Banks beam

Banking sector of the country continues to perform reasonably well. According to SBP's Quarterly Performance Review of the Banking Sector for the quarter ended 30th September, 2017 released on 12th December, the overall risk profile of the banking sector remains within tolerable bounds, characterised by high quality adequacy ratio, improving asset quality and favourable liquidity conditions. However, in order to deliver better performance, banks need to calibrate the changing macroeconomic environment in their business models to capitalize the emerging opportunities, particularly from the China Pakistan Economic Corridor (CPEC). Gross advances (domestic) to private sector declined by Rs 5.4 billion during Q3CY17; significantly lower than the contraction of Rs 112.2 billion in the same period of last year. A sector-wise analysis has revealed that advances to agriculture, textiles, automobiles and electronics resisted the overall fall in financing during the quarter while there was a notable decline in the energy sector, attributed mainly to the retirement by one of the public sector oil companies. The share of long-term fixed investment was persistently rising. The deposit mobilisation has remained on track, primarily, on the back of growth in saving and fixed deposits. Asset quality has improved as the ratio of NPLs to gross advances has declined to 9.2 percent at end of September, 2017 from 9.3 percent a quarter earlier. Profitability of the banking sector has moderated further with the earnings of Rs 195.3 billion during January-September, 2017, ROA of 1.6 percent and ROE of 19.1 percent. Net Interest Income, however, was reported to have improved (year-on-year basis) due to rising interest earned on advances.
The quarterly review of banking sector shows that its performance during the third quarter of CY17 has been quite encouraging and there is no need to worry on this account. Gross advances to private sector have declined somewhat but this is a seasonal pattern. Consumer financing has continued its steady growth, primarily due to a rise in auto, mortgage and credit card loans. The share of fixed investment loans was also steadily increasing in both corporate and SME segments, reflecting investor confidence in the outlook of domestic economy and low interest rate environment. The seasonal pattern of advances and a robust growth in LSM suggest that advances would rise during October-December, 2017 quarter. SBP has also advised banks that "demand for credit might rise in the future with the expected increase in economic activity. Banks need to calibrate the changing macroeconomic environment in their business models in order to better capitalise the emerging opportunities, particularly from the CPEC." We feel that this is a very sound advice. The growth in advances is likely to be facilitated by continuous increase in deposits. The fact that liabilities of the banking system are growing mainly due to rise in saving and fixed deposits is reassuring as there will be no mismatch between assets/investments of banks and liabilities. Further, the risks to the resilience of the banking sector are not strong but muted. Capital Adequacy Ratio (CAR) at 15.4 percent remains well above the minimum required level of 10.65 percent and profitability, ROA and ROE also stand at reasonable level. NPLs as a percentage of gross advances are also on the decline. All of this suggests that the banking sector of the country as a whole faces no immediate threat and there is no risk of insolvency, at least in the near future. This is a good news as development of country depends to a great extent on a sound banking system which could act as an efficient intermediary between savers and investors.