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KARACHI: The State Bank of Pakistan (SBP) returns to profitability after incurring loss in the preceding year (FY19). It earned highest-ever profit of Rs 1.16 trillion for the year ended June 30, 2020 (FY20), mainly due to stability in exchange rate and significant increase in interest income.

The Board of Directors of the State Bank of Pakistan on October 26, 2020 approved the Annual Performance Review on the working of the Bank and its subsidiaries and the financial statements for the year ended June 30, 2020.

According to annual performance review, the stability in the exchange rate allowed SBP to return to profitability after incurring loss in the preceding year (FY19). The State Bank posted net profit of Rs 1.163 trillion during FY20 compared to a loss of Rs 1.043 billion in FY19. The profit earned by the SBP in the year ended June 30, 2020 is highest in its history.

The high interest rate prevalent in the first three quarters of the year allowed the Bank to accrue significant amount of interest income from the interest sensitive assets, particularly lending to the government and income from the bank’s open market operations.

The report pointed out that the exchange gains/ (losses) arise on FCY assets and liabilities of the Bank and major part of the foreign currency assets of the Bank are USD denominated whereas the foreign currency liability exposure is mainly Special Drawing Rights (SDRs) and USD denominated.

Accordingly, the movement in the PKR/SDR and PKR/USD exchange rates directly affects the exchange account. The bank earned a net exchange gain of Rs. 66.402 billion during FY20 as against exchange loss of Rs. 506.131 billion during FY19. The PKR depreciated against USD and SDR during the period however, exchange gain arose due to improvement in net FCY liability exposure as compared to previous year.

The interest/markup income posted a significant growth of 87 percent and increased by Rs. 562.612 billion to Rs.1.207 trillion during the last fiscal year. The lending to the Government of Pakistan (GoP) by SBP remained the major source of income of the SBP during the year.

Although, there was no further lending to the GoP after June 30, 2019, however, the income on lending to the GoP increased by 84 percent due to increase in average volume of lending as well as increase in average interest rate during the year, the report mentioned.

The income earned on lending to commercial banks through Open Market Operation (OMO) injections increased by 194 percent due to increase in average interest rate and larger volumes of monetary injections during the year.

The interest earned on refinance facilities to priority sectors increased to Rs.12.837 billion in FY20 from Rs.11.945 billion in FY19 primarily due to increase in lending to banks under various refinance schemes. The income on foreign currency deposits registered 15 percent decrease during the year. Although, foreign currency (FCY) reserves increased significantly during the year; however, the return on the reserves decreased due to lower interest rates in the international market.

The SBP incurred interest/markup expense on FCY and domestic liabilities. FCY liabilities include deposits of international organizations and central banks, borrowings from International Monetary Fund and currency swap arrangements. The domestic interest bearing liabilities include repurchase transactions and Sukuks purchased under Bai-muajjal agreement. The interest expense witnessed a decline of Rs. 37.418 billion primarily due to decrease in expense on repurchase transactions by Rs. 46.478 billion. Further expense on FCY deposits increased during the year, which resulted in additional interest expense of Rs.14.136 billion.

Further, during the year, the liquidity mopping up operations were relatively on reduced scale and hence the interest expense registered a substantial decline. The total assets stood at Rs.12,273 billion as at June 30, 2020 as compared to Rs.11,467 billion on June 30, 2019, registering an increase of Rs.806 billion primarily due to increase in foreign currency accounts and investments.

Similarly, the total liabilities of the bank stood at Rs.11,219 billion as at June 30, 2020 as compared to Rs.10,761 billion as at June 30, 2019, registering an increase of Rs.458 billion. This rise was primarily led by increase in currency in circulation.

The SBP introduced certain interest free/subsidized refinancing schemes during COVID-19 pandemic. As per the requirements of IFRS-9, the subsidized loans are required to be recorded at fair value.

Accordingly, an amount of Rs.4.194 billion has been recognized as fair valuation adjustment against these loans. This fair valuation adjustment will be amortized and recorded as income over the period of loans.

The other operating income increased to Rs.8.604 billion in FY20 from Rs.4.347 billion in last year primarily due to increase in income on penalties levied on banks and financial institutions, licenses fee, e-CIB fee and gain on disposal of foreign investments.

The total expenditure during the year was Rs.59.089 billion as against Rs.50.467 billion in FY19. The increase was due to 26 percent increase in general administrative & other expenses and 17 percent increase in banknote printing charges. An analysis of major components of Bank’s expenditure is given as under:

The banknote printing charges increased to Rs.13.325 billion in FY20 from Rs.11.419 billion in FY19, thereby registering an increase of 17 percent mainly due to larger volumes of printing and increase in printing rates.

The Agency commission paid to National Bank of Pakistan and Bank of Punjab increased by only 0.24 percent during the year to Rs.10.668 billion. The marginal increase in the agency commission is due to gradual shifting of collection of duties and taxes to Alternate Delivery Channels (ADC), which entails nominal cost for the SBP.

The overall general and administrative expenses increased to Rs. 35.168 billion in FY20 from Rs.27.909 billion in FY19, thus registering an increase of Rs. 7.259 billion. The major increase was witnessed in retirement benefits, which is attributable to higher interest cost during the year due to increase in interest rate.

Copyright Business Recorder, 2020