Pakistan Financial Sector's Strong Performance

Pakistan's banks are showing strong performance with significant growth in deposits, assets and private sector credit.  All areas of banking, including commercial, mobile and Islamic banking, are contributing to it.

Karachi Financial District

Commercial Banking:

Pakistan's commercial banking industry grew by 16.1 percent during fiscal year 2015/16. Strong aggregate demand and improving business sentiments were seen in private sector credit growth of 12 percent, expanding by Rs. 461 billion in FY16 from Rs. 224 billion in the prior year, according to a World Bank report in the media.

Mobile Banking:

Mobile banking transactions in Pakistan grew to Rs. 1.5 trillion during 2015-16. The State Bank of Pakistan (SBP) has recorded Rs. 543.6 billion in branchless banking transactions in the latest quarter,  sequential growth of 6.8% over the previous quarter. It's a good sign of growing financial inclusion in the country.

Islamic Banking:

Islamic banking industry continued its double-digit growth during fiscal year 2015-16 (FY16) with 16.8% and 14.1% year-on-year (YoY) growth in assets and deposits respectively, according to the State Bank of Pakistan. Islamic banking share of banking in Pakistan has nearly doubled in the last 5 years. It now accounts for 13% of the overall banking industry, up from 7.8% five years ago.

Demand for Liquidity:

Pakistani banks have increased their deposits by over a trillion rupees since January 2016. However, strong demand for liquidity in a growing economy has forced the State Bank of Pakistan (SBP) to inject another Rs. 880 billion into the banking system just last week, according to news reports.

Summary:

Banks are a good barometer of a nation's economic health. Growth in banking in Pakistan is a good sign of accelerating economic growth in the country.

Related Links:

Haq's Musings

Mobile Banking in Pakistan

Financial Inclusion in Pakistan

Financial Services Industry in Pakistan

China Pakistan Economic Growth

ADB Raises Pakistan GDP Growth Forecast

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Comment by Riaz Haq on November 20, 2016 at 8:17am

#Pakistan saw 45% fewer #terror attacks & 38% fewer deaths this year, says ‘Global Terrorism Index (GTI) 2016’.

http://www.dawn.com/news/1297480/global-index-records-drop-in-terro...

Pakistan recor-ded a substantial decrease in terrorist activities last year, with 45 per cent fewer attacks and 38pc fewer deaths reported in the year than in the previous year, according to the report of the ‘Global Terrorism Index (GTI) 2016’.

This is the second consecutive year in which Pakistan has seen reduction in terrorist activities. Terrorism in the country is now at its lowest level since 2006, says the report released by the US-based Institute for Economics and Peace, an independent think-tank.

The GTI is based on data from the Global Terrorism Database which is collected and collated by the National Consortium for the Study of Terrorism and Responses to Terrorism, a department of the Homeland Security Centre of Excellence led by the University of Maryland.

Pakistan had the third largest decline in deaths. There were 677 fewer deaths in Pakistan. As a result, Pakistan had the lowest number of deaths from terrorism since 2008, said the report released on Thursday.

The reduction in deaths from terrorism is in part explained by Zarb-i-Azb military operation being carried out by Pakistan Army. The operation focused on removing militant safe havens in North Waziristan.

Pakistan continued to see decline in its levels of terrorism due to infighting within the largest active group, the Tehreek-i-Taliban Pakistan (TTP), as well as to the operations of the army in the Federally Administered Tribal Areas.

Although the TTP reduced the number of attacks in Pakistan, it was still responsible for the most attacks, according to the report. In 2015 the group was responsible for 36pc of the deaths, totalling 240 people. This was down from 59pc of the deaths, totalling 544, in 2014, representing a sharp year-on-year reduction.

Although the number of attacks declined, terrorist activities was spreading across the country. It moved from the border region with Afghanistan to many other parts of the country, especially the Punjab province in the east which is the most populated area of Pakistan. A total of 429 cities experienced terrorist attacks in 2015, up from 17 in 2000. This may create a much more difficult situation for the Pakistani government in the coming years.

