KARACHI - The State Bank of Pakistan in its Quarterly Performance Review said that banking sector’s asset base has expanded marginally during Q3CY17, though, on YoY basis, the growth has been quite robust (16.0 percent). Financing has observed a minor dip over the quarter in line with the seasonal pattern of the credit cycle.

The Quarterly Performance Review (QPR) of the Banking Sector for the quarter ended 30th September, 2017, released Tuesday, said encouragingly, share of fixed investment (long-term) loans in total loans continues to rise indicating improved business confidence. Funding needs of the system are met by a nominal growth in deposits and interbank borrowings. The rising long term advances and declining share of fixed deposits is widening the assets-liabilities mismatch against which the banks need to remain vigilant.

It said the overall risk profile of the banking sector remains within tolerable bounds in Q3CY17 characterized by high capital adequacy ratio, improving asset quality and favorable liquidity conditions. Earnings of the banking sector, however, have moderated due to low interest rates and increased administrative expenses, in addition to one-off settlement payment made by a large bank. Nevertheless, Capital Adequacy Ratio (CAR) at 15.4 percent remains well above the minimum regulatory required level of 10.65 percent.

In order to deliver better performance, banks need to calibrate the changing macroeconomic environment in their business models to capitalize the emerging opportunities as arising from, generally, growth in the economy and, particularly, from the CPEC. Report said the performance of the banking sector, both on QoQ and YoY basis, has remained quite satisfactory during Q3CY17.

The assets of the banking sector have inched up by 0.3 percent during Q3CY17 as compared to a decline of 1.6 percent during Q3CY16. The increase in asset base is primarily attributed to an increase of 1.8 percent in investments (net); while advances (net) have seen a moderate decline of 0.4 percent (2.5 percent decline in Q3CY16). The reduction in advances is seasonal in nature, it said.

On YoY basis, however, there is a robust growth in net-advances (20.6 percent). This growth, among others things, is attributed to 51.5 percent increase in financing by Islamic banking institutions (34% share in YoY advances flow). Investments have also increased (12.8 percent) resulting in expansion of 16.0 percent in the asset base of the banking sector.

On the funding side, QoQ growth of 1.1 percent in borrowings from financial institutions coupled with an increase of 0.3 percent in deposit base has enabled the banks to finance the growth in assets.

Gross advances (domestic) to private sector have declined by PKR 5.4 billion during Q3CY17; significantly lower than the contraction of PKR 112.2 billion in the same period last year. The sector-wise analysis reveals that the broad based advances disbursement to various sectors (agriculture, textiles, automobiles, electronics) has resisted the overall fall in financing during the reviewed quarter.

This is despite a notable decline in advances to the energy sector; attributed mainly to retirement by one of the public sector oil companies.

Also, the “others” sector which constitutes various smaller sub-sectors has received advances flow of PKR 18.7 billion against a decline of PKR 58.3 billion last year. This is due not only to lower retirements in food products and beverages but also to higher financing demand by commerce & trade, transport, storage and communications, and machinery & equipment sectors.

Report said the segment-wise analysis of the domestic private sector advances reveals that the decline in corporate sector advances during Q3CY17 is substantially lower than the corresponding quarter of previous year. The higher credit disbursement for trade finance and fixed investment coupled with relatively lower retirement in working capital loans explains this lower decline in advances.

It said in line with trend, Islamic Banking contributed 28 percent of the total increase in CF during Q3CY17 (24 percent YoY). Among the CF categories, 73 percent of the increase in auto financing has been disbursed by the Islamic Banks.

The seasonal decline in commodity operations financing during the reviewed quarter has remained relatively low as compared to the corresponding quarter of previous year. It is, primarily, on account of lower credit retirement by the private sector during Q3CY17. Unfavorable commodity prices in the market have disincentivized stock offloading. However, as Figure reveals, total credit retirement against wheat during Q3CY17 is significantly higher (PKR 51.2 billion) than in Q3CY16 (PKR 31.0 billion), mostly relating to public sector.