financial intermediation function of banks and some non-banks, but is also susceptible to changes in government policy, it added. As the financial sector integrates, the breadth of interconnectedness among banks and non-bank is bound to increase. Already many of the banks own Asset Management Companies and Alternate Payment Delivery systems; therefore, consolidated supervisory oversight has become imperative.
The Review said that the widespread use of technology, though useful for the end consumer, puts an additional burden on the institutions to protect and safeguard their vital systems and information technology infrastructures. The threat of nefarious cyber-attacks is real and omnipresent. Asset prices, especially equity prices, have been rising at a brisk pace. Corporate performance and an enabling macroeconomic environment support this surge, but, investor sentiments are also playing their part. Though the banking sector''s exposure to equities is within prescribed limits, it is vulnerable to corrections in asset prices, it said.
Capital adequacy of the banking system, though substantially above the prescribed limits at present, needs further attention in view of enhanced regulatory requirements in the coming years, moderation of profits and expected increase in their risk profile as exposure to the private sector increases. Moreover, stress test results under severely adverse developments in the global scenario reveal that the capital adequacy of the banking system falls below the prescribed limits in the simulations, the Review said.
Other than the financial sector, the corporate sector is likely to benefit from favorable economic conditions, particularly, the low borrowing costs, rising demand, improving security conditions, and better energy supply. The highly profitable corporate sector is a positive sign as it reduces the asset quality concerns of the lending financial institutions in the short to medium term. However, given the enabling environment, the corporate sector also needs to innovate in terms of production processes, product development, quality controls and price rationalizations.