Comment by Riaz Haq on December 19, 2016 at 9:09pm

Electronic banking in #Pakistan up 16% in 2016 from 2015, State Bank of Pakistan http://bit.ly/2h2cpF9 via @techjuicepk

Payment systems in Pakistan have shown significant growth in 2016 by using digital transaction channels, State Bank of Pakistan (SBP) has stated in a Press Release.

SBP listed the facts and figures of Financial Year 2016 in the latest press release. SBP also mentioned that Real-time Gross settlement (RTGS) has increased to 29% in value from Financial Year 2015. The use of electronic and digital technology in making transactions is in line with SBP’s mission of promoting digital payments in Pakistan.

The volume of paper-based transactions has decreased significantly and e-banking is slowly replacing it. E-banking transactions have increased by 16% in volume and 4% in value, as compared to FY15. E-banking is an electronic payment system in which customers can make transactions like withdrawals, transfer of funds, bill payments etc., using mobile and the internet.

The use of Alternate Delivery Channels (ADCs) like ATMs, Point of Sale (POS) terminals, internet and mobile banking also showed rising trends. The internet and mobile banking increased by 18% and 8% in value respectively, as compared to 2015. It states

“Payment System infrastructure also showed phenomenal growth during the period under review. The number of branches increased from 11,937 to 13,179 whereas total number of ATMs installed in the country increased from 9,597 to 11,381 during the year.”

SBP functions as the central bank of Pakistan and it regulates the monetary and credit system. It works on the expansion of financial infrastructure by incorporating digital technology like cards, wallets, ATMs, POS, gateways, mobile and internet. It also ensures the security of the payments and transactions.

Comment by Riaz Haq on January 21, 2017 at 8:43pm

#Pakistan #banks show strong growth. #Deposits up 20%, #loans rise 17% in 2016.

http://www.khaleejtimes.com/buzzon/jobs/banking-financial-services/...

Banks advanced Rs5.6 trillion to the private sector in 2016, which is 17 per cent more than 2015
Deposits at Pakistan's commercial banks reached Rs11.2 trillion as of December 30, 2016. At this level, it works out as a 20.4 per cent year-on-year growth in deposits compared to the last three years.

Add to it the good news that banks advanced Rs5.6 trillion to the private sector in 2016, which is 17 per cent more than 2015 when only Rs4.8 trillion was sanctioned.

Banking and equity sector analyst Umair Naseer of Topline Securities said this is significantly higher than the historical average growth of 12 per cent in the past three years. He added that the strong deposit growth bodes well for banks as it remains the key earning driver in a low interest rate environment.

This is a success story for the banking sector as it took place at a time when some sectors of the economy, including the biggest one such as textiles - are still struggling to match their good performance in the past. At the same time, exports, hit by the international crash of oil and commodity prices and lower domestic output, declined from $24 billion to $19 billion in 2016.

The easy money policy of the State Bank of Pakistan (SBP), the central bank, has brought down the interest rate to 5.75 per cent - the lowest in 42 years. The banks have also been slashing the profit rate payable to depositors. This, in turn, was holding up a major growth in deposits.

The government of Pakistan, financial institutions and economists firmly believe that commercial banks should redouble their efforts and undertake a major deposit mobilisation campaign so that they can lend more money to the credit-starved private sector, including key industries such as textiles and the stagnant export sector. The government has to share part of the blame for credit shortage in the private sector as it has been borrowing heavily to fill its budgetary gap.

The current year will need redoubling of the deposit mobilisation efforts for growth as there are already some economists who feel the rate may be reduced to the range of 13 to 15 per cent. This is because, in the recent past, the government deposited larger amounts of money in these banks to earn larger profits. But this practice is almost over.

