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GOVT BORROWING FROM BANKING SECTOR REMAINS STRONG.

Byline: AMANULLAH BASHAR

The Quarterly Performance Review (QPR) of the banking sector for the quarter ended 30th September, 2015 highlighted that the year to date (Jan-Sep) profit after tax of the banking sector recorded at Rs148 billion, as against Rs163 billion during CY14. Return on Assets (ROA) before tax has increased to 2.6 percent in September 2015 from 2.2 percent in September 2014. However, the likely adjustment on account of provisions against infected portfolio by the year end may keep a check on further growth in profits. The September 2015 quarter observed a marginal rise of 2.1 percent in the asset base of the banking sector. Public sector demand for credit remained strong due to fiscal needs while private sector advances witnessed nominal seasonal decline of 0.4 percent. Well aligned with the domestic credit cycle, deposits also declined by 2.6 percent. Banks, therefore, relied more on borrowings which grew by 38 percent during the quarter.

On the soundness of banking sector, the report added that the asset quality remained stable as NPLs almost stayed unchanged at Rs630 billion. However, the NPLs to Loans Ratio (infection ratio) marginally increased from 12.4 percent in June-2014 to 12.5 percent in Sept-2015 on account of seasonal fall in advances. Net NPLs to net loans ratio, however, declined to 2.5 percent from 2.7 percent in June-2015 due to rise in accumulated provisioning against infected loans. The solvency profile of the banking system further strengthened with Capital Adequacy Ratio (CAR) rising to 18.2 percent (17.2 percent as of June-2015). Importantly, the banking system is cushioned with high level of capital that may be utilized in any exigency.

Distributional Deposits

###NCR billion

###CY12###CY13###Sep-14###Dec-14###Jun-15###Sep-15

DEPOSITS###7,294###8,311###8,740###9,230###9,970###9,715

Customers###6,972###7,975###8,479###8886###9,657###9,400

Fixed Deposits###2,078###2,216###1,197###2,268###2,248###1,272

Saving Deposits###2,642###3,094###3,346###3,167###3,690###3,794

Current accounts- Remunerative###343###381###310###323###348###318

Current accounts- Non-remunerative###1,868###2,241###2,368###2,764###3,289###2,933

###41###43###59###64###83###64

financial InstitutIons###321###336###261###344###312###315

Remunerative Deposits###214###211###182###201###229###268

Non-remunerative Deposits###107###119###79###143###83###47

Break up of Deposits currency Wise###7,294###8,311###8,740###9,230###9,970###9,715

Local Currency Deposits###6,310###7,129###7,515###7,903###9,740###8,438

Foreign Currency Deposits###984###1,182###1,225###1,247###1,222###1,277

CONSUMER FINANCE

Consumer finance also grew at a steady pace (2.7 percent QoQ and 13.8 percent YoY) on the back of consistent momentum in auto financing and other personal loans. The stock of financing for public sector commodity operations, which usually declines in the 3rd quarter, has inched up during Sep 2015.

DEPOSIT BASE

The deposit base of the banking sector, after declining by 2.6 percent, has reached Rs9.7 trillion. This seasonal reduction is driven by 10.2 percent (Rs336 billion) fall in non-remunerative current deposits (CD), which generally follow the trend in working capital advances. On the contrary, saving deposits (SD) and fixed deposits (FD), which are remunerative, inched up by 2.8 percent (Rs104 billion) and 1.1 percent (Rs24 billion), respective.

CURRENCY WISE BREAK UP

Currency-wise break-up shows that decline in deposits came from local currency deposits, while Pak rupee value of foreign currency (FCY) deposits witnessed increase of 4.5 percent (in line with 2.7 percent depreciation in domestic currency during Sept-2015 quarter). The FCY deposits remained well within the limits prescribed by the SBP6 . The banking sector posted profit after tax of Rs148 billion during Jan-Sept, 2015, as against Rs163 billion during CY2014.

Examining the year-on-year growth, the profitability has improved on the back of high net mark-up income contributed not only by 25 percent YoY growth in return on investments in Government Securities but also 11 percent decline in interest expense on deposits. The 39 percent growth in non-interest income further improved the profitability of the banking sector. Bank-wise statistics revealed a broad based contribution in banking profits as 30 banks posted profits while only 6 banks registered losses in Sept-2015 as against 9 in Sept-2014.

Concentration of earnings further reduced as the share of top 5 banks decreased to 62.6 percent in Sept-2015 down from 67.2 percent in Sept-2014.

INVESTMENT BY THE BANKS

Unlike recent quarters, a shift from long term securities (PIBs) to short term securities (MTBs) was witnessed during Sept-2015.

In addition, banks investments in long term private sector instruments (Bonds and Term Finance Certificates) have increased by around 12.2 percent (Rs19.4 billion).

ASSET QUALITY OF THE BANKING SECTOR

The asset quality of the banking sector remained stable. During Sep-2015, the level of NPLs stayed at around Rs630 billion and NPLs to loans ratio marginally increased to 12.5 from 12.4 percent in June-2015. Net NPLs to net loans ratio has, however, declined to 2.5 from 2.7 percent in June-2015. This is due to increase in provisioning (as a result of increased aging of loans), which now covers 81.8 percent of bad debts (80.8 percent in June-2015).

Continuous cash recoveries have largely offset the shrinking volume of fresh NPLs. Moreover, the capital impairment (Net NPLs to Capital) ratio has also declined by 92 bps to reach at 10 percent.

All these indicators advocate limited risk to the future operating performance and equity of the banking system.

BANKING SECTOR OUTLOOK

Going forward, with pickup in economic activity and the start of Rabi season of cotton harvesting (textile sector) and cane crushing (sugar sector), the banking sector advances are expected to rise in Dec-2015.

Accommodative monetary policy and improved energy supplies may enhance the private sector lending activities of the banks. However, persistent low inflation particularly commodity prices may keep the financing need for the working capital subdued.

Banks profitability may improve on account of: i) sizeable mark-up income on high level of investments, ii) likely increase in private sector advances, and iii) lower interest expense on deposits due to prevailing interest rate environment. However, adjustments owing to provisions against bad debts by the year end may limit the growth in profits. The risks to the performance of banks largely emanate from their ability to generate low cost funds. In order to finance the growth of both advances and investments, in the coming quarter, banks need to focus more on deposit mobilization.
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Publication:Pakistan & Gulf Economist
Date:Dec 6, 2015
Words:1109
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