State Bank of Pakistan (SBP)’s quarterly Performance Review of the Banking Sector ending June 30, 2015 revealed on Wednesday that the profit after tax of the banking sector surged by 52 per cent year on year (YoY) on the back of both interest and non-interest income.
Accordingly, Return on Assets increased to 2.7 per cent in June 2015 from 2.1 per cent in June 2014. Capital Adequacy Ratio remained strong at 17.2 per cent, well above the local requirement of 10 per cent and international benchmark of 8 per cent.
During the quarter, asset base of the banking sector grew by 5.7 per cent (YoY 19.2 per cent) compared to 3.4 per cent in the corresponding period last year. Most of the increase in assets resulted from growth in public sector credit for matching the fiscal needs and financing commodity operations.
The share of investments in total asset continued to increase due to growth in stock of government securities.
According to the report, the asset quality observed some deterioration during June 2015 as non-performing loans increased by 1.6 per cent (YoY 5.8 per cent) to Rs 630 billion. However, with more than proportional increase in gross loans (4.7 per cent), non-performing loans to gross loans ratio decreased by 39 bps to 12.4 per cent and Net NPLs to Net Loans decreased by 18 bps to 2.7 per cent during April to June 2015.
On the funding side, steady growth in deposit base continued to provide the needed resources for financing asset growth. With a healthy increase of 7.9 per cent over the quarter (YoY 13.6 per cent), banks’ deposits reached Rs 9.97 trillion in June 2015.
Gross advances saw a reasonable increase of 4.7 per cent (Rs 227 billion) during the second quarter of 2015 (YoY growth 8.6 per cent), after declining in the first quarter of the year.
Financing flows were utilized for public sector commodity procurement operations followed by PSEs credit uptake for fixed investment loans.
The overall stock of public sector commodity finance – which is self-liquidating in nature – continued to accumulate on the balance sheets of the banks and reached Rs 589.2 billion (11.6 per cent of total advances) as of end June, 2015. Most of the increase during June 2015 came from 39 per cent growth in seasonal financing for wheat due to increase in wheat support price.
Lower depletion of previous year’s wheat stock led to lower retirement of wheat financing, which coupled with fresh financing for procurement during June 2015, enhanced the overall level of commodity finance.
Though food security has been the key reason for setting support prices, need remains for developing a mechanism for timely retirement of commodity finance within the given cycle. This will not only limit the increasing government exposure on banks’ balance sheet but also allow space for financing the private sector.
Financing to private sector remained subdued despite the current environment of low interest rates. During June 2015, private sector advances grew by around 1.8 per cent largely due to uptake in agri-business, cement, chemical and pharmaceuticals sectors coupled with a 7.5 per cent growth (Rs 22 billion) in consumer finance.
Increase in consumer financing was primarily contributed by “personal loans”, and auto loans. The latter category financing jumped with decline in lending rates, increase in demand for new car models and sales on account of government sponsored cab schemes. Net retirement by various economic sectors, like textile, food and beverages and sugar partially offset the growth in private sector lending. Textile sector, which is the largest borrower of the banking sector observed net retirement not only in the quarter under review but also during FY15, primarily, due to restrained domestic and international demand (particularly China and Euro zone), competition from India and falling output prices.
Working capital financing decelerated (QoQ per cent growth) largely due to decrease in commodity prices as reflected in decline in all price indices particularly Whole Sale Price Index. Encouraging development was a continuous increase in the fixed investment segment (including SME’s) and the growth pace further accelerated during the quarter (11 per cent).
The growth in fixed investment advances hints at capacity building at firms’ level and more potential for industrial growth which, cumulatively, will boost private sector credit demand in coming months. However, this will be largely contingent upon timely resolution of domestic structural issues facing the economy.