The SBP recently reported that bank investments rose eight per cent to Rs7.2 trillion last year. This helped the economy to look up after years of slowdown. It also confirms the fact that the economy is looking up under pro-business Prime Minister Nawaz Sharif, whose party will face new parliamentary elections in the first half of 2018. Other key elements which can help him win these elections will be the fast-track implementation of the $61 billion Chinese investment in the China Pakistan Economic Corridor (CPEC).

Other positive factors are the recently announced FDI inflow from the UAE, Saudi Arabia and other countries, attracted by CPEC and the improved investment climate in Pakistan, and revival of the overall economy.

The Chinese investment in financial and equity sectors and energy is now very substantial. A consortium of three Chinese and two Pakistani companies have bought 40 per cent shares of the PSX - the Karachi Stock Exchange, for $80 million. Besides attracting more Chinese FDI, it is likely to encourage other foreign countries and companies to invest in Pakistani shares and the financial market.

Comment by Riaz Haq on March 1, 2017 at 10:15pm

#Investment inflows spur #Pakistan's corporate #sukuk (Islamic bond) market http://reut.rs/2mHKBoO via @Reuters

Growth of sharia-compliant investment funds in Pakistan is helping fuel demand for sukuk, or Islamic bonds, giving local firms new funding options while strengthening the case for Islamic pensions in other majority-Muslim countries.

Strong demand for Islamic funds, and in turn sukuk, could encourage other countries trying to deepen their Islamic capital markets, in particular in the Gulf region where private pensions are rare.

Pakistan's Islamic banks lag their conventional peers, holding around 13 percent of total deposits, while Islamic mutual funds and private pensions have a far greater market share.

Islamic mutual funds held 242.7 billion rupees ($2.3 billion) in assets as of December, or 37 percent of the total, official statistics show.

Almost two-thirds of assets in the country's voluntary pension system (VPS) are now managed under Islamic principles.

All 10 VPS managers offer Islamic pension products, worth a combined 14.5 billion rupees, or 63 percent of total VPS assets with the largest VPS product being sharia-compliant.

Attractive yields, tax exemptions and greater flexibility in choosing external managers have made VPS products popular, which in turn adds to demand for sukuk, said Abdullah Ghaffar, head of investment banking at Al Baraka Bank Pakistan.

"Mutual funds, both fixed income as well as equity funds, have become big time investors in existing and new sukuk issues taking place because of the huge assets under management under their disposal."

Two recent sukuk transactions from manufacturing companies attracted significant interest from such investment funds, while equity funds are also becoming active in initial public offerings, Ghaffar added.

Reforms from Pakistan's capital market regulator have also helped equity-like financing vehicles, known as modarabas, to grow their combined assets above 41 billion rupees.

This has attracted a wide range of issuers: Byco Oil Pakistan Limited raised 3.12 billion rupees via sukuk using a credit gurantee and Ghani Gases raised 1.3 billion rupees via a privately-placed sukuk last month.

In December, Fatima Fertilizer Company mandated banks to raise 10.5 billion rupees through a lease-based sukuk.

Pakistan GasPort Consortium Limited plans to raise 8.6 billion rupees via seven-year sukuk to finance the construction of the country's second LNG import terminal.

Comment by Riaz Haq on March 26, 2017 at 11:09am

#Sharia compliant #Islamic #banking available 2,322 branches in 112 districts across #Pakistan

http://www.khaleejtimes.com/business/banking-finance/why-pakistans-...


The growth and expansion of the Islamic banking is moving fast. This is the view of Islamic scholars who spoke at a seminar arranged by the Securities & Exchange Commission of Pakistan (SECP), the official regulator of Islamic banking in the country.

At the same time, the World Bank and the Islamic Development Bank, in their first global review of the fast-track movement of the Islamic banking system, have reported that Pakistan is among those countries in which the government and the central bank are "not taking Islamic banking lightly".

