ISLAMABAD: The seasonal pattern along with robust growth in Large Scale Manufacturing Index (LSM) has observed during the third quarter of the calendar year 2017 (Q3C17) suggests that advances to the private sector would rise during the next quarter.
The core funding source of the banks i.e. deposits were likely to improve in the upcoming quarter, according to Quarterly Performance Review of the Banking Sector published by the State Bank of Pakistan (SBP).
The report indicated that the improvement would be witnessed as the banks would proactively seek to mobilise deposits in order to meet the anticipated rise in private sector advances.
Secondly, the expected increase in advances would further improve deposits base due to the feedback effect. The risks to the resilience of the banking sector are likely to remain muted in Q4CY16, according to the report which added that despite narrowing return margins and an anticipated rise in risk-weighted assets (due to expected uptick in advances), Capital Adequacy Ratio (CAR) is expected to remain well above the minimum regulatory requirement.
The interest income from advances is likely to further rise (quantum impact of an expected increase in advances) which in turn would compensate the reduced earnings from low yielding government bonds.
It is pertinent to mention here that the banking sector’s asset base during Q3CY17 has expanded marginally, though, on a YoY basis, the growth has been quite robust (16.0 per cent).
However, financing has observed a minor dip over the quarter in line with the seasonal pattern of the credit cycle according to the report which added that encouragingly, the share of fixed investment (long-term) loans in total loans continues to rise indicating improved business confidence.
The overall risk profile of the banking sector remained within tolerable bounds in Q3CY17 characterized by high capital adequacy ratio, improving asset quality and favourable 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 per cent remains well above the minimum regulatory required level of 10.65 per cent.
In order to deliver better performance, banks need to calibrate the changing macroeconomic environment in their business models to capitalise the emerging opportunities as arising from, generally, growth in the economy and, particularly, from the China Pakistan Economic Corridor (CPEC).
