Q4CY16: Advances to private sector reach Rs410bn

KARACHI: With low interest rate and better economic conditions, advances to private sector posted a historical growth, reaching Rs 410 billion in the last quarter of CY16, said the State Bank of Pakistan in its Quarterly Performance Review (QPR) of the Banking Sector for the quarter ended 31st December, 2016 (Q4CY16).

In terms of the QPR, the key highlight is the highest quarterly growth in advances to private sector in the last 10 years, which has contributed to most of the increase in assets. The lagged effect of consistent easy monetary policy, ample availability of liquidity owing to high deposit growth and maturing PIBs, CPEC related activities, and positive economic outlook are the major driving factors behind the impressive growth in advances, it added.

However, the report revealed that lower interest rate on the other side has hurt the banking sector profitability, which declined some 4.5 percent during the last calendar year (CY16).

The gross advances (domestic) to private sector have surged by a higher rate of 10.6 percent to reach Rs 410 billion during Q4CY16 as against 7.7 percent during Q4CY15. The major thrust (in volume terms) came from the rebound in textile sector followed by energy and sugar sectors. Other contributing sectors are agribusiness, financial, and cement.

The SBP also expecting that current growth momentum in the private sector credit will continue during this calendar year. Historical low interest rates, growth momentum of non-seasonal fixed investment advances, and shifting pattern of government borrowing suggest better prospects for private sector financing in the Q1CY17, it said. However, seasonal slowdown in demand for advances and net retirement in commodity financing may keep the overall advances growth in check, it added.

According to report the solvency profile of the banking sector remains robust as Capital Adequacy Ratio (CAR) of 16.17 percent is well above the minimum required level of 10.65 percent.

It said that the banking sector recorded a reasonable performance during Oct-Dec 2016 and profitability of the banking sector narrowed due to low interest rate environment and reduced quantum of investment. Accordingly, Return on Assets (ROA) has reduced to 2.1 percent in CY16 compared to 2.5 percent in CY15 and Net Interest Margin (NIM) has declined to 3.7 percent in CY16 as against 4.4 percent in CY15.

The credit risk profile of the banking sector improved with decline in non-performing loans ratios. On the solvency front, Capital Adequacy Ratio (CAR) has slightly declined to 16.17 percent due to rise in advances but it is still well above the minimum required level of 10.65 percent.

For the entire CY16, however, asset growth remains contained at 11.9 percent to Rs 15.831 trillion in CY16 compared to 16.8 percent growth in CY15 largely due to slowdown in investments in government papers. The key contribution has come from demand for credit from private sector; thanks to lag impact of monetary easing, better economic conditions, and improved liquidity.

Deposit growth has remained on steady path while 4th quarters profit has improved over last years though entire years profit slightly narrowed owing to low interest rate environment. Banks investments, however, have fallen by 1.5 percent to Rs 7.509 trillion during CY16 mainly on account of decline in investments in government securities.

Deposits, the key funding source of the banking sector, have observed growth of 13.6 percent growth in the Calendar Year 2016 and reached Rs 11.798 trillion mark. The addition in the overall deposits has been contributed by non-remunerative current deposits followed by fixed deposits and saving deposits. The report highlights that the high deposit growth in the 4th quarter as well in the entire year is a welcome sign considering deceleration in deposit growth observed in the last couple of years.

The asset quality of the banking sector has improved with decline in non-performing loans (NPLs) and corresponding ratios. Importantly, besides pick up in advances, recoveries in NPLs have played a pivotal role in bringing the ratio down.

The dip in interest margins and reduced quantum of investment has narrowed the Year-to-Date profitability of the banking sector from Rs 199 billion (profit after tax) in CY15 to Rs 190 billion in CY16. As a result, return on assets (RoA) has declined to 2.1 percent as compared to 2.5 percent in CY15.

Since June, 2016 the focus of government borrowing has shifted from schedule banks to SBP resulting in decelerated pace of banks investment in government securities10 during CY16.

According to SBP current high rise in financing activities may be attributed to the lag impact of easy monetary policy: Since November 2014 till December 2016, SBP has reduced the policy rate by 425 bps which is well translated into 373 bps reduction in Weighted Average Lending Rate (WALR) during the corresponding period. The YoY growth in gross advances, however, picked up pace in CY16 after remaining flat in CY15.

In addition better economic conditions including CPEC, improved security, improved energy supply, better business sentiments etc. have also contributed in higher financing. Banks reduced investment in Govt. papers, maturity of PIBs/Sukuk, and higher growth in deposits raised available funds for advances have also created space for financing.