Karachi September 18 2024: The banking sector grew at a decent pace of 11.5 percent, with its footing ticking at PKR 51,687 billion in H1CY24, according to data releases by State Bank of Pakistan.
The expansion in the asset base was mainly driven by investments, while gross advances (domestic + global) posted a contained growth. The pace of expansion, nonetheless, was lower as compared to 14.0 percent growth in the comparable period of last year, as the growth in public sector advances significantly decelerated during the reviewed period.
On funding side, deposits increased by 11.7 percent to PKR 32,538 billion—lower than the 14.2 percent rise in H1CY23. Besides, banks’ reliance on borrowings from financial institutions remained noticeable, which increased by 13.1 percent during the first half of CY24. Importantly, Advances to Deposits Ratio (ADR) continued to decline: 37.1 percent at end June-2024 from 41.8 percent in Dec-2023 (45.0 percent in June-2023). This reflects persistently weak private sector demand for bank credit amid subdued economic conditions as well as government’s high demand for bank financing to meet the budget deficit.
The weaker economic dynamics also moderated the asset base of Islamic Banking Institutions (IBIs), which grew by 7.7 percent in H1CY24—lowest growth during the first half of previous four years. Accordingly, their share lowered in banking sector’s asset base to 18.7 percent in June-2024 (19.4 percent in Dec-2023) and in deposit base to 22.6 percent (23.2 percent in Dec-2023).
In H1CY24, the domestic operating environment improved as economic activity recovered, inflationary pressures subsided, and current account deficit significantly narrowed. With muted growth in advances portfolio, gross NPLs ratio marginally rose to 7.6 percent in H1CY24 (7.4 percent in H1CY23), as the increase in NPLs also remained subdued during the first half of CY24, increasing only by PKR 10 billion compared to an increase of PKR 35 billion H1CY23.
Disaggregated data shows that the overall increase in NPLs was primarily driven by domestic operations, while overseas NPLs contracted in H1CY24 by PKR 5 billion. Domestic NPLs rose by PKR 15 billion in H1CY24. The energy sector mainly contributed as its NPLs increased by PKR 5 billion followed by individuals (PKR 2 billion), chemicals and pharmaceuticals (PKR 2 billion), and agribusiness sector (PKR 2 billion).
Provisioning coverage of NPLs improved significantly from 94.4 percent at end June-2023 to 105.3 percent at end June-2024 amid banks’ adoption of IFRS-9, which requires creation of general provisioning to also cover any prospective future losses in the performing loan portfolio. 26 However, banks also increased their specific provisioning against NPLs. Resultantly, the net NPLs to net loans ratio further improved to -0.4 percent at end June-2024 as compared to 0.4 percent at end June2023, while specific provisioning against NPLs increased to 85.5 percent (83.6 percent in June-2023). On a net basis, therefore, there are relatively muted residual credit risks to the solvency of banks from their current delinquent loan portfolio. The results of the latest stress testing exercise (sensitivity analysis) also show that the banking sector has adequate resilience to some severe but plausible hypothetical shocks to the credit risks factors.
Earning of the banking sector slowed down, as the after-tax profit grew only by 1.1 percent to PKR 287 billion in H1CY24. As the minute growth in the bottom line was driven by increase in volume of assets and capital base, key profitability indicators i.e., after-tax ROA and ROE declined to 1.2 percent and 20.4 percent in H1CY24 compared to, respectively, 1.5 percent and 26.0 percent in H1CY23.
This slowdown in profitability was due to both a deceleration in the growth of advances as well as falling returns on earning assets as the market interest rates started to factor in the declining inflation. Accordingly, net interest margin (NIM) of the banking sector also contracted over the reviewed period. The net interest income (NII) of H1CY24 remained 13.2 percent lower than that of H2CY23.
While NII posted a slowdown, non-interest income supported the profitability, as fee and FX incomes together with gains on sale of government securities contributed to overall earnings during H1CY24.
Taxation charges as percent of profit before tax also rose during H1CY24 to 52.2 percent (50.1 percent for CY23 and 48.7 percent for H1CY23), which further dragged the bottom line. The rising taxation has implications for the ability of the banking sector to both build necessary capital buffers to withstand unforeseen macrofinancial shocks as well as to invest in technology and capacity development to improve efficiency.
The banking sector remains well-capitalized as the key soundness indicator of CAR improved to 20.0 percent in H1CY24 (17.8 percent in H1CY23) – well above the
domestic regulatory requirement of 11.5 percent. The growth of 4.5 percent in eligible capital outpaced the growth of 2.7 percent in total risk-weighted assets, resulting in an improvement of CAR.
