Pakistan’s banking sector remains strong: report

KARACHI: The Pakistani banking sector has remained remarkably strong and resilient during the last 18 months but the excessive dependence of economy on banking system is quite stark in comparison with the other emerging economies, said Financial Stability Review 2007-08 released by the State Bank of Pakistan (SBP) here.

Pakistan’s banking sector has remained remarkably strong and resilient, despite facing pressures emanating from weakening macroeconomic environment since late 2007, said the SBP report.

However, the report cautioned that excessive dependence on the banking system to meet the financing needs of economy, as well as other participants of the financial sector, is quite stark in comparison with other emerging economies, where in general, the growth in other components of the financial sector, such as capital markets, and complements supplements the financing capacity of the banking sector.

The report also bitterly criticised the long suspension of capital market operation through floor system which it said shocked the economy.

While financial markets (money market and foreign exchange market) remained resilient to developments in the macroeconomic environment and functioned well in maintaining financial stability, the imposition of the floor of 9,144 points on the KSE-100 index in August 2008 has adversely impacted investor sentiments by effectively blocking the exit mechanism generally taken for granted in a market based system, said the report.

Incidentally, there is no known precedent of placing a floor on a market index, albeit temporary suspension of trading in equity market has been implemented in some cases as an extreme measure, it said.

The review said the banking system is on strong footing and has long term potential – a feature which has served to attract a substantial amount of FDI in the sector, with established global financial institutions now active participants in the domestic financial sector.

The report states that with strong regulatory oversight, there has been a significant enhancement of capital and risk-weighted capital adequacy, supported by high provisioning requirements which were tightened in 2007.
Stringent loan provisioning requirement has built sufficient reserves against the nonperforming loans [NPL]s’ portfolio.

“In contrast to the liberalised financial system in the west which took its toll in the form of the current global financial crisis, there are stringent regulations and adequate policies in place to help the banking system manage its risks,” said the report.

The Report said solvency profile has improved, and given the pressures from the macroeconomic environment, there is an indication of marginal deterioration in asset quality, which banks are well-equipped to handle.

Stress tests conducted on June-2008 data indicate that the large banks are relatively robust, with the medium and small-sized banks positioning themselves in niche markets, it added.

Capital adequacy of the banking system is strong, 12.1% at end-June 2008, well above the internationally acceptable minimum requirement of 8.0%, it said and added core capital constitutes about 80.0% of the total capital, and Tier 1 to risk weighted assets ratio of the banking system is at 9.7%.

“This strong capital base is accompanied by adequate reserves on the back of stringent provisioning requirements against classified assets – the net NPLs to net loans ratio is reasonably well-contained ie at 1.3% in June 2008, comparable to international best standards,” the report said.

Profitability of the banking system continues to be impressive, largely emanating from the persistent growth in high-yield earning assets and expanded business volumes.

Before-tax Return On Assets of the banking system remains strong at 2.3% in June 2008. The strengths built up over the years are now coming in handy in managing the recent financial strains.

The Report mentioned that the demand for credit from both the government and the private sector resulted in liquidity strains faced by some individual banks, which also emanated from the combined impact of their weak deposit mobilisation and low interest rates offered on deposits.

The government and public sector organisations’ excessive borrowings from the banking system posed another challenge for the banking system.

Notwithstanding, the liquidity strains were temporary and the inter-bank market is now functioning normally. — Internews