PAT of banking sector touches Rs 148b for July-Sept 2015

The profit after tax (PAT) of the banking sector has touched Rs 148 billion in Jan-September 2015 compared to Rs 163 billion during same period last year.

A quarterly performance review of the banking sector released by the State Bank of Pakistan (SBP) on Wednesday said that the return on assets (ROA) before tax has increased to 2.6 percent in September 2015 from 2.2 percent in Sept 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 review said that 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, it added.

On the soundness of banking sector, the report added that the asset quality remained stable as NPLs almost stayed unchanged at Rs 630 billion. However, the NPLs to Loans Ratio (infection ratio) marginally increased from 12.4 percent in Jun 2014 to 12.5 percent in Sept 2015 on account of seasonal fall in advances.

It said 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 utilised in any exigency, the report said.

Investments’ share in total asset continued to increase due to growing stock of government securities, the report said, adding with QoQ growth of 4.4 percent (YoY 41.2 percent), banks holding of government bonds surged to Rs 5.66 trillion as of end June 2015, representing more than 90 percent share in total investments. However, investment in MTBs as well as PIBs observed deceleration during the quarter as HBL’s privatisation proceeds enabled government to borrow less from commercial banks for its fiscal needs.

Further, most of these investments were mostly placed in available for sale (AFS) category from the perspective of liquidity management.

In addition, banks enhanced their investments in other avenues (fully paid up capital, ordinary shares, TFCs, bonds etc) by around 5.3 percent (Rs 19 billion) primarily due to bullish behaviour in capital markets of Pakistan and better corporate results. However, equity investments remained within the exposure limits prescribed by the SBP.

On the funding side, steady growth in deposits base continued to provide the needed resources for financing assets growth. With a healthy increase of 7.9 percent over the quarter (YoY 13.6 percent), banks’ deposits reached 9.97 trillion in June-2015. The decomposed data of customer deposits – representing 97 percent of overall deposits – shows that most of the growth came from non-remunerative current deposits (Rs 467 billion or 16.6 percent) followed by saving deposit (Rs 107 billion or 3.0 percent).

Over the last few years, banks are putting relatively more efforts to mobilise current deposits seemingly for managing the deposits’ cost. Visibly, share of fixed deposits in overall deposits reduced to 22.5 percent in June 2015 from 29.2 percent as in June 2012.

In contrast, share of current deposit (non-remunerative) picked up to 33 percent in June 2015 from 27.5 percent in June 2012.

Currency-wise break-up shows that entire growth in deposits came from local currency deposits, while rupee value of FCY deposit stayed almost unchanged due to stability in USD/PKR exchange rate, the SBP said.

The asset quality observed some deterioration during June 2015 as NPLs increased by 1.6 percent (YoY 5.8 percent) to Rs 630 billion. Most of the increase came from agriculture loans due to seasonal factors. However, with more than proportional increase in gross loans (4.7 percent), NPLs to Loans ratio declined by 39 bps to reach 12.4 percent and net NPLs to Net Loans by 18 bps to 2.7 percent. With increase in provisions against infected loans, provision coverage further improved by 62 bps to 80.8 percent, while capital impairment (Net NPLs to Capital) ratio increased by 110 bps to reach 10.9 percent.

The central banks in its report said: “Multiple factors will drive the asset structure of banking sector in the third quarter of calendar year 2015. The asset base of the banking sector is expected to remain subdued in line with seasonal slowdown in domestic credit in private sector driven by seasonal net retirements in textile and sugar sectors and recent dip in commodity prices.”

The SBP further said that some improvement in energy supplies and reduction in policy rate by 250 bps during CY15 (till date) is expected to provide some boost to overall lending activity. Though government continues to make efforts towards fiscal consolidation and raise external resources, recent floods, security related expenditures, issues on the taxation front, and cap on government borrowing from SBP under IMF’s EFF programme may induce government to meet its financing need through commercial banks.