Foreign banks in Pakistan have reported 91 percent increase in their ratio of non-performing loans (NPLs) to total loans during the last year.
In June 2009-10 the NPL ratio was 4.5 percent that had surged to 8.6 percent by June 2010, exposing an alarming increase of 91.1 percent one year.
In comparison to domestic banks, the foreign banks have reported a much higher increase in their NPL ratio.
By June 2010, the non-performing loans of the foreign banks amounted to Rs7.726 billion while total NPLs stood at Rs1.648 billion.
The overall NPL level of all banks and Development Financial Institutions (DFIs) stood at Rs474 billion by June 2010. NPLs were valued at Rs460 billion while remaining Rs14 billion NPLs were released by DFIs.
Commercial banks also revealed that their NPL ratio had also increased slightly from 11.1 percent in June 2009 to 12.5 percent by June 2010. Specialized banks reduced their NPL ratio from 25.8 percent to 24.9 percent this year.
The capital level of foreign banks had also dropped and it has compressed to 22.7 percent by June 2010.
The Financial Soundness Indicators (FSIs) of the SBP also pointed out that the foreign banks have the lowest rate of return on assets (before tax) determined to be 0.6 percent in June 2010, mainly because of their smaller size in comparison to local commercial banks.
Foreign banks have earned only Rs0.4 billion profit after tax in the second quarter of calendar year 2010, whereas the entire banking sector has reported Rs36 billion post-tax profits.
The Financial Sector Review of SBP points out that the distribution of earnings once again underscored the fact that large sized banks are at a competitive advantage in terms of their outreach and relatively easy access to economical and stable sources of funds. The size of a bank remained the key contributor to success for the banking system, while the performance of the small-sized local private banks remained underwhelming.
Significantly, more banks posted profits in the second half of CY10 in comparison to the same period in the previous year. Positive earnings, supported by strong performance of the top tier banks, succeeded in maintaining the ROA (return on assets) ratio at the previous quarter’s level despite rapid expansion in the asset base.
On the other hand, increased equity due to the issuance of bonus shares and equity injection for meeting marginal cash requirement (MRC) resulted in a slight decrease in the ROE (return on equity). Income earned on interest from investment continued to surge due to growth in investments (annual growth of 34 percent) in contrast to advances. Earnings from investments showed a substantial annual increase of 43.5 percent.
However, no noticeable change was observed in the earning structure during June 2010. Healthy growth in income earned on interest raised its share in gross income by 70 bps to 74.7 percent.
Accumulation of loan loss provisions slowed down, mainly on account of sluggish growth in advances, marginal increase in FSV benefit allowed on collateral was another important reason in the reports of healthy earnings. Loan loss provisions recorded an annual decrease of 27.3 percent in June 2010. Operating expenses as a percentage of gross income continued to grow.
Accordingly, provisions as a percentage of net interest income showed a decline of 10 percentage points in first half of CY10.
