Pakistan’s banking industry stellar performance in 2019, profitability jumps 27.5pc

Despite the economic slowdown and global uncertainty, Pakistan’s banking industry enjoyed an exceptional run in 2019, with the sector overall profitability increase by approximately 27.5 percent during the calendar year ended 31 December 2019.

As per Banking Results 2019-Commercial Banks Operating in Pakistan, published by KPMG Taseer Hadi & Co. Chartered Accountants, the key driver behind the stellar performance of the banking sector was the significant increase in interest rates, as the banking spread of banks included in the report increased to 5.67pc from 4.41pc in 2018.

According to SBP statistical publication, the weighted average lending rate in 2019 was 11.7pc compared to 8.2pc in 2018 and the average deposit rate in 2019 was 5.9pc compared to 3.3pc in 2018. The growth of 22.3pc in advances in 2018 also contributed to an increase in 2019 profits.

As per the report, the total assets of the banks included increased from Rs19,618 billion in 2018 to Rs21,729bn in 2019, showing an increase of 10.8pc. Meanwhile, the number of deposits rose from Rs14,123bn in 2018 to Rs15,865bn in 2019, i.e. an increase of 12.3pc.

ISLAMIC BANKING BOOM IN 2019

As per the report, the Islamic Banking segment performed exceptionally with a 90.6pc increase in profitability. The significantly higher growth in profitability of the Islamic Banks is due to strong total assets growth in 2018 and 2019 and the higher spreads resulting from higher interest rates.

As per the report, the total assets of the Islamic Banks included increased from Rs1,614 billion in 2018 to Rs1,942bn in 2019, showing an increase of 17.7pc. Meanwhile, the number of deposits rose from Rs1,325bn in 2018 to Rs1,583bn in 2019, i.e. showing an increase of 19.4pc.

AT A GLANCE

In 2019 the annualized increase in deposits was 12.3pc while advances grew by 4.7pc only, primarily due to the prevalence of the higher interest rate scenario. The availability of government paper and high returns resulted in banks focusing on earning healthy and secure returns.

Further, the high-interest cost resulted in lower offtake from businesses who considered borrowing mostly unfeasible.

CORONAVIRUS IMPACT ON BANKING INDUSTRY

The report was of the view that 2020 is expected to be a much difficult year due to the ongoing pandemic scenario. Interest rates have already witnessed a decline of 525 basis point to date and are expected to go down further, it said.

The post-pandemic situation is unpredictable but based on the existing outlook, banking sector profitability is expected to be under pressure due to reduced offtake of advances under recessionary market conditions and cautious customer outlook, drop-in fee income on distribution of wealth products due to volatility in the capital distribution of wealth products due to volatility in the capital market increased credit losses/delinquencies as a consequence of lockdowns, etc.