KARACHI - The recent floods are likely to influence the performance of the banks in the coming quarters. The banking system in aggregate is expected to post steady profits, however, these profits are likely to remain concentrated in larger size banks having better earning profile and competitive advantage in raising the economical and stable funds, says State Bank report. According to State Bank of Pakistans Quarterly Performance Review of the Banking System for the quarter ended June 30, 2010 released on Wednesday, the heightened credit risk and increased portfolio of NPLs will remain a major challenge for the banking system in the time to come as the floods could cause additional NPLs mainly in agriculture sector and affect credit activities in sectors allied to Kharif crop. Further they are likely to increase the governments demand for bank credit. The report predicted that the inflow of donations, grants and assistance and expenditures on the rescue of flood affectees and rehabilitation of infrastructure would accelerate the growth of monetary aggregates and banks fund base in short-to-long term. The report found that although banks in Pakistan are at comfortable solvency levels, slow macroeconomic recovery and impact of the floods on agriculture, SME and allied industries will bring the solvency of the system under some stress in the next few quarters. Pakistans banking industry witnessed a 5.4 percent growth in its asset base to Rs 6,782 billion during the April-June quarter of the 2009-2010 fiscal year (FY10) compared with a contraction of 1.4 percent in the Jan-March quarter of FY10. The increase in asset base of the banking system, which was well supported by growth in deposits, mainly occurred in banks balances, inter-bank lending, government papers and public sector commodity finance. Banking industrys deposits rose to Rs 5,128 billion in April-June quarter compared with overall deposits of Rs4,774 billion in Jan-March quarter of FY10. The report pointed out that the banking system witnessed a let-up in the inflow of fresh non-performing loans (NPLs) during the quarter under review that has been a leading challenge for the last two years or so. The NPLs of banks registered a marginal growth of 0.6 percent to Rs 460b in April-June 2010 quarter (Rs457b in March-10) as compared to last two years average quarterly growth of 9.7pc. Due to contained increase in NPLs that was adequately covered by loan loss provisioning, the provision coverage ratio of NPLs improved to 73.2 percent (70.9 percent in March-10) and net NPLs to Loans ratio declined to 3.8pc (4.2pc in March-10). The contained provisioning charges preserved the profitability of the system from any significant deterioration and earnings remained in satisfactory range with pre-tax Return on Assets of 1.8pc (1.3pc for CY09). The earnings of individual banks also showed some improvement as the number of loss-making banks remained lower than CY09 statistics, the report added. The SBP report said that due to shift in asset-mix of banks towards less risky assets, the risk-based capital adequacy ratio of the system improved to 13.9 percent (13.7 percent in March-10) as compared to the minimum regulatory standard of 10 percent. Moreover, due to contained growth in NPLs and improvement in provisioning coverage, the risk to banks solvency from impairment in asset quality also lowered. The report said that the results of the stress tests indicate banking systems adequate capacity to withstand unusual shocks in the major risk factors and avert the emergence of any systemic crisis from such shocks.