[dropcap]P[/dropcap]akistani banks are encountering number of challenges ranging from historically low interest rates to lethargic credit off-take while menace of interruption from mobile financial services also emerges large. Pakistani banks, have done pretty well financially despite these challenges. Profitability of banks declined in an atmosphere of low interest rates. Return on assets fell and deposits grew minimal at 0.1 percent in the period of Jan-March of this year. The banking sector registered an overall profit-after-tax (PAT) of Rs49 billion in the first quarter of 2017 against Rs52 billion a year ago, depicting a negative growth of 7.2 percent.
Despite in the past years low policy interest rate, banks still depends mostly on investing in government papers. At present the returns on government papers have been reduced exceedingly that cut back banking profits.
Low interest rates and a development of low-yielding stock of short-term government bonds have declined the profitability of the banking sector. Correspondingly, the return on assets declined to 1.9 percent in Jan-Mar against 2.3 percent a year ago.
Deposits, which create a key funding source for the banking sector, increased 0.1 percent in the first quarter in contrast to 0.6 percent contraction in the same quarter of 2016. The flow of funds has largely been in savings (Rs54 billion) and current account-remunerative (Rs44 billion) categories.
Gross advances grew 2.4 percent during the first quarter against 0.78 percent a year ago. Most of the growth originated from Islamic banking institutions that added Rs102 billion of fresh loans in the quarter under review.
The major push in volume terms came from sugar, automobile/transportation, electronics and electrical appliances sectors. In terms of segments, corporate financing working capital, fixed investment and trade finance showed comparatively higher year-on-year growth in Jan-Mar. Fortunately, the private sector has availed the major share (78 percent).
Large-scale manufacturing witnessed the growth of 10.46 percent in March (quarter-on-quarter growth of 15.04 percent). Food, beverage and tobacco, automobiles, cement and iron and steel were major supporters.
All categories of consumer finance like credit cards, auto finance, mortgage finance and personal loans have seen positive growth.
Auto financing has been on the rise for the last few years and its share in consumer financing has also been increasing. Higher growth in auto financing is due to the increased interest of banks in secured financing where margins are relatively higher. In the backdrop of declining interest rate environment, it is also attractive for consumers.
Mortgage financing portfolio is continuously growing since the third quarter of 2014. The ‘search for yield” motive of Islamic banks and preference for Shariah-compliant mortgage products by customers have resulted in Islamic banks achieving the highest share in this sub-segment.
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Mortgage financing provides immense opportunities to banks and it is necessary that they take measures for accelerating its share in the overall loan portfolio.
During the second half of 2016, the government shifted its reliance for budgetary borrowing from commercial banks to the central bank. As a result there was contraction of treasury investments of the banking sector.
In Jan-Mar as the government borrowed Rs268.1 billion from commercial banks while retiring Rs121.1 billion to the State Bank of Pakistan. Most of the growth that is 12 percent has been in treasury bills, which are short-term in nature. The investment-to-deposit ratio advanced up from 64 percent to 68.2 percent in a single quarter.
Banks’ investments in other avenues (term finance certificates, bonds, debentures and other investments) also increased during the first quarter of 2017.
Banks in Pakistan are charging up to 29 percent interest rate to their borrowers despite the lowest 5.45 percent policy rate of the State Bank of Pakistan (SBP).
Policy rate is the interest rate on which SBP gives financial loans to commercial banks. Banks can charge an interest rate slightly higher than this to cover their expenses and potential business risks. The slightly higher percentage has reached more than 23 percent, which is very much alarming. Both Public sector and Private sector are offering loans on higher interest rates, starting from 7.72 percent by Habib Metropolitan Bank to the 28.8 percent the interest rate charged by Standard Chartered Bank.
The Islamic banks who have the profit rate charge at 13.11 percent, which includes Bank Islamic and Dubai Islamic Bank at 11. 65 percent. Bank of Punjab, Sindh Bank and Bank of Khyber charge at 9.66 percent, 9.73 percent and 10.23 percent. First Women Bank offers loans at the rate of 18.44 percent, which is highest among the state-owned banks.
Despite, such lower level of policy rates how an ordinary man can avail the advantages its if the commercial banks are set on depriving people of their monetary resources in the name of interest.
The State Bank of Pakistan fear damage in banking profitability in days ahead as decades-old interest rate and easing yields on debts is affecting the sector’s income. In an environment of low interest rates and falling yield on public debt, it would be challenging for the banking system to maintain the present level of profitability. The high-yield credit off-take by the private sector may offset the downward pressure on interest income. The growth in profitability is expected to remain under pressure in the coming months.