The SECP reports that "there is an even stronger growth of Islamic assets in the non-banking financial institutions. Their market share is now approaching 33 per cent, - up from 14 per cent in 2012".

What's behind this growth? One, the persistently strong demand from customers of the country of 200 million, largely Muslims, and two, the fact that the State Bank of Pakistan (SBP), the central bank, the government of Pakistan and the SECP "created the enabling regulations environment for this fast track growth".

These were the views made at a seminar held at the SECP in Islamabad. Hayat says "the priority and responsibility of the regulator like SECP is to develop [an] Islamic capital market."

The SECP on its part, recently had two sessions for consultation with banking sector participants to help investment in issuing sukuk and real estate investment trusts (Reits).

As of now, the SECP is analysing the proposals from the financial and banking sector to formulate necessary amendments into the regulations to further reduce the cost for such investment. The SECP is also considering the banking sector and investors' proposals regarding the existing tax problems relating to sukuk and Reits and to overcome such problems.

---

The bankers and Islamic scholars also debated at the SECP seminar as to which model is to be adopted, because in 2001 policy makers had decided to allow both Islamic and conventional banking in Pakistan. This policy continues as of now.

As at now, 21 banking institutions are providing Islamic banking services and products, through their 2,322 branches in 112 districts across Pakistan. Abbasi said: "The SBP has a holistic approach for the promotion of Islamic banking, and is providing the enabling policy environment for Shariah governance, risk management and capacity building." The Islamic Finance News, in 2015, adjudged the SBP as the "Best Central Bank for Promoting Islamic Finance".

Another Islamic scholar, Dr Shafiullah Jan, says: "The economic substance in Islamic banking may seem to be the same as that of the conventional banking, but the underling process is different."

Dr Jan said along with the growth of the Islamic banking industry, more attention should be given to ask as to why this industry was created, and whether it is delivering along the Islamic vision of development that it is associated with.

Now let us go back to the first-ever Islamic banking report issued last week by the World Bank and Islamic Development Bank. It says: "The fact that a strategic roadmap on a national level is in place in jurisdictions. These jurisdictions include Indonesia, Malaysia and Pakistan, [and] shows that the governments in those countries are no longer taking Islamic financing lightly."

It says, "Indonesia and Pakistan are, perhaps, the strongest proponents of incorporating financial inclusion as a policy objective."

As the banking sector expands as a result of financial inclusion, Islamic banking is projected to expand more.

Comment by Riaz Haq on April 16, 2017 at 7:05am

#Pakistan #bank profits soar with rising deposits and increased lending
http://www.khaleejtimes.com/business/banking-finance/as-deposits-an...

Gains on bigger volumes, enlarging transactions and growing business rising
Commercial bank profits in Pakistan are going up on the back of rising deposits and growing lending.

The profits on bigger volumes, enlarging transactions and growing business are rising. This is so even though the spread is also down to around five per cent from its sunny days of seven per cent. The interest rate is down to 5.75 per cent.

Overall deposits of all commercial banks stood at Rs10,726.66 billion on March 3 according to the latest report by the State Bank of Pakistan (SBP), the central bank. Deposits and other accounts of specialised banks stood at Rs71.07 billion. Total assets of banks were at Rs14,941.67 billion.

Lending by banks rose, too, the SBP said. The gross advances of all scheduled banks stood at Rs5,502.81 billion in the first quarter of fiscal year 2017. Lending by banks in the same period was Rs4,835.19 billion, which was 13.8 per cent higher than the same period of fiscal year 2016.

Borrowing by all scheduled banks rose 2.8 per cent to Rs2,025.84 billion in fiscal year 2017, compared to Rs1,990.44 billion in fiscal year 2016.

The central bank reports a much-awaited rise to Rs7,525.10 billion in investments by banks in fiscal year 2017, up from Rs7,039.33 billion in the past year. It shows a rise of 6.9 per cent.

