KARACHI - The book value and Capital Adequacy Ratios of the banking sector are expected to remain under pressure during the upcoming quarter of calendar year 2008 unless the liquidity crisis of local exchange markets is eased. In addition to that default on margin financing and Continuous Funding System (CFS) exposures, triggered by the free market fall are also anticipated to be the significant risks for the financial sector. It is important to mention here that the KSE 100-index has already declined by over 27pc since the removal of the floor mechanism from Dec 15 when the index stood at 9187 points. On the pretext of the current stock market turmoil, banks have an exposure in the range of Rs100-150b on stock market which is 20-25pc of their equity base. Farhan Rizvi, an analyst at JS Research was of the opinion that stocks free fall has proved negative for the banking sector which hold a significant exposure in capital markets through investment in shares, CFS, mutual funds and margin financing. As per the report undertaken by JS Research on 11 banks' shares statistics (constituting 78pc of the banking sector), the exposure in capital markets is in excess of Rs100b ($1.3b) as of Sep 30, 2008 which is 24.6 percent of their equity. This does not include margin financing against shares whose statistics is not available and is reported to be in the range of Rs30-50bn for all banks. The stock market has already seen sharp decline in revaluation surplus during the quarter ended Sep 30, 2008 with Rs23bn fall in investment revaluation reserve. He also said that the prevalent equity market's liquidity crisis had raised concerns over its impact on various stakeholders, in particular on the banking sector which carried substantial exposure through a combination of direct investment, margin financing and the CFS financing. The banking sector was already going through a tough phase due to declining deposits growth and rising bad loans because of high interest rates and credit crunch. Apart from concerns over equity investment, other major risks being faced by the banking sector are the exposure in the CFS MKII and margin financing. CFS has been particularly in the limelight due to the law suit filed by a few brokers and counter suit by some banks, he added. According to Sep 30, 2008 financial accounts, the total exposure of banks in JS Universe in CFS MKII was Rs9.0bn (60 percent of the total outstanding amount of Rs15.2bn). The banking sector continues to remain under distress due to a combination of economic slowdown, liquidity crunch and increasing asset quality concerns, which has forced banks to book heavy provisions for NPLs, he said and citing the SBP official data he added that total banking sector provisions rose by Rs44bn until Dec 13, 2008. Moreover, liquidity crunch has seen a dismal deposit growth in 2008 which was recorded at 4.5 percent to date. Going forward, higher interest rates on the NSS schemes would keep deposits growth under pressure while higher interest rates liquidity constraints are likely to curtail advances growth in 2009. The analysts expect the deposits and advances growth of 5 percent and 6 percent respectively in 2009. As a result, the profits of the sector are likely to decline by 3 percent in 2008 and 15 percent in 2009, he added.