Positive outlook ahead

The Covid-19 pandemic fails to dent the Pakistani banking sector’s profitability

Pakistani banks are performing well and enjoy a stable outlook on the back of abundant liquidity and growing demand for banking and there has been no significant impact of the Covid-19 pandemic on the sector. Bankers say that the increased remittances and foreign funds inflow from overseas Pakistanis and through Roshan Digital Accounts have helped the local banking sector to improve their deposit base. But loan quality and non-performing loans (NPLs) remain a challenge for the sector this year.

According to KPMG report, total assets of Pakistani banks increased 14.4 per cent to Rs24.849 trillion in 2020 while profit before tax rose 30.7 per cent to Rs427 billion and deposits grew 16.3 per cent to Rs18.45 trillion.

However, Islamic banks are outperforming the conventional banking sector in Pakistan as demand for Shariah-compliant products grows in the country.

The Shariah-compliant banks recorded profits of 37.6 per cent growth to Rs47 billion, which is 6.9 per cent more when compared to conventional banking. While total assets grew by 28.8 per cent to Rs2.5 trillion as compared to a 14 per cent increase of assets of the conventional bank. Total deposits also increased by 28.4 per cent as compared to 16 per cent on the conventional side.

Muhammad Aurangzeb, president and CEO of Habib Bank Ltd, said banks need to diversify their revenue streams. In an environment where interest rates appear to be remaining dovish for some time in the near terms, Government Securities will only take us so far.

“Asset books need to be diversified towards lending and lending needs to be diversified to under served areas of the economy — eg., agriculture, consumer and SME — where there is a huge demand and need,” Aurangzeb said in KPMG’s annual report on Pakistan’s banking sector for 2021.

Aurangzeb sees a need for the banks to continuously innovate to develop new products and revenues streams.

Global rating agency Moody’s Investors Service noted that Pakistan’s long-term credit growth potential is strong, given the country’s large unbanked population.

No significant impact of Covid-19

Sarfaraz Nazir, general manager for the UAE at Bank Alfalah, says the banking sector in Pakistan generally performed well during 2020 despite the outbreak of the Covid-19 pandemic as the impact on the industry has not been very significant, thanks to better management of pandemic.

“The impact of the pandemic was not significant and the banks overall performed very well. The country’s banking sector is largely dependent on large scale corporates and the general growth was better in 2020 over the last couple of years because the exports have grown. Also, intervention by the State Bank of Pakistan (SBP) wherein credit to large scale manufacturing industry was offered through various types of schemes helped the banks to defer installments on loans and it helped the industry. The size of the banks’ balance sheet has grown and the profitability has been stable,” says Nazir.

In addition, he noted that the remittances from overseas Pakistanis, which reached close to $30 billion last year fiscal year, helped banks to increase their deposit base as well. “Overall, the banking industry and economy benefitted from this surge in remittances.”

Moody’s said in a recent report that a stable outlook for Pakistan’s banking system reflects banks’ solid funding and liquidity, although a challenging — but improving — operating environment will weigh on asset quality and profitability.

“Despite a difficult environment, the Pakistani government’s credit profile is stable due to ongoing reforms and increasing policy effectiveness — a positive for the banks given their outsized holdings of Pakistani government debt link their credit profiles to that of the government,” said Constantinos Kypreos, a senior vice-president at Moody’s.

The rating agency expects the slow economic recovery to affect loan quality, with NPLs expected to rise over the coming months from a sector-wide level of 9.9 per cent of gross loans in September 2020. Banks’ foreign operations, export-oriented industries and companies reliant on government payments and subsidies will be hit hardest, but loan repayment holidays and other government support measures should help contain some risks.

However, banks’ profitability, which has materially increased during 2020, will come under pressure on lowered margins, higher loan-loss provisions given the challenging operating environment, and subdued business generation. “Deposit-based funding and good liquidity buffers also remain strengths, while the probability of government support in a crisis is high, even if its ability to do so is limited by fiscal challenges,” added Kypreos.

— waheedabbas@khaleejtimes.com