Banks' balance sheet swells on hefty lending to govt

Credit demand from govt remains high; advances to private sector fall

KARACHI:

The State Bank of Pakistan (SBP) has said that the balance sheet of the banking sector expanded by 11.5% in the first half of current calendar year (1HCY24), which was mainly driven by investments in government securities as state demand for bank credit remained high.

In its Mid-year Performance Review of the Banking Sector for 2024 issued on Wednesday, the central bank, however, pointed out that advances showed contained growth due to the net credit retirement by the private sector, although long-term financing to small and medium enterprises (SMEs) showed some revival.

"Nonetheless, the decline in private sector advances was significantly lower as compared to 1HCY23." The review covers the performance and soundness of the domestic banking sector for the period January to June 2024. It also briefly covers the performance of financial markets as well as the results of Systemic Risk Survey (SRS), which represents views of independent experts about the key current and potential risks to financial stability.

On the funding side, according to the review, deposits increased by 11.7% in 1HCY24 with a major impetus from saving and current deposits. The higher pace of assets growth, however, necessitated additional funding, which kept banks' reliance on borrowing intact.

It was noted that the asset quality profile of the sector remained satisfactory, as gross non-performing loans (NPLs) registered a subdued increase.

Moreover, the total provisioning coverage against NPLs further improved to 105.3% by the end of June 2024, as with the application of International Financial Reporting Standard (IFRS)-9, the banks also started providing general loan loss allowances for performing loans.

Earnings, nonetheless, slowed down owing to the declaration in return on advances and the contraction in net interest margin. Non-interest income such as fee income and trading gains on government securities supported profitability.

Performance indicators such as return on asset and return on equity thus declined to 1.2% compared to 1.5% in June 2023 and 20.4% compared to 26% in June 2023, respectively. The solvency position of the banking sector remained strong, as the capital adequacy ratio improved to 20% (17.8% in June 2023) and was well above the minimum regulatory requirement.

The review revealed that in the wake of gradual improvement in macroeconomic conditions, the domestic financial markets witnessed relatively lower stress during 1HCY24.

As per results of the 14th wave of SRS (July 2024), the top three prevailing risks highlighted by the independent participants of the survey include energy crisis followed by volatility in commodity prices and foreign exchange risk. The respondents, nevertheless, expressed confidence in the stability of the financial system and the oversight ability of regulators.