SBP sees private credit off-take to boom in Q4

KARACHI: State Bank of Pakistan (SBP) expected the private sector’s credit off-take to rise in the three-month period (October-December) on growing appetite of low-cost funds in the industrial sector.

“The seasonal pattern along with robust growth in large scale manufacturing index observed during Jul-Sep 2017 suggests that advances to private sector will rise in Q4CY17,” the central bank said in the quarterly performance review of the banking sector on Tuesday.

“Less than normal seasonal fall in advances along with improved liquidity and strong solvency – well above the minimum benchmark – are the key highlights of the 3rd quarter of CY17.” Though gross advances to private sector decreased Rs5.4 billion in July-September 2017, they were significantly lower than the contraction of Rs112.2 billion during the same period of last year.

“Banking sector’s asset base has expanded marginally during third quarter, though, on year-on-year basis, the growth has been quite robust (16 percent),” the central bank said. “Encouragingly, share of fixed investment (long-term) loans in total loans continues to rise indicating improved business confidence.”

The central bank said low interest rates help credit flow into the real economy. “However, the banking sector’s review showed that corporate borrowing was a little bit disappointing during the third quarter.”

It further added that advance-to-deposit ratio inched down 48.3 percent in July-September 2017 from 48.7 percent in the previous quarter. The central bank suggested banks to boost their ability to maximise benefits from pickup in economic activity driven by China-Pakistan Economic Corridor.

“In order to deliver better performance, banks need to calibrate the changing macroeconomic environment in their business models to capitalise the emerging opportunities as arising from, generally, growth in the economy and, particularly, from the China Pakistan Economic Corridor (CPEC),” it said.

The SBP said the risks to the resilience of the banking sector are likely to remain muted in the last quarter of 2017 as capital adequacy ratio is expected to remain well above the minimum regulatory requirement despite narrowing return margins and anticipated rise in risk weighted assets.

Banks posted profit of Rs111.7 billion in the third quarter, as compared to Rs89.9 billion in a quarter ago. The central bank said earnings of the banking sector have moderated due to low interest rates and increased administrative expenses, in addition to one-off settlement payment made by a large bank.

The SBP expected banking interest income from advances to further rise and that growth “will compensate the reduced earnings from low yielding government bonds”. “The core funding source of the banks i.e. deposits are likely to improve in the upcoming quarter for two reasons,” it said.

The central bank said banks have continued to invest in short-term market treasury bills while investment in Pakistan Investment Bonds and sukuk have declined. “The deposit mobilisation has remained on track, primarily, on the back of growth in saving and fixed deposits.”

The overall net investments of the banking sector surged 1.8 percent during Q3CY17 against a decline of 2.5 percent during Q3CY16. Similarly, banks’ investment in corporate securities decreased 2.6 percent during Q3CY17.

The SBP said the banking sector’s risk profile was within tolerable bounds in Q3CY17 due to high capital adequacy ratio, improving asset quality and favourable liquidity conditions. It advised banks to mobilise deposits in order to meet the anticipated rise in private sector advances. The expected increase in advances would further improve deposits base due to the feedback effect. “The rising long term advances and declining share of fixed deposits is widening the assets-liabilities mismatch against which the banks need to remain vigilant,” it added.