Bad debt provisions skyrocket

Omair Zeeshan April 17, 2010

KARACHI: Provisions for loan losses by commercial banks have increased by a staggering Rs27 billion QoQ in 1Q10, according to SBP data.

The increase is primarily due to a one time increase of Rs14 billion in the second week of March 2010. These numbers show that non-performing loans and bad debts are increasing. Still these numbers may not depict the true state of the bad debts that the banks are facing, say KASB securities. According to them it is very likely that some of 1Q10 provisioning that is shown in the SBP data has already been booked in 4Q09 actual results.

Even so, the cumulative effect of these non-performing loans has been mounting and has been bad for bank profits. Deposit growth has become relatively buoyant, the credit market and savings are normalising in the fiscal year of 2010, say analysts at KASB Securities. Private loans given by commercial banks rebounded, increasing by Rs199 billion, because of them financing the recovering manufacturing and production sector.

This is after bank lending went down by an alarming amount to Rs65 billion in the previous year. Declining credit costs may boost profit growth in 2010 according to KASB Securities analyst, Hamza Marath, according to whom sustained recovery in manufacturing and normalization in the credit market is the most in this regards. SBP: Provisions inflate by Rs27 billion in 1Q10 Earnings are expected to increase due to declining credit cost and asset growth even though Pre-Provision Operating (PPoP) is either expected to stay the same or grow.

PPoP is the profit incomes banks earn in a given time period, before taking into account funds set aside to provide for future bad debts are either flat or low. Normalcy in credit and deposit market… Private sector credit has rebounded by Rs199 billion from September 2009 to February 2010 after contracting to Rs65 billion in the third quarter of 2009.

This is underpinned by working capital financing of textile, food and utilities sector amid recovery in manufacturing sector production, which increased by 2.3 per cent in July 2009 to January2010. Deposit growth has also recovered to 9 per cent in July 2009 to March 2010.

This corresponds to higher inward remittances, which increased 16 per cent Year-over-Year and the Government covering its deficits by printing more money, 21 percent of M2 growth so far. M2 is currency in circulation outside the vaults of the Federal Reserve and other depository institutions.

Sustained private credit is the key catalyst Credit distribution has remained relatively skewed towards the government and public sector so far, due to fiscal flux and risk aversion of banks. Furthermore the delay in settlement of quasi-fiscal loans commodity financing and energy sector has disturbed the financial flow of savings.

According to KASB Securities sustainable sequential improvement in private sector credit will depend on external budgetary financing and retirement of these quasi-fiscal loans.