Banking system assets grow by 8% to Rs 7.7tr in Jan-June 2011

[Salman]

Banking system assets grow by 8% to Rs 7.7tr in Jan-June 2011


KARACHI: The assets of Pakistan’s banking system soared by 8 percent or Rs 577 billion to Rs 7.7 trillion during first half of calendar year 2011 (January-June, 2011).

This surge in banks’ total assets, both in absolute and growth terms, was the most significant since 2007, said State Bank of Pakistan’s Financial Stability Review FSR released on Friday.

Deposits increased by 9.4 percent, registering highest half yearly growth during last four years. Net investments, with an increase of 22.4 percent during first half of 2011, markedly outpaced anemic growth of 1.04 percent in net advances. The first-half yearly Review said banks’ profits before tax were up by 31 percent during first half of 2011 to reach Rs 77 billion, with Return On Assets (ROA) of 2.1 percent (1.8% in June-10) and Return On Equity (ROE) of 21.9 percent (17.7% in June-10).

During Jan-June 2011, banks remained fairly liquid on back of growing share of investments in government papers. Further, banks’ capital adequacy ratio also observed improvement, reaching 14.1 percent by June-2011.

It said concentration in profits dropped (share of top 5 banks down from 95 percent in Dec-10 to 78 percent in June-11), ensuring that even smaller banks have a share, albeit marginal, in industry profits.

Further, growing profits also helped reduce number of loss making banks, from 17 in June-10 to 8 in June-11. However, Review cautioned source of profits was shifting away from interest income through advances to investments in government papers.

Specifically, returns from investments in government papers now accounts for almost 30 percent of banks’ interest income, up from 24 percent in June-2010.

This suggests growth in government borrowings has shored up banks’ earnings. This trend is neither desirable nor sustainable, first because it compromises intermediation function and second as any sharp cut in discount rate can discernibly affect banks’ profits.

There has been growing evidence of banks’ flight towards quality as net investments, mainly in government securities, now constitute around 34 percent of banks’ assets compared with 28 percent in June, 2010.

The share of net advances witnessed concomitant drop, from 47.6 to 43.9 percent during same period, it said.

Unsurprisingly, Advances-to-Deposits ratio has further dropped from 63.0 percent in June, 2010 to 56.7 percent by June, 2011.

While government’s reliance on banking sector heightens concerns about private sector crowding out, poor credit off-take by private sector has other causes as well that include severe energy crises and challenging economic environment.

Credit risk remained a major challenge as banks accumulated Rs 31 billion of fresh Non-Performing Loans, pushing infection ratio from 14.7 percent to 15.3 percent, Review said.

Public sector commercial banks and mid-sized local private banks appear more vulnerable to higher credit risk. However, going forward, results of stress tests showed banking system is resilient to shocks emanating from a challenging macroeconomic and business environment.

Islamic banking institutions IBIs registered 17.5 percent growth during H1-CY11, with bulk of incremental assets channeled into government securities. Islamic banks appear more liquid, solvent and profitable when compared with rest of banking sector but face unique risks like reputational risk and displaced commercial risk.

On other components of financial system, it said domestic financial markets remained stable during half year under review, despite some bouts of mild strain. External inflows kept value of domestic currency almost stable, as Pak rupee depreciated by a marginal (0.35%) against dollar.

Capital market managed to post growth of 4 percent during half year under review. Asset base of Development Finance Institutions DFIs managed to grow marginally by 4 percent, primarily on account of stronger growth in investments. Share of advances in total assets remained intact (around 35%), though at significantly lower level than what DFIs’ nature of business would warrant.

However, trading volumes and activities in corporate debt market largely remained low. Derivatives market, on other hand, shrank further as insipid credit to private sector coupled with stable exchange rate and interest rate environment dampened the demand for new derivative contracts.

Review said in contrast, mutual funds industry witnessed its revival as money market investments improved net assets of industry by 24 percent in H1-CY11.

Insurance industry witnessed growth of 16.6 percent in its asset base with life business experienced much strong growth (24%).

The payment systems functioned smoothly, with amount transacted through retail payment system growing by 14 percent (YoY) against 11.6 percent in corresponding period last year. In terms of volume, share of e-banking transactions gained momentum, reaching 42 percent by June-11.

In branchless banking, Pakistan is experiencing rapid expansion, with four banks offering services through various operational setups.

As more banks are planning to enter this growing segment, there is strong potential to significantly improve financial inclusion in years ahead.

FSR said a mild pick-up in private sector credit is likely as borrowing cycle of some key industries resumes, though receding commodity prices would keep growth in check.

Further, challenging business environment in general and banks’ risk aversion amid high credit risk would limit possibility of a perceptible reversal in asset mix away from government papers. Current monetary policy stance would make banks’ asset selection challenging in months ahead; banks will either have to live with lower returns on their investments (a key contribution to profits in recent times) or to aim for greater private sector credit, which in difficult economic environment, would truly test their ability to adroitly manage an already high credit risk. staff rpeort