Daily Times

KARACHI: In order to deliver better performance, banks need to calibrate the changing macroeconomic environment in their business models to capitalize the emerging opportunities as arising from the China Pakistan Economic Corridor (CPEC), said State Bank of Pakistan (SBP).

The SBP on Tuesday in Quarterly Performance Review of the Banking Sector for the period of July-September, 2017 said the performance of the banking sector, both on QoQ and YoY basis, has remained quite satisfactory during third quarter 2017.

The SBP reported that banking sector’s asset base has expanded marginally during third quarter 2017, though, on YoY basis, the growth has been quite robust (16.0 percent). Financing has observed a minor dip over the quarter in line with the seasonal pattern of the credit cycle. Encouragingly, share of fixed investment (long-term) loans in total loans continues to rise indicating improved business confidence. Funding needs of the system are met by a nominal growth in deposits and inter-bank borrowings. The rising long term advances and declining share of fixed deposits is widening the assets-liabilities mismatch against which the banks need to remain vigilant.

The Central Bank forecasts that the seasonal pattern along with robust growth in Large Scale Manufacturing Index (LSM) observed during July-September 2017 suggests that advances to private sector will rise in fourth quarter of 2017. The core funding source of the banks i.e. deposits are likely to improve in the upcoming quarter for two reasons. First, banks would proactively seek to mobilize deposits in order to meet the anticipated rise in private sector advances. Second, the expected increase in advances, would further improve deposits base due to the feedback effect.

“The overall risk profile of the banking sector remains within tolerable bounds in Q3CY17 characterized by high capital adequacy ratio, improving asset quality and favorable liquidity conditions. Earnings of the banking sector, however, have moderated due to low interest rates and increased administrative expenses, in addition to one-off settlement payment made by a large bank. Nevertheless, Capital Adequacy Ratio (CAR) at 15.4 percent remains well above the minimum regulatory required level of 10.65 percent.”

Further, the Bank added that the risks to the resilience of the banking sector are likely to remain muted in fourth quarter 2016. Despite narrowing return margins and anticipated rise in risk weighted assets (due to expected uptick in advances), Capital Adequacy Ratio (CAR) is expected to remain well above the minimum regulatory requirement. The interest income from advances is likely to further rise (quantum impact of expected increase in advances) which in turn will compensate the reduced earnings from low yielding government bonds.

Published in Daily Times, December 13^th 2017.