Commercial banks - 2009 ended on a good note

The last quarter brought some respite to the nine month drought as some liquidity was poured into the banking system. Deposit base increased by Rs304 billion (7%) during Oct-Dec 09. The credit advancement to low risk public sector entities at rates competitive to the relatively high risk private sector, amid more exposure to government papers, left little of incremental liquidity to advances.
The return-on-equity for commercial banks, nonetheless improved a bit in 2009, after nose-diving consistently in the previous two years. Unlike their global peers, Pakistani banks have had an adequate capital base to cover the risky assets with ever improving ratios. But the quantity itself does not speak of prudence of the banks; rather, they expose their lack of potency as asset quality ratios have deteriorated in 2009.
During last year, the deposits of banking system increased by Rs570 billion (14%), out of which only Rs65 billion on net basis were deployed in advances, as virtually all the incremental supply was used to plug the government revenue-expenditure gap and to tackle the circular debt.
The investments (read government borrowing) increased by Rs673 billion (62%) in 2009, while on the other hand, advances-to-deposits ratio declined by 760 basis points to stand at 67.9 percent.
The slowdown in toxic assets growth is a good omen nevertheless. Non-performing loans growth for commercial banks which peaked at 29 percent in Oct-Dec 08 reduced to a mere 2 percent in Oct-Dec 09. The NPLs to gross loan ratio which peaked at 12.4 percent in Sep reduced to 12.2 percent by Dec 09.
With improving macroeconomic fundamentals, this ratio is likely to improve further in the coming quarters. However, concentration of bad loans - due over 12 months - increased pressure on provisioning for commercial banks which have hampered their profitability in the last quarter.
The corporate sector which constitutes over 60 percent of the pie maintained its share but underperformed the industry, as its toxic assets ratio grew by 4 percentage points to 13 percent during 2009.
On the other hand in the SME and consumer sectors, not only is the pie shrinking but bad loans are also on the rise. The farmers showed no major deviation in their borrowing patterns as both the loan size and the non performance virtually stood at the same level.
No wonder banks are more inclined towards commodity financing which increased by Rs184 billion (78%) last year with virtual absence of non-performance. Similarly, banks increased their exposure in the power sector TFCs, again backed by government, with little risk of default by investing Rs162 billion in two papers during 2009.
Now, a little on the industrys overall performance in CY09; the profit for all commercial banks increased by 26 percent, year-on-year. The ROE (average equity and surplus) increased by 120 bps to 8.5 percent in 2009. The interest income continued to grow but at a slower pace to the interest expensed.
On the other hand, the share of non interest income in gross income which was on a continuous rise from 2005-08 declined by 170 bps to 27.7 percent, thanks to low trade and business activities.
The banks, however, could not control their administrative expenses in line with slowdown in economic activities, as the cost to income ratio rose by 130 bps in 2009. However, with more focus on less risky government papers, the risk measures improved significantly - capital adequacy for banks increased by 190 bps to 14.6 percent in 2009.