SBP expects rise in credit demand from private borrowers

KARACHI: The State Bank of Pakistan (SBP) expects a significant increase in credit demand from private sector borrowers in the current quarter of 2016, the bank said in a report on banking sector that was published on Wednesday.

The central bank said businesses likely to borrow more money in upcoming quarters than they did a year earlier as growth in manufacturing sector, better energy supplies, CPEC-related activities and soft monetary stance signaling continued growth in the economy.

Moreover, the government reliance for budgetary borrowing from the central bank may also induce commercial banks to go for alternative investment avenue of corporate lending. Banks’ advances declined to Rs5.052 billion in the third quarter of 2016 against Rs5.180 billion in previous quarter.  

The SBP, in its quarterly performance review of the banking sector for the quarter ended September 30, 2016 said the spread between lending and deposit rate is shrinking in the wake of low interest rates.

“This coupled with falling yield on treasury investments are already taking a toll on the sector’s profitability,” the central bank said. “However, it is expected that the decelerating profitability may further push banks towards their core -and higher yielding -business of lending.”

The expected credit expansion, due to its feedback effect, is likely to strengthen the deposit base –a major funding source -of the sector, the SBP said. The report highlights that the asset base of the banking sector has registered a decrease of 1.6 percent during third quarter (July-September) of 2016. 

The quarter was marked with seasonal decline in gross advances by 2.3 percent on account of net retirement by private sector and commodity operation financing and reduction in banks’ investments in the government securities, the report added.  

Textile, sugar, cement, agribusiness, and chemical and pharmaceutical sectors have observed net retirement, while production and transmission of energy sector has revealed positive financing demand.

Total assets of the banks fell to Rs15.134 billion in July-September of the current financial year from Rs15.374 billion in previous quarter. Banking sector assets stood at Rs13.518 billion in the same quarter of last year. Banks’ investments dropped 2.5 percent to Rs7.625 billion during the quarter under review.  

The report said performance of the banking sector remains steady despite seasonal effects and shift in the government’s borrowing pattern. “Deposits of the banking sector, after observing some deceleration in recent past, have inched up 0.6 percent which is in contrast to fall of deposits usually seen in the third quarter of a calendar year,” it said. “The rise in the deposits is due to lower decline in current deposits and higher growth in saving and fixed deposits.” The fund based liquidity has remained comfortable as asset mix on the banks’ balance sheet remains tilted towards treasury investments.

The investments to deposits ratio (IDR) stands at 69.2 percent as of end September, 2016 compared with the end June 2016 level of 71.4 percent. The decline in investments to deposits ratio reflects a quarter-on-quarter drop of 3.2 percent in investments in government  securities and a slight uptick in deposits.

At the same time, the seasonal decline in advances also brought the already low advances to deposit ratio (ADR) down to 46 percent in Q3CY16 from 47 percent in Q2CY16

The SBP said the banking sector has remained in sound and stable state during the reviewed quarter. “The solvency profile of the banking sector has strengthened as Capital Adequacy Ratio (CAR) has improved to 16.8 percent, while profit after tax has stood at Rs138.9 billion for the first nine months of 2016.

“During the reviewed quarter, non-performing loans (NPLs) have observed marginal decline, though, NPLs to gross advances ratio has slightly increased,” it said. The ratio has inched up by 20 bps to 11.3 percent as of September 30, 2016 but entirely on account of decline in seasonal financing activity.” The coverage ratio, provisions to NPLs, has, on the other hand, improved by 30 bps to reach 82.7 percent as of September 30, 2016.

The dip in interest margins and rising costs has narrowed the year-to-date profitability of the banking sector. As a result, return on assets has declined 2.1 percent as compared to 2.2 percent in the second quarter of 2016 and 2.6 percent in the third quarter. However, strong solvency remains intact as CAR has further strengthened by 70 bps to reach 16.8 percent as of September 30, 2016.