The growth in the asset base of the banking sector has moderated during the first half of the 2018 (January-June), primarily due to the decline in net-investments, according to the State Bank of Pakistan (SBP)’ Half-Yearly Performance Review (HPR) of the Banking Sector report. The prime reason, according to the SBP, behind this deceleration is 3.6 percent decline in net-investment (mainly in govt. securities) due to shift in government’s borrowing from commercial banks to the SBP. As such, most of the increase in asset has resulted from broad based rise in advances, particularly, to the private sector.Encouragingly, advances to private sector have continued their broad-based upward trajectory with sugar, energy, and cement sectors being the major borrowers during the reviewed period. However, sector specific factors coupled with tightening of macro-financial conditions may possibly have slowed down the growth in fixed investment advances. On the funding side, deceleration in deposit growth remains a concern. The overall risk profile of the banking sector has improved in the first half of 2018, mainly due to the strengthening capital adequacy and improving asset quality. Capital Adequacy Ratio (CAR) has inched up to 15.9 percent and NPLs to loans ratio has come down to 7.9 percent – lowest since the first half of 2008. Banks’ after-tax earnings, however, have declined by 14.7 percent due to lower gain on sale of securities, one-off provisions and increase in administrative expenses.The second wave of SBP Systemic Risk Survey suggests that external sector pressures, fiscal sector vulnerabilities, growing domestic inflation and volatile commodity markets are potential risks to financial stability over the coming six months. While the performance of the banking sector could be affected by these factors, it is still expected that it will remain sound and resilient during the second half of 2018. In the first half of 2018, consumer financing has surged by 11.0 percent against 10.1 percent during the corresponding period of the last year. The share of auto advances (in total consumer finance) has been continuously rising, which has reached 40.5 percent as of end June 2018, from 27.4 percent as end June 2015. This may be attributed to low financing cost, wider use of ride hailing services, launch of new models by local manufacturers, growing popularity of imported cars as well as Sports Utility Vehicle (SUV) segment, etc.Since most consumer financing products are Shariah compliant in nature (i.e. asset backed financing), the share of IBIs in outstanding consumer financing has risen to 29.3 percent in the first half of 2018, from 26.4 percent in the comparable period of last year, the report stated.Disaggregated analysis of sector-wise flow of advances in the first half of 2018 shows that the energy sector has posted highest financing demand, both, from the private (growth: 12.8 percent) and public (26.7 percent) sectors. In the private sector, the higher flow of advances is, largely, on account of two reasons. First, energy supply- produced by coal, high-speed diesel (HSD), residual furnace oil (RFO), gas, and re-gasified liquefied natural gas (RLNG) – has improved by 20.1 percent. Higher energy generation implies higher working capital needs to purchase raw material. Second, rising energy prices also translate into higher cost of production, requiring higher financing.This, coupled with substantially higher flow of advances to the public sector energy projects and increase in circular debt, has increased the overall financing to energy sector by 19.4 percent during first half of 2018.Published in Daily Times, September 28th 2018.