Daily Times

Fitch Solutions expects that Pakistan’s banking profitability will remain subdued in 2021 on rising loan loss provisioning as asset quality deteriorates and weak net interest margins, although strong credit growth should offset some of the weakness.

In a report released on Wednesday, Fitch Solutions said it expects banking profitability to remain fairly flat over 2021 due to conflicting factors. The after-tax return on assets (ROA) for all banks in Pakistan came in at 0.9% in Q121 versus 1.0% in Q420. This was the result of a decline in net interest income to gross loan due to a repricing of assets on the back of the State Bank of Pakistan (SBP) accommodative stance.

Additionally, an increase in provisions and loan write-off particularly for specialised banks coupled with higher personnel costs weighed on banking profitability.

“Moving forward, we expect pressure on banking profitability to persist on the back of continued high provisioning for non-performing loans (NPL) following the expiry of a loan moratorium in Q321, and relatively narrower net interest margins (NIM).” Despite weakness in profitability, more than adequate capitalisation of banks lead us to believe that risks to financial instability are low, said Fitch Solutions.

The report said that loan loss provisioning will remain elevated over the coming months as loans continue to soar amid a weak economic environment. This comes as the SBP loan moratorium facility which was enacted in March 2020 to allow for the deferment of principal payments for one year is slated to expire in Q321. As it is, the NPL ratio has edged up slightly from 9.3% of total loans in Q121 as compared to 9.2% in Q420. This was mainly driven by an increase in NPL from the corporate sector and small-and-medium-sized enterprises which account for 75% and 9% of the total NPL in Q121, respectively.

With uncertainty surrounding the Covid-19 pandemic continuing to weigh on the economy, borrowers will continue to face challenges in repaying their loans given their already weakened balance sheets.

Meanwhile, NIMs will likely continue to narrow over the coming months as new loans issued at lower interest rates pandemic post-monetary easing gain share in the total loan book. The spread between the weighted average lending rates and deposit rates has fallen from 520 basis points (bps) in March 2020 before the pandemic to 450bps as of May.

This comes as the central bank undertook a total of 675 bps worth of cuts target policy rate, which currently stands at 7.00% as compared to 13.75% in February 2020.

According to the report, stronger loan growth will limit the decline in profitability.