The State Bank of Pakistan (SBP) is expecting that the profitability of the banking sector may remain under pressure during this quarter due to lower interest rate, receding investments in government securities and maturity of high yielding long term bonds. According to SBP''s Quarterly Performance Review (QPR) of the Banking Sector for the quarter ended 31st December, 2016, the growth in investments is contingent upon the behaviour of government borrowings from the banking system.
The current trend of retirements from commercial banks, if continues in Q1CY17, suggests decline in stock of investments. On the funding side, deposit growth, which is generally aligned with pattern of advances flow, is expected to remain moderate in Q1CY17. The report said that in the current environment, the profitability of the banking sector may come under pressure in the next quarter. "Low interest rates, receding investments in government securities and maturity of high yielding PIBs is already having an impact on interest income of the banks and could keep their earnings in check in Q1CY17," it added.
Income from rise in advances during CY16 may, however, partially compensate the decline in returns on investments and the solvency of the banking sector remains robust and is expected to remain so in Q1CY17, SBP mentioned.
However, the banking sector needs to take into consideration a host of anticipated operational and regulatory developments. For example, the uptick in advances may lead to higher risk weighted assets, pressure on profitability may constrain the plough back of retained earnings to capital base and as part of Basel-III implementation process, the regulatory Capital Adequacy ratio (CAR) requirements are set to increase in the future, the report said.
The SBP said that banks also need to keep a close watch on these developments and devise capital enhancement plans accordingly. Fund based liquidity is expected to remain comfortable; while market liquidity and banks'' financial borrowing will be largely driven by government''s institutional choice for borrowing (SBP vs. commercial banks). Overall, the banking sector is expected to remain sound and resilient in the next quarter, the QPR said.
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