Banking system assets grow by 7.7pc to 7.1tr: SBP

KARACHI - The State Bank of Pakistan has stated that the capital structure of some of the smaller banks reported a considerable improvement in October-December, 2010, primarily on account of three mergers and the formation of Sindh Bank. At the same time, the SBP has observed that there are around half of the banks confronting with the challenge of meeting the recently enhanced minimum capital requirement (MCR) of Rs7 billion set by the SBP for the banks for the year 2010. In terms of capital adequacy ratio (a risk-sensitive measure of capital adequacy), banks with around 94 per cent market share have maintained the required CAR of 10 per cent. This suggests that in overall terms, the banking industry is well capitalised, according to State Bank of Pakistans Quarterly Performance Review of the Banking System which was released Tuesday. The report said that healthy profits, accumulation of reserves, enhanced minimum capital requirements, and moderate growth in risk-weighted assets help explain the increase in banks capital adequacy ratio (CAR) from 13.8 to 14 percent during the quarter. The report predicted credit infection is expected to decelerate on the back of some let-up in non-performing loans and banks shift of asset mix towards risk-free investments. However, reversal in asset mix does not appear likely in the short run, given the borrowing needs of the government and the challenging market conditions for private businesses. The banking system is resilient to shocks emanating from a tough macroeconomic and business environment, the report warned. According to the report revelations, the assets of the banking system grew by 7.7 per cent to Rs7.1 trillion during the October-December quarter of 2010. This growth in total assets, while in line with the established seasonal pattern of the fourth quarter, was particularly strong given the comparatively weak performance in the earlier three quarters of 2010. The growth in total assets was primarily on account of investments in government papers and seasonal credit requirements of the private sector due to soaring input prices. It said that net investments, with an increase of 14.3 per cent during the quarter, outpaced the subdued growth of 5.7 per cent in net advances. Within private sector credit, lending to textile and sugar industries accounted for two-third of the credit off-take of Rs196 billion. On the funding side, deposits increased by 8.5 per cent, registering the highest quarterly growth during the last three years, the report added. During October-December quarter, banks remained fairly liquid on the back of growing share of investments in government papers, the report mentioned. Credit risk remained a challenge as banks accumulated Rs53.7 billion of fresh Non-Performing Loans, pushing infection ratio from 14 to 14.7 per cent, though bulk of incremental NPLs were confined to a few banks. According to the report banks profits before tax were up by 23.1 per cent during 2010 to reach Rs111.2 billion, with return on assets (ROA) of 1.7 per cent (1.3pc in CY09) and return on equity (ROE) of 16.7 per cent (13.2pc in CY09). However, profits continued to remain heavily concentrated among the big five banks, the report observed. The report stressed that there has been growing evidence of banks flight towards quality as investments, mainly in government securities, now constitute around 30.4 per cent of banks assets compared with 19.3 per cent in December, 2008. Share of advances has witnessed a concomitant drop, from 60.8 to 52.0 per cent during the past two years; it said and added that unsurprisingly, return on government paper now accounts for 34.5 per cent of banks gross mark-up/ interest income, compared to 28.8 per cent in December, 2008. The growth in government borrowings, in a rising interest rate scenario, has shored up banks earnings, the report said. Banks disturbingly diminishing role as financial intermediaries is becoming evident from their advances-to-deposits ratio, which has dropped from 76.0 per cent in September, 2008 to 61.4 per cent by December, 2010, the report added. In the short run, lure of risk-free investments in government paper, coupled with high NPLs, has reduced banks eagerness for extending private sector credit, it added.