Overseas risks and rapid changes in global economic environment have forced the Pakistani banks to scale down their overseas operations. According to State Bank of Pakistan''s (SBP) Half Yearly Performance Review of the Banking Sector, the asset base of the overseas operations of banks has been decreasing since first half of last calendar year (H1CY17) and total assets of the overseas operations were reduced by 4.8 percent during the first half of this calendar year (H1CY18) compared to 1.4 percent increase in same period of last year.
However, SBP mentioned that, the decline in assets is not broad based as excluding one large bank, the overseas assets has depicted a growth of 4.4 percent during the reviewed period and despite registering decrease, the contribution of overseas assets is still 4.1 percent in overall banking assets as of June 30, 2018, though, lower than 5.0 percent as of June 30, 2017.
According to review, foreign operations in any form including subsidiaries, branches, representative offices and/or collaborating with foreign banks enable local banks to access diversified capital markets, benefiting from enhanced technological capabilities and entrance in international network. However, there are also risks associated with the international banking as macro-financial conditions of a host country can have severe implications for domestic banks through its foreign operations.
The report pointed out that overall, the performance of overseas branches, Representative Offices (ROs) and subsidiaries was moderated during H1CY18 due to challenging global macro-financial conditions. SBP, in its regulatory capacity, has also rolled out ''Governance Framework for Banks'' Overseas Operations'' to further strengthen the governance, risk management & compliance practices for banks'' overseas operations, it added.
The foreign operations of local banks are playing the intermediary role better than their local counterparts with Gross Loans to Deposit Ratio (ADR) of 84.4 percent as of June 30, 2018 as against domestic ADR of 55.9 percent.
According to SBP, the deposits of overseas operations were declined by 6.3 percent in H1CY18 compared to an increase of 3.2 percent in H1CY17 (YoY: decline of 13.9 percent). This decrease is due to reduction of 74.4 percent in "Financial Institutions Remunerative Deposits" from Rs 43.9 billion to Rs 11.2 billion. The asset quality of overseas operations deteriorated in H1CY18 with 13.7 percent increase in Non Performing Loans (NPLs) (YoY: 35.9 percent). Consequently, "NPLs to advances" ratio surged to 19.0 percent as of June 30, 2018 from 16.9 percent as of December 31, 2017.
However, most of the bad loans are already provided-for with net NPLs to net loans ratio at 1.3 percent. Moreover, analysis reveals that NPLs are not broad-based as most of the banks, except one bank, have negligible infection ratio.
Profitability of the overseas banks'' branches was dropped as the industry on consolidated basis has booked pre-tax losses of Rs 4.9 billion. Accordingly, all profitability indicators were also dropped with return on asset (ROA) declining to negative 0.7 percent in H1CY18 from 1.1 percent in H1CY17.
However, excluding two large banks, which booked loss due to increase in bad debt provisioning and administrative expenses the pre-tax profit for the period under review is Rs 3.4 billion. During H1CY18, the advances of overseas operations of the banks were inched up by 1.3 percent compared to 5.5 percent in H1CY17 (YoY: decline of 2.9 percent). The flow of outstanding data, during H1CY18, reveals that major rise in financing has been observed in automobile and transportation equipment, agribusiness, shoes and leather garments and production and transmission of energy.
Unlike the domestic operations which hold around 44.5 percent share of investment in assets, overseas operation''s share in their asset base was 29.9 percent. Around 41.3 percent of investments were made in sovereign papers by overseas operations.
During reviewed period, outstanding amount of investments shown a marginal expansion of 1.1 percent (YoY: decline of 12.1 percent, primarily, owing to divestment of sovereign papers). On the funding side, deposits are the prime source of financing with 70.2 percent of the assets followed by borrowing (18.5 percent). In tandem with assets, the deposits were declined during the period under review due to banks'' decision of rolling back their overseas operations.
It may be mentioned here that in Pakistan, nine local banks have foreign presence with 117 branches, 18 representative offices (ROs), and eight subsidiaries as of June 30, 2018, which are operating in 37 jurisdictions including Export Processing Zone in Pakistan. Largest overseas branch network is present in Bangladesh and UAE (18 branches each) followed by Bahrain and Sri Lanka (13 branches each).