The approved foreign exchange reserves with banks were Rs996.45 billion in March, compared to Rs923.4 billion, a year ago, which is higher by 7.9 per cent.

All these statistics of the banking sector confirm a definite growth in all these sectors.

The banks' operations and profits are projected to rise, though at a slower pace than the last few years. But the economy is moving up. Bankers are not likely to gain seven per cent-plus spreads, as in the past several years when this rate was the highest in the world. Spreads and profits are low because the SBP-set soft monetary policy had reduced the interest to as low as 5.75 per cent - the lowest in the last 43 years. Fiscal year 2016 saw a reduction of 2.2 per cent in the mark-up income of banks. The average spread, as a consequence, is now around five per cent.

But all said and done, the economy is moving up at a good pace as stated by Finance Minister Ishaq Dar who insists: "We project the GDP growth of five per cent-plus even if it does not turn out to be the hoped-for 5.7 per cent." It will provide reasonably good profits to all sectors of the economy.

The Pakistan stock market index PSX-100, for instance, within a short span of time, has shot up and crossed 50,000 points in recent weeks. It faced a small downturn, and the PSX these days is moving in the range of 48,697.65 on March 20 - the opening day the week, which moved to 49,016.78 later in the week.

During three-and-a-half years of the government of pro-business Prime Minister Nawaz Sharif the index has moved from around 35,000 to the current level - nearly a whopping one-third up.

The improving health of the Pakistani economy is also testified by international rating agencies and global stock market operators who have described the Pakistan Stock Exchange as "one of the top 10 emerging markets worldwide".

Besides other big foreign businessmen and financiers flocking to buy PSX shares, there is a growing interest of the investors from the UAE and China - part of which is related to the ongoing implementation of the $56 billion China-Pakistan Economic Corridor (CPEC). The CPEC-related investment and other FDI indicators are leading up to larger banking transactions and growing bank profits. This is happening despite one or the other quarter of the financial year coming out with somewhat smaller bank profits.

Comment by Riaz Haq on May 22, 2017 at 9:16pm

#MiddleEast #investment bank EFG-Hermes commences operations in #Pakistan
https://tribune.com.pk/story/1416354/efg-hermes-commences-operation...


KARACHI: After a gap of nine years, a foreign brokerage house has commenced operations in Pakistan ahead of the country’s reclassification to the MSCI Emerging Markets Index, a development expected to generate the inflow of millions of dollars this year.

EFG-Hermes, a Cairo-based leading investment bank of Middle East and North African (MENA), has opened its office in Pakistan through the acquisition of a majority (51%) stake in Invest and Finance Securities Limited (IFSL).

EFG-Hermes Group Chief Executive Officer Karim Awad said the bank was operating in nine major countries in the MENA region, including UAE, Qatar, Saudi Arabia and Oman.

“Now, we are very proud to be in Pakistan. This is a market full of potential,” he said after ringing the opening bell to begin the trading session at the Pakistan Stock Exchange (PSX) on Monday.

Pakistan upgraded to MSCI Emerging Markets Index

He said PSX’s return to the MSCI Emerging Markets is set to attract significant foreign inflows. “We believe we can play a good role in bringing foreign inflows from western institutions and GCC countries to Pakistan’s stock market, as well as hopefully bring new IPOs [Initial Public Offerings] from local companies,” Awad said.

“We are quite bullish on Pakistan’s economy and that’s why we are here,” he told The Express Tribune.

Foreigners leave

Foreign brokerage houses including JP Morgan, a US bank, suspended brokerage services in Pakistan about nine years ago when trading at the PSX (the then Karachi Stock Market) was suspended following the 2008 crisis.

The US bank still holds PSX membership, but it has remained dormant since then.

Cairo-based firm wants to sink teeth in Pakistan’s brokerage industry

EFG-Hermes Pakistan (earlier known as IFSL) Chief Executive Officer Muzammil Aslam said the investment bank acquired 51% stake in IFSL at Rs15 per share, translating into a transaction of $1.5 million.

