Financial system resilient: SBP

Economy endures turbulent CY22 due to imbalances, external environment

KARACHI:

The State Bank of Pakistan (SBP) has said in its Financial Stability Review for CY22 that the national economy experienced a turbulent year as the economic imbalances were compounded by an unfavourable external environment.

It blamed domestic headwinds including the twin deficits, high inflation, catastrophic flooding, delay in completion of IMF programme reviews as well as global challenges such as a fast-paced increase in commodity prices and monetary tightening by major central banks in advanced economies for the deteriorating macroeconomic conditions.

Nonetheless, it pointed out, the financial sector showed resilience against stress and posted a steady performance. The sector’s asset base grew 18.3% in calendar year 2022, mainly supported by the banking sector.

The Financial Stability Review noted that the SBP and the government took various policy steps to address the widening imbalances, which included a further increase in the policy rate and macro-prudential policies pertaining to consumer financing and administrative measures to contain external imbalance.

Resultantly, the current account deficit improved towards the year end while economic momentum weakened. In this backdrop, the gross domestic product (GDP) grew a meagre 0.29% in fiscal year 2023.

The review presents the performance and risk assessment of various segments of the financial sector including banks, non-bank financial institutions, financial markets, financial market infrastructure and non-financial corporates.

It highlighted that notwithstanding the increased volatility of financial markets in CY22, the banking sector’s assets showed a strong growth of 19.1%. The expansion was mainly driven by investments while advances decelerated.

Since deposits registered a notable slowdown, banks relied substantially on borrowing. Encouragingly, the credit risk remained contained as the gross non-performing loans (NPLs) ratio dropped to 7.3% by the end of CY22 from 7.9% at the end of CY21.

The net NPLs ratio inched up to 0.8% from 0.7% a year earlier, remaining at one of the lowest levels in the last two decades.

After-tax earnings of banks improved during CY22, primarily due to a rise in interest income. As a result, the return on equity improved to 16.9% in CY22 from 14% last year.

According to the review, the contained delinquencies and higher profitability supported banks’ solvency as the capital adequacy ratio stood at 17%, well above the minimum regulatory requirement of 11.5%.

The Islamic banking segment also observed a robust growth of 29.6% during CY22. Their asset quality indicators improved and earnings rebounded from the previous year.

Microfinance banks, however, remained under stress as the asset quality indicators deteriorated along with after-tax losses.

The review revealed that the non-financial corporate sector posted a moderate decline in earnings due to the elevated economic stress and an increase in taxation and financing costs.

Nevertheless, the overall financial standing of the top 100 listed companies remained steady and the corporate sector in general continued to meet its obligations to financial institutions.

In CY22, the financial market infrastructure (FMI) also remained resilient when the SBP implemented the second phase of Raast, enabling instant and free person-to-person (P2P) funds transfer.

At the same time, a comprehensive licensing and regulatory framework for digital banks was also issued with a view to promoting digital financial services in a prudent manner.

The Financial Stability Review emphasised that a comprehensive supervisory and safety net framework was also in place to preserve the general confidence in banking system and safeguard the soundness of regulated institutions.

The SBP’s supervisory framework monitors and assesses both firm-specific and system-wide risks to financial stability and takes proactive actions to address these risks.

During the year under review, the central bank took a number of measures to further strengthen the framework in line with market conditions and emerging best practices. Going forward, according to the review, the dynamics of financial stability will be contingent upon the evolving conditions both on the international and domestic fronts.

Results of the latest macro stress tests suggest that the banking sector in general and the large systemically important banks in particular are expected to show resilience to withstand the assumed severe macroeconomic shocks.

“SBP stands prepared to take necessary and timely measures to preserve financial stability and support economic growth by ensuring a smooth supply of credit and financial services.”

Published in The Express Tribune, July 8^th, 2023.

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