Local lenders’ offshore operations outperform onshore banking: SBP

KARACHI: The overseas operations of local lenders are far better than their performance in the domestic market in terms of financial intermediation despite facing risks and rapid changes in global economic environment, the central bank said in its latest report.

“The foreign operations of local banks are playing the intermediary role [lend out money deposited by savers] better than their local counterparts with Gross Loans to Deposit Ratio (ADR) of 84.4 percent as of June 30, 2018,” State Bank of Pakistan’s (SBP) recently published half-yearly performance review of the banking sector said.

However, the review added that the advance-to-deposit ratio of the banks’ domestic operations stood at 55.9 percent in the period under review.

“During H1CY18, the advances inched up by 1.3 percent compared to 5.5 percent in H1CY17, a decline of 2.9 percent year-on-year,” the SBP’s report said.

The flow of outstanding data, during H1CY18, revealed the major rise in financing was observed in automobile and transportation equipment, up 53.3 percent, agribusiness, up 47.5 percent, shoes and leather garments, up 32.9 percent, sugar, up 21.8 percent, electronics and electrical appliances, up 16.7 percent, and production and transmission of energy also recorded growth.

The report shows, in Pakistan, nine local banks have foreign presence with 117 branches, 18 representative offices, and eight subsidiaries, as of June 30, 2018, which are operating in 37 jurisdictions including Export Processing Zone in the country. “The Largest overseas branch network is present in Bangladesh and UAE, having 18 branches each, followed by Bahrain and Sri Lanka with 13 branches each.

The banks have been exposed to the overseas risks and rapid changes in global economic environment, which has forced the local banks to scale down their overseas operations. In this backdrop, the asset base of the overseas operations has been decreasing since the first six months of this calendar year.

The report stated that unlike the domestic operations, which hold around 44.5 percent share of investment in assets, overseas operations have 29.9 percent share in their asset base. Around 41.3 percent of investments have been made in sovereign papers by overseas operations. During reviewed period, outstanding amount of investments has shown a marginal expansion of 1.1 percent, a decline of 12.1 percent year-on-year, primarily owing to divestment of sovereign papers. On the funding side, deposits are the prime source of financing with 70.2 percent of the assets followed by borrowing (18.5 percent).

In tandem with assets, the deposits have declined during the period under review due to banks’ decision of rolling back their overseas operations.

In H1CY18, the deposits declined by 6.3 percent compared to an increase of 3.2 percent in H1CY17, a decline of 13.9 percent year-on-year.

“This decrease is due to reduction of 74.4 percent in ‘Financial Institutions Remunerative Deposits’ from PKR 43.9 billion to PKR 11.2 billion,” the report mentioned.

The report also said the asset quality of overseas operations suffered deterioration in H1CY18 with 13.7 percent increase in NPLs. “Consequently, “NPLs to advances” ratio also surged to 19.0 percent as of June 30, 2018 from 16.9 percent as of December 31, 2017,” the report showed.

It also came to fore that profitability of the overseas banks’ branches has dropped as the industry, on consolidated basis, has booked pre-tax losses of Rs4.9 billion. Accordingly, all profitability indicators have dropped with return on asset declining to negative 0.7 percent in H1CY18 from 1.1 percent in H1CY17.

“Overall, the performance of overseas branches/ROs/subsidiaries has moderated during H1CY18 due to challenging global macro-financial conditions. The SBP, in its regulatory capacity, has rolled out ‘Governance Framework for Banks’ Overseas Operations’ to further strengthen the governance, risk management and compliance practices for banks’ overseas operations,” the report said.

The report also mentioned that Habib Bank Limited, one of the country’s largest lenders by assets, faced a penalty of $225 million imposed by New York State Department of Financial Services (DFS) for non-compliance with the federal and state laws. The bank had surrendered its NY branch last year in response to such violations.