Private sector financing may continue to fall on slowdown

KARACHI: Private sector financing may continue to ebb in the ongoing second half of 2019 on an expected economic slowdown, but risk-averse banks are likely to remain unhurt as they bet on government papers amid high interest rate earnings, the central bank said on Monday.

“While macro stabilisation measures have started to show favourable results, particularly on external front, the economic activity is expected to remain muted,” the State Bank of Pakistan (SBP) said. “Accordingly, the private sector financing demand is likely to remain subdued during H2CY19.”

The SBP said the growth in private sector advances remained minimal (2.1 percent) in H1CY19 as compared to average expansion (7.6 percent) in the comparable period of last three years.

“This slowdown in private sector advances also resulted from increased risk aversion by banks, besides the seasonality,” it said in its mid-year performance review of the banking sector.

The SBP’s data showed that domestic advances flows to private sector fell to Rs128.2 billion in the January-June period of 2019 compared to Rs467.9 billion in the corresponding period a year earlier.

The SBP said a projected slowdown in global economic activity — particularly in the US and Euro area — is likely to influence exports and the demand for advances. “In addition, owing to perceived weakening in re-payment capacity of firms and recent pick-up in the non-performing loans (NPLs), banks may remain risk averse in their lending behaviour.”

The infection ratio – NPLs to total gross loans – increased to 8.8 percent by the June-end compared to 8 percent by end H2CY18 mainly due to an increase of Rs88.3 billion (or 13 percent) in NPLs during H1CY19.

The State Bank, however, said the government’s commitment to cease its borrowing from the SBP is expected to increase government reliance on banks for meeting its financing needs, “which will further increase the banks’ exposure to the public sector”.

“Particularly, banks overall investments in government securities are expected to rise, though the maturity choice will largely hinge upon their views about the interest rate movements,” it said. “The expected increase in investments will enhance the funding requirements of banks. While deposits will remain the key source of funding, some uptake in borrowings could also happen.”

The State Bank said the rise in minimum savings rate is likely to induce depositors to opt for more savings and fixed deposits, while banks may face challenges in mobilising low cost deposits.

The SBP said banks are addressing margin pressure by making their investments in the risk-free government papers.

“The (bank) earnings are likely to remain decent in the half year ahead, due to higher interest earning and expected pick-up in banks’ investment in government securities,” it said. “However, increase in credit risk due to deterioration in asset quality, in the face of tighter macrofinancial conditions, may put earnings under some stress.”

The SBP said banking portfolio tilt towards zero risk weighted government securities may further augment already strong capital adequacy ratio (CAR) as well as liquidity of the banking sector.

“Banks need to put in place capital enhancement plans in light of the regulatory CAR requirement increasing to 12.5 percent by December 31, 2019.”

Overall, the SBP said the performance of the banking sector remained satisfactory in the first half, despite challenging macroeconomic environment.

Banking sector maintained its growth trajectory with asset expansion of 5.3 percent during the first half of this calendar year, “primarily funded by deposits that witnessed the highest growth since H1CY16”.

“The overall risk profile of the banking sector remained robust,” the State Bank said. “…all profitability indicators showed improvement. The CAR at 16.1 percent was well above the local and international minimum benchmarks of 11.9 percent and 10.5 percent, respectively.”