Non-performing loans hurting banks severely

[Naveed Yaseen]

By Mushfiq Ahmad
KARACHI: The deterioration in the economic condition of the country has started to impact the banking sector severely, as more and more borrowers are finding themselves unable to repay.

With the exception of a few small banks, non-performing loans (NPLs) of all banks witnessed increase during the first quarter of the calendar year.

As on March 31, 2009, gross NPLs of 24 listed banks stood at Rs 289 billion, an increase of Rs 17 billion over the NPLs of December 2008, according to a report. The report analysed the data of all listed banks, with the exception of Bank of Punjab, from their 1Q2009 accounts. The 24 banks represent 92 percent of the banking sector’s assets.

A year earlier, on March 31, 2008, NPLs stood at Rs 176 billion. On segregated basis, Rs 164 billion (57%) NPLs are held under loss category, while Rs 66 billion (23%) and Rs 52 billion (18%) are classified as doubtful and substandard, respectively. Gross NPLs to gross advances, an important ratio to gauge the flow of NPLs, climbed to 10 percent from 9.1 percent at end-2008 and 6.7 percent at end-March 2008. Moreover, net NPLs to net advances climbed to 3.6 percent from 1.6 percent at end-March 2008 and 3.3 percent at end-2008.

For the banks around the globe and in Pakistan, the toxic assets have become the major cause of concern for the investors. In current scenario, the significance of ratios like gross NPLs, gross advances and net NPLs, net advances has increased as these ratios determine the balance sheet’s health.

Moreover, any increase in NPLs and provisions thereof dilutes the impact of growth in net interest income (NII) by increasing credit cost. Coverage ratio at 67 percent and credit cost at 2.3 percent: Due to 30 percent FSV benefit given by the central bank in 2008, loan loss coverage ratio of the banking sector dropped to 67 percent from 81 percent a year earlier.

“By applying a respective 25 percent, 50 percent and 100 percent provisions on substandard, doubtful and loss categories, we infer that the banks loan loss coverage ratio may increase to 73 percent if banks do not account for the benefit of FSV,” said Muhammad Imran Khan, an analyst at First Capital Equities.

Despite the benefit of FSV, the banks booked provisions of Rs 14.8 billion during the quarter under review in their profit and loss accounts versus Rs 12.8 billion in the same quarter of last year when FSV benefit was not allowed. This shows how much the situation has deteriorated in the last one year in the banking industry, he added. Further deterioration likely in quarters to come: “NPLs will be prime concern for the banking sector in the quarters to come,” said the analyst. “There are some tentative signs that the worst may be over in 2009 as far as the flow of NPLs is concerned. We do not foresee, however, any major recovery (reverse provisioning) in 2010.”

http://www.dailytimes.com.pk/default.asp...2009_pg5_1