“The brokerage house may bring a large part of foreign inflows of around $200-250 million of the total inflows this year,” he said.

Comment by Riaz Haq on October 30, 2017 at 10:51am

Banks’ growing romance with car industry

https://www.dawn.com/news/1365688/banks-growing-romance-with-car-in...

Car financing in particular and consumer loans in general saw signs of resurging after a gap of several years for the first time in 2013-14 on the back of economic growth.

In July-September this year, banks’ auto loans almost doubled to Rs11.1 billion from Rs5.7bn in July-September last year.

This is just a continuation of the huge 60 per cent rise recorded in auto loans last fiscal year ending June, according to the latest data of the State Bank of Pakistan (SBP). In 2016-17, banks’ auto financing totalled Rs70.5bn against that of Rs44bn in the preceding fiscal year.

According to the Pakistan Automotive Manufacturers Association, auto sales also recorded a matching growth of 60pc, as 44,372 vehicles were sold during July-September 2017 against 27,630 in the same period of 2016.

Senior bankers say an increase in auto loans (and also in overall consumer finance) in the first quarter of the fiscal year is always good as during this period net credit to private sector businesses remains negative due to usual heavy credit retirement.

‘The acceleration in car loans is demand-driven and bulk of the demand is coming from people employing vehicles in Uber and Careem e-hailing services,’ says the head of consumer banking

During the first quarter of this year, “it’s the volume of incremental auto loans (Rs11.1bn) that is noteworthy”, says the head of a local bank.

Between July and September this year, net stock of loans to private sector businesses saw a decline of Rs2bn, latest SBP stats show.

“The acceleration in car loans is demand-driven and bulk of the demand is coming from people employing vehicles in Uber and Careem e-hailing services,” says the head of consumer banking at a local bank.

Increasing car deliveries to people associated with Uber and Careem are helping the creation of full-time jobs for some and part-time opportunities for others. That is good for the economy.

What is bad, though, is that in their quest for meeting a demand rush, car assemblers are delaying deliveries.

Or this is what bankers tell their customers after sanctioning auto loans at lightning speed and then failing in ensuring vehicle delivery from designated dealers for weeks, and in some cases for months. Failure in timely delivery, regardless of who is responsible, reflects poorly on the auto industry’s reputation.

As auto financing fever runs high, banks, in competitive frenzy, are over-committing to car loan seekers. After approving auto loans, many bank branches debit down-payments from customers’ accounts and also make these accounts operational, thus requiring borrowers to start paying loan instalments. But they leave the customers at the mercy of car dealers instead of ensuring car deliveries within the promised timeline.

Comment by Riaz Haq on December 13, 2017 at 10:53am

SBP sees private credit off-take to boom in Q4

https://www.thenews.com.pk/print/255270-sbp-sees-private-credit-off...

“The seasonal pattern along with robust growth in large scale manufacturing index observed during Jul-Sep 2017 suggests that advances to private sector will rise in Q4CY17,” the central bank said in the quarterly performance review of the banking sector on Tuesday.

“Less than normal seasonal fall in advances along with improved liquidity and strong solvency – well above the minimum benchmark – are the key highlights of the 3rd quarter of CY17.” Though gross advances to private sector decreased Rs5.4 billion in July-September 2017, they were significantly lower than the contraction of Rs112.2 billion during the same period of last year.

“Banking sector’s asset base has expanded marginally during third quarter, though, on year-on-year basis, the growth has been quite robust (16 percent),” the central bank said. “Encouragingly, share of fixed investment (long-term) loans in total loans continues to rise indicating improved business confidence.”

The central bank said low interest rates help credit flow into the real economy. “However, the banking sector’s review showed that corporate borrowing was a little bit disappointing during the third quarter.”

