Non-banking financial institutions: Earnings going down despite expansion in assets
At the end of FY15, assets grew 10.1% to Rs738b, net profit fell 12% to Rs8b
The SBP said investment banks have slowly been “waning” in the absence of funding sources from commercial banks and limited equity. PHOTO: EXPRESS
KARACHI:
Earnings of non-banking financial institutions (NBFIs) are declining despite expansion in their assets, a recent review of the sector released by the State Bank of Pakistan (SBP) shows.
NBFIs are non-banking intermediaries that offer services like investment finance, leasing, housing finance, venture capital investment, investment advisory, asset management, modaraba and development finance.
“The presence of an ever-imposing banking sector with deep resources that offers matching products continues to challenge the existence of NBFIs,” the SBP said in its recently issued annual Financial Stability Review.
As evidence, it noted the asset base of non-bank players was 7% of the asset base of the banking sector in 2011-12, which dropped to 6% in 2014-15.
Despite a reduction in the relative size of NBFIs within the overall financial system, they have witnessed modest growth of 7% over the three-year period, the review noted. The increase is on the back of “reasonable growth” observed in all the sub-sectors of NBFIs, except investment banks.
The asset size of the NBFI industry at the end of fiscal year 2015 was Rs738 billion, up 10.1% from a year ago. But the expansion in the balance sheets of NBFIs did not translate into earnings growth.
The sector posted an after-tax profit of Rs8 billion in fiscal year 2015, down 12% from the preceding year.
“With the exception of leasing, profitability in the rest of the sub-sectors has declined where a major drop is observed under development finance institutions (DFIs) segment,” the review said.
The Financial Stability Review listed funding as a prominent risk faced by the NBFI sector. “Also, the diversification of clientele suggested in the business models of NBFIs has yet to be achieved,” the SBP said, noting that the NBFIs are serving market segments that are also being served by the banks and that the NBFIs lack competitive advantage.
Mutual funds, which are run by asset management companies, led the NBFI sector with an average growth of 6% in the three fiscal years under review. Shariah-compliant funds and pension funds have gained increasing popularity as reflected by their share in the funds market: their share increased from 14% in FY12 to 29% in FY15.
“Nevertheless, lack of awareness about investment options among the general public coupled with expenses at the fund level, which places direct investments at an advantage, continue to constrain the emergence of mutual funds as a viable conduit for retail savings,” the SBP said.
As for DFIs, their asset quality remained within the satisfactory limits owing to growing advances and shrinking non-performing loans (NPLs) stock. Their funding profile remained tilted towards borrowings while growth of deposits was subdued.
Meanwhile, their profitability dwindled a bit due to abridged spreads and higher non-mark-up expenses.
Both leasing companies and modaraba firms conduct leasing business. They have exhibited mixed business results in FY15 due to their exposures to different segments of the economy.
The leasing sector, which focuses on transportation and logistical fleet, witnessed year-on-year asset growth of 10% in FY15. Profits also increased 14%, which was the maximum growth witnessed among the profit-making entities of NBFIs.
As for the modaraba sector, Ijarah exposure to plant, machinery and equipment led to a build-up of impairment losses, which dented its profitability in FY15.
The asset base of the 24-company sector, while expanding over the years at an average rate of 3%, accounts for a meagre 4% of the non-banking financial sector’s assets.
“Despite a large number of players, concentration of business is evident as seven companies represent 80% of the sector’s assets, 70% of the sector’s equity and 86% of the sector’s income,” the review noted.
The SBP said investment banks have slowly been “waning” in the absence of funding sources from commercial banks and limited equity.
“The sector is unprofitable and has been operating on the sidelines owing to its inability to compete with the investment banking wings of commercial banks,” the central bank said in the review.
Published in The Express Tribune, July 12th, 2016.
Earnings of non-banking financial institutions (NBFIs) are declining despite expansion in their assets, a recent review of the sector released by the State Bank of Pakistan (SBP) shows.
NBFIs are non-banking intermediaries that offer services like investment finance, leasing, housing finance, venture capital investment, investment advisory, asset management, modaraba and development finance.
“The presence of an ever-imposing banking sector with deep resources that offers matching products continues to challenge the existence of NBFIs,” the SBP said in its recently issued annual Financial Stability Review.
As evidence, it noted the asset base of non-bank players was 7% of the asset base of the banking sector in 2011-12, which dropped to 6% in 2014-15.
Despite a reduction in the relative size of NBFIs within the overall financial system, they have witnessed modest growth of 7% over the three-year period, the review noted. The increase is on the back of “reasonable growth” observed in all the sub-sectors of NBFIs, except investment banks.
The asset size of the NBFI industry at the end of fiscal year 2015 was Rs738 billion, up 10.1% from a year ago. But the expansion in the balance sheets of NBFIs did not translate into earnings growth.
The sector posted an after-tax profit of Rs8 billion in fiscal year 2015, down 12% from the preceding year.
“With the exception of leasing, profitability in the rest of the sub-sectors has declined where a major drop is observed under development finance institutions (DFIs) segment,” the review said.
The Financial Stability Review listed funding as a prominent risk faced by the NBFI sector. “Also, the diversification of clientele suggested in the business models of NBFIs has yet to be achieved,” the SBP said, noting that the NBFIs are serving market segments that are also being served by the banks and that the NBFIs lack competitive advantage.
Mutual funds, which are run by asset management companies, led the NBFI sector with an average growth of 6% in the three fiscal years under review. Shariah-compliant funds and pension funds have gained increasing popularity as reflected by their share in the funds market: their share increased from 14% in FY12 to 29% in FY15.
“Nevertheless, lack of awareness about investment options among the general public coupled with expenses at the fund level, which places direct investments at an advantage, continue to constrain the emergence of mutual funds as a viable conduit for retail savings,” the SBP said.
As for DFIs, their asset quality remained within the satisfactory limits owing to growing advances and shrinking non-performing loans (NPLs) stock. Their funding profile remained tilted towards borrowings while growth of deposits was subdued.
Meanwhile, their profitability dwindled a bit due to abridged spreads and higher non-mark-up expenses.
Both leasing companies and modaraba firms conduct leasing business. They have exhibited mixed business results in FY15 due to their exposures to different segments of the economy.
The leasing sector, which focuses on transportation and logistical fleet, witnessed year-on-year asset growth of 10% in FY15. Profits also increased 14%, which was the maximum growth witnessed among the profit-making entities of NBFIs.
As for the modaraba sector, Ijarah exposure to plant, machinery and equipment led to a build-up of impairment losses, which dented its profitability in FY15.
The asset base of the 24-company sector, while expanding over the years at an average rate of 3%, accounts for a meagre 4% of the non-banking financial sector’s assets.
“Despite a large number of players, concentration of business is evident as seven companies represent 80% of the sector’s assets, 70% of the sector’s equity and 86% of the sector’s income,” the review noted.
The SBP said investment banks have slowly been “waning” in the absence of funding sources from commercial banks and limited equity.
“The sector is unprofitable and has been operating on the sidelines owing to its inability to compete with the investment banking wings of commercial banks,” the central bank said in the review.
Published in The Express Tribune, July 12th, 2016.