Low season of credit, especially in quasi fiscal operations, and higher mobilization of savings in National Savings Schemes marginally slashed the advances and deposits in the banking system in the quarter ending March 2010.
With a 2.5 percent reduction in net advances and 5.7 percent surge in toxic assets, the gross infection ratio rose by 90 bps to 13.1 percent during the same period. However, higher shift from non-performance to the loss category (100% provisioning required) and some benefits accrued on Forced Sale Value relaxation contained the rise in net infection ratio to 30 bps (at 4.2%) during the quarter.
The signs of economic recovery are visible from the uptick in private sector credit, thanks to improvement in LSM, including automobile and transportation, sugar, fertilizers and chemical and energy. Although the consumer segment continued to lose its share in the pie, auto financing was in the green.
This is encouraging. Yet, persistent inflation, fiscal account relapse, precarious security situation and lingering energy shortages, as cited by SBP in its quarterly banking performance, are major impediments to economic growth.
The chief reason for erosion in assets is the slight retirement in commodity financing during Jan-Mar 10, which still remains at very high levels. The provisional data till the second week of May suggest that the seasonal wheat procurement in full swing, might facilitate some growth in advances and deposits.
Nonetheless, during the first quarter of 2010, liquidity conditions eased a bit in spite of the fact that advances-to-deposits ratio hit a six year low.
The strategy of big five banks to lower cost of funds in an attempt to replace some fixed deposits by saving accounts, further widened the asset liability match. Yet, better liquidity position is evident from the fact that SBP injected Rs1.2 trillion through open market operations into the system during Jan-Mar versus Rs1.7 trillion the previous quarter.
Economic recovery came with decent profits amongst the banking companies as commercial banks posted a growth of 16 percent, year-on-year, in net profits during the quarter ending Mar 31, 2010, thanks to growth in earning assets, accruing FSV benefit, some trading gains and higher dividend income.
The persistent increase in toxic assets, against analysts expectations, still remain a concern for banks managements. Corporate and SMEs having the lions share of advances worsened their infection ratio by 69 and 225 bps to 13.25 percent and 24.68 percent respectively. Within them, textile (by 166 bps to 21.25%), cement (by 320 bps to 15.44%) and auto & transportation equipment (by 327 bps to 19.86%) remained the main culprits.
Commodity financing, on the other hand, marginally reduced its bad debt ratio which stood at a mere 1.06 percent. This explains the bankers liking to enhance their exposure to fiscal and quasi fiscal operations. That in turn crowds out private investment.