Banking sector grows by 11.5% in H1CY24

The State Bank of Pakistan (SBP) has reported that the balance sheet footing of the banking sector expanded by 11.5% during the first half (January to June) of the CY24, mainly driven by investments in government securities as the government demand for bank credit remained high. 

The SBP has issued the Mid-Year Performance Review of the banking sector for 2024 that covers the performance of the banking sector and financial markets as well as the results of the Systemic Risk Survey (SRS), which represents the views of independent experts about key current and potential risks to financial stability.

Baking sector’s advances posted a contained growth due to the net retirements by the private sector, although long-term financing to SMEs showed some revival. Nonetheless, the decline in private sector advances was significantly lower as compared to H1CY23. 

On the funding side, deposits increased by 11.7 percent in H1CY24 with a major impetus from savings and current deposits. The higher pace of asset growth, however, necessitated additional funding, which kept banks’ reliance on borrowing intact.

The Review notes that the asset quality profile of the sector remained satisfactory, as gross NPLs witnessed a subdued increase. 

Moreover, the total provisioning coverage against non-performing loans (NPLs) further improved to 105.3 percent by the end of June 2024. With the application of IFRS-9, the banks also started to provide general loan loss allowances for performing loans. Earnings, nonetheless, slowed down owing to a decline in return on advances and contraction in net interest margins. Non-interest income, such as fee income and trading gains on government securities, however, supported profitability. 

The performance indicators such as Return on Assets (ROA) and Return on Equity (ROE) thus declined to 1.2% (1.5% in June 2023) and 20.4% (26.0% in June 2023), respectively. The solvency position of the banking sector remained strong as the Capital Adequacy Ratio improved to 20.0 percent (17.8 percent in June 2023) and was well above the minimum regulatory environment.

The Review reveals that in the wake of gradual improvement in macroeconomic conditions, domestic financial markets witnessed relatively lower stress during H1CY24. 

As per the results of the 14th wave of SRS (July-2024), the top three prevailing risks highlighted by the independent participants of the survey include energy crisis followed by volatility in commodity prices and foreign exchange risk. However, they expressed confidence in the stability of the financial system and the oversight ability of the regulators.