Solid performance by Pakistan’s banking sector in 2017, State Bank reports

Pakistan's banking sector was stable in 2017, says the state bank. (AFP)

KARACHI: Pakistan’s banking sector remained sound and stable in 2017, with total assets growing to Rs18.34 trillion ($159.5 billion) from Rs15.83 trillion the previous year.
However, in its latest Quarterly Performance Review of the Banking Sector — covering the final quarter of 2017 and published on March 21 — the State Bank of Pakistan (SBP) revealed the number of loss-making banks rose to five, from three in 2016.
“Two additional loss-making banks posted marginal profits in 2016 and they belong to the lowest quartile of the banking sector in terms of asset base,” said SBP. “Rising cost of operations has compelled these banks to incur losses in 2017.”
Equity increased by Rs36.7 billion (2.7 percent) during the quarter, compared with Rs28.4 billion (2.1 percent) during the same period in 2016.
“Banks have added 305 branches and 416 ATMs during the fourth quarter of calendar year 2017, while 304 additional branches have been linked to the online network,” SBP noted. “There has also been a rise in point of sales machines and plastic cards.”
In terms of assets, the sector performed as per trend during the quarter. They increased by 4.5 percent, compared with 4.6 percent quarterly growth recorded a year earlier. About 70 percent of the growth in total assets came from net advances and net investments.
On a year-on-year basis, assets grew by 15.9 percent in 2017 compared with 11.9 percent the previous year. Net advances grew by 18.4 percent, and net investments by 16.2 percent.
As for liabilities, growth in deposits was subpar, the central bank said. During the quarter, banks recorded a 3.2 percent increase in deposits, and an annual increase of 10.3 percent. These compare with 2016 figures of 6.4 percent in the fourth quarter, and 13.6 percent for the year. As a result, borrowing by banks substantially increased to Rs280.1 billion, compared with retirement of Rs69.4 billion during the same period last year.
Islamic banking institutions, which represent 12.4 percent of banking-sector assets, contributed 24.1 percent (Rs 188.6 billion) of asset growth during the quarter, compared with the same period a year earlier. Year on year, they accounted for 16.7 percent (Rs 418.8 billion) of total asset growth.
The seasonal pick up in private-sector advances stands at 7.3 percent for the quarter, down from 10.6 percent in the final quarter of 2016.
“This is on account of a decline in advances to the chemical and pharmaceuticals sector, and lower advances flows to sugar and energy sectors,” SBP noted. “Within the chemical and pharmaceuticals sector, fertilizer companies have retired their advances during [the quarter]. Higher cash flows resulting from release of the stocks accumulated since 2016, and lower fertilizer production in 2017 due to higher liquefied natural gas prices and its limited availability have led to the decline in advances by fertilizers.”
In the case of sugar, the availability of unsold stock resulting from a bumper crop in 2016, and a delay in sugarcane crushing, due to a dispute over prices between farmers and producers, explain the slump in demand for advances.
Private-sector advances to the textiles sector — the largest recipient of advances — continued to increase during the quarter. Analysis of the figures suggests this increase might be linked to growth of 37.3 percent in working-capital advances to small and medium enterprises.
Rising exports to eurozone and North America during the quarter explains the higher demand for advances by the textiles sector. Moreover, the government recently announced an incentive package for the sector, which is likely to further boost exports.
The analysis of investments by banks in the corporate sector reveals a decline in equity/listed shares of Rs18.5 billion and Rs31.2 billion quarter on quarter and year on year, respectively.
“The slowdown in the capital market during the reviewed quarter seems to drive down banks’ equity investments”, SBP said.
Deposit growth slowed during the quarter. Fixed deposits increased by Rs89.8 billion, compared with Rs135.4 billion in the same period a year earlier. Similarly, savings deposits rose by Rs31.4 billion, compared with Rs89.5 billion in the final quarter of 2016.
Year-to-date profits before tax of the banking sector fell by 15 percent year on year, primarily due to a one-off settlement payment made by a large bank during the third quarter of 2017. If that is excluded, the decline is 7.5 percent, which is still greater than the 4.5 percent drop in 2016.
At Rs71.4 billion, the profits generated during the fourth quarter alone were lower than the previous three year’s average of Rs76.2 billion.
Regarding the future outlook of the sector, the central bank said profitability will depend on the momentum of advances, developments in the foreign-exchange market and performance of the capital market.