Daily Times

The State Bank of Pakistan (SBP), on Friday said that financial sector had shown resilience against internal and external headwinds and posted steady performance as the financial sector’s asset base grew by 18.3 percent in Calendar year 2022. The banking sector witnessed 19.1 % growth in its assets mainly driven by investments while the credit risk remained contained as gross NPLs ratio lowered to 7.3 percent by end CY22.

The observations were made in Financial Stability Review (FSR) for CY22, the annual flagship publication of the central bank published under Section 39(3) of the SBP Act 1956, said a statement issued here.

The review presents the performance and risk assessment of various segments of the financial sector including banks, non-bank financial institutions, financial markets, financial market infrastructures and non-financial corporates.

The FSR for CY22 noted that Pakistan’s economy experienced a turbulent year as the existing economic imbalances were compounded by the unfavourable external environment. The review termed the twin deficits, high inflation, catastrophic flooding, and delay in the completion of IMF program reviews as major challenges at domestic side while the global challenges including fast paced increase in commodity prices and monetary tightening by major central banks in advanced economies, manifested in the deteriorating macroeconomic conditions.

The FSR noted that the SBP and the government took various policy steps to address widening imbalances, which included further increase in policy rate and macro-prudential policies pertaining to consumer financing and administrative measures to contain external imbalance.

Resultantly, current account deficit improved towards the year end while economic momentum weakened, the review noted adding that, in the backdrop the GDP grew only by a meagre 0.29 percent in Fiscal Year 2022-23. Notwithstanding the increased volatility of financial markets in CY22, the banking sector witnessed a strong growth of 19.1 percent in its assets, the FSR highlighted and added that this expansion was mainly driven by investments while advances decelerated. Since deposits observed notable slowdown, banks’ reliance on borrowings remained substantial and the credit risk remained contained as gross NPLs ratio lowered to 7.3 percent by end CY22 from 7.9 percent at end CY21, while the net NPLs ratio slightly inched up to 0.8 percent from 0.7 percent a year earlier, remaining at one of the lowest levels of last two decades.

The review noted that banks’s after-tax earnings improved during CY22, primarily due to rise in interest income and resultantly ROE improved to 16.9 percent in CY22 from 14.0 percent in last year.

The contained delinquencies and higher profitability supported banks’ solvency as Capital Adequacy Ratio stood at 17.0 percent – well above the minimum regulatory requirement of 11.5 percent.

The review highlighted that Islamic banking segment also observed robust growth of 29.6 percent, the asset quality indicators improved and earnings rebounded from previous year and Financial Market Infrastructures (FMIs) remained resilient while Microfinance banks remained under stress as the asset quality indicators deteriorated along with after-tax losses. The FSR revealed that non-financial corporate sector posted a moderate decline in earnings due to the elevated economic stress and an increase in taxation and financing costs. Despite of that, the overall financial standing of top 100 listed companies remained steady and corporate sector in general continued to serve its obligations to financial institutions, it noted.

SBP implemented the second phase of Raast during CY22, enabling an instant and free Person-to-Person (P2P) funds transfer while a comprehensive licensing and regulatory framework for digital banks was also issued with a view to promote digital financial services (DFS) in a prudent manner.

The FSR noted that a comprehensive supervisory and safety net framework was also in place to preserve the general confidence in banking system and safeguard the soundness of regulated institutions. The supervisory framework proactively monitors and assesses both firm-specific and system-wide risks to financial stability and takes proactive actions to address these risks.

During the year under review, SBP took a number of measures to further strengthen the framework in line with market conditions and emerging best practices, the statement said.

The results of the latest macro stress tests suggested that the banking sector, in general, and the large systemically important banks, in particular, were expected to show resilience to withstand assumed severe macroeconomic shocks. SBP vowed that it was cognisant of the prevailing risks and with the toolkit and capabilities at its disposal, SBP stood prepared to take necessary and timely measures to preserve financial stability and support economic growth by ensuring a smooth supply of credit and financial services in the economy.