Where is Pak banking industry heading?
Pak banks' holding of government securities reached at Rs7.2 trillion in June 2016. It represents more than 90 per cent of investments.
Islamabad - The investments continue to rise due to a growing stock of government securities
Pakistani banking has been one of the highest performing and a big profit-earning industry for years. But, now, where is it heading?
The current trends, on the back of record low interest rates and the private sector borrowers trying to boost the slowdown-hit industry requiring incentives, the country's Monetary Policy can go hay-wire, if the government and the State Bank of Pakistan (SBP) delay ordering corrective steps.
In this situation, the central has admitted that "in an environment of the low interest rates, falling yields on public debt and some shift in the pattern of the government borrowing, profitability of the banking system is expected to remain in check. A lower provisioning charge and the off take of high yielding private credit might partially offset the downward pressure on interest income."
However, in this somewhat unhappy scenario, there is a word of cheer. "The investments continue to rise due to a growing stock of government securities. Banks' holding of government securities reached 7.2 trillion rupees as of June 30, 2016. It represents more than 90 per cent in total investments."
The good news, however, is that the private sector credit off-take is increasing and the bank assets are growing, though not very fast.
The SBP in its quarterly review of the banking sector reported last week that the asset base of the banking industry recorded a 7.7 per cent growth during the quarter ended on June 30.
"The quarter is marked by a significant rise in advances by 7.6 per cent, which in turn, was led by growth in advances to the private sector and financing for commodity operations of the government. After months of low availability of credit for the private business, bank advances for the private sector rose by four per cent during this quarter, compared to just 2.1 per cent in the like quarter of 2015.
"Despite seasonal net retirements in textile and sugar sectors, a strong financing demand from several manufacturing sectors - including production and transmission of energy, chemicals, pharmaceuticals and individuals - has resulted in the overall healthy growth in advance," said the report.
However, the asset quality has "declined slightly" during April-June, 2016 "due to a rise in the Non-Performing Loans. But the proportionately larger growth in advances pushed down NPLS loans to 11.1 per cent as off the end of June, 2016 from 11.7 per cent as of end of March 2016," the bank also recorded.
The quarter saw the investments grew by 4.9 per cent with most of it going into government papers. "This continuing increase in the investment in the government securities has further strengthened the already comfortable liquidity position of the banking system."
The quarter also saw the deposited rising 6.8 per cent that helped the increased credit to borrowers. "There has been some deceleration, due to multiple factors, including the declining return on deposits, shift in depositors' preference to alternative modes of savings - like prize bonds, and the capital market - imposition of Withholding Tax. The banks met the balance of the funding needs through financial borrowing. There has been a small hit on the bank profits. The profits-after-tax for the fist half of calendar year-2016 were down by 5.4 per cent to 93.7 billion rupees over the corresponding year of last year, largely due to decline in the low interest rates.
The good news is that the SBP also noted that "the rising cost to income ratio, owing to the infrastructure expansion, hiring of manpower and IT-related investment also hit the profitability of the banking sector.
Yet one more good news is that the SBP confirms that the solvency of the system has remained strong with the Capital Adequacy Ratio (CAR) at 16.1 per cent during the quarter, staying well above the minimum Pakistani and the international benchmarks."
The SBP had earlier reported on September 9 that "the banking sector profitability during July and August - the first two months of CY-2016 - shrunk by 5.4 per cent on an annual basis due to declining interests rates."
It said: "Profit after tax for the first half of the banking sector has declined by 5.4 per cent to 93.7 billion rupees over the corresponding period of CY-15. The profitability has received a major dent from the decline in the interest earned on advances and a steep decline of 29.1 per cent in gains on the sale of the investment portfolio."
The review stated that the number of "loss-making banks has increased during the period. Bank-wise statistics revealed a broad-based contribution to banking earnings as 30 banks have posted profits while the count for loss-making banks has increased to five in the first half of CY-2016."
There is a good deal of demand for fresh credits from the businessmen who wish to get out of the economy's slow down mode, and make things to go forward. Despite that, the SBP review said that "the demand for credits is expected to be slack in the July-September- quarter due to the retirement of both the commodity Financing in the public sector and working capital loans by textiles and cement sectors."
The projection for the deposits was unhappy, too. "The deposits of the banks, which closely follow credits, may witness a further decelerated growth due to Eid-related withdrawals and slowdown of remittances from the Overseas Pakistanis," the SBP projected. In fact, the home remittances did slow down in July, but quickly bounced back by 15 per cent in August. So this is where the banks and Pakistani economy stand as of now, plus all the hopes for god days to come - soon.
The writer is based in Islamabad. Views expressed by him are his own and do not reflect the newspaper's policy.