It further added that advance-to-deposit ratio inched down 48.3 percent in July-September 2017 from 48.7 percent in the previous quarter. The central bank suggested banks to boost their ability to maximise benefits from pickup in economic activity driven by China-Pakistan Economic Corridor.

“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),” it said.

The SBP said the risks to the resilience of the banking sector are likely to remain muted in the last quarter of 2017 as capital adequacy ratio is expected to remain well above the minimum regulatory requirement despite narrowing return margins and anticipated rise in risk weighted assets.

Banks posted profit of Rs111.7 billion in the third quarter, as compared to Rs89.9 billion in a quarter ago. The central bank said earnings of the banking sector have moderated due to low interest rates and increased administrative expenses, in addition to one-off settlement payment made by a large bank.

Banking sector remains sound & stable in Q3CY17: SBP

https://www.brecorder.com/2017/12/12/386346/banking-sector-remains-...

Advances demand from textile and other sectors (agriculture, automobiles, electronics etc.) have been promising. Noticeably, the share of fixed investment (long-term) advances in overall advances is persistently rising.

Banks have continued to invest in short term MTBs while investment in PIBs and Sukuk have declined. The deposit mobilization has remained on track, primarily, on the back of growth in saving and fixed deposits.

Asset quality has improved as Non Performing Loans (NPLs) to gross advances (infection) ratio has moved down to 9.2 percent as of end September 2017 from 9.3 percent as of end June 2017.

However, profitability has moderated further with the banking sector earning profit (before tax) of PKR 195.3 billion during Jan-Sep, 2017 (ROA of 1.6 percent and ROE of 19.1 percent).

Encouragingly, Net Interest Income (NII) has improved (Year-on-Year basis) on account of rising interest earned on advances. Capital Adequacy Ratio of the banking sector at 15.4 percent is well above the minimum required level of 10.65 percent and advocates that banks have enough buffers available to meet additional financing need of the market.

Comment by Riaz Haq on March 11, 2018 at 7:36pm

Accelerating economy to support Pakistan’s banking sector growth
Modest capital and large holdings of government bonds remain risk factors

Published: 14:06 March 11, 2018 Gulf News
Babu Das Augustine, Banking Editor

http://gulfnews.com/business/sectors/banking/accelerating-economy-t...


The outlook for banks in Pakistan is stable over the next 12-18 months driven by an accelerating economy and stable funding, according to rating agency Moody’s.

“Our stable outlook for Pakistan’s banking system is driven by an accelerating economy, boosted by domestic demand and China-funded infrastructure projects. Economic growth will stimulate lending and support a slight improvement in asset quality. Despite margin pressure, we expect profitability to remain flat. Stable funding from customer deposits and high liquidity are further strengths,” said Constantinos Kypreos, a Moody’s Senior Vice President.
Pakistan’s real GDP growth is projected at 5.5 per cent and 5.6 per cent in the fiscal years ending June 2018 and June 2019. Infrastructure investment and solid domestic demand will be the main drivers of economic growth and will fuel lending growth of 12 per cent to 15 per cent for 2018. The economy, however, remains susceptible to political instability and a deterioration in domestic security.
Analysts expect problem loans (NPLs at 9.2 per cent of gross loans as of September 2017) to decline in the current supportive macro environment, helped by the banks’ diversified loan portfolios and low corporate debt. Asset risk remains high, however, due to weaknesses in the legal framework, inefficient foreclosure processes and scant information for assessing borrower creditworthiness.


-----------------------

With regard to asset risk, analysts expect asset quality to improve in the current supportive macroeconomic environment, helped by the banks’ diversified loan portfolios and low corporate debt.
Moody’s says that the banks’ profitability will remain flat amid margin compression. However, profits will be supported by strong lending growth, a focus on low-cost current accounts and moderate provisioning needs. Interest margins should level off towards the end of 2018, once pressure from the reinvesting of legacy high-yielding Pakistan investment bonds reduces, as the remaining of these mature.
Credit growth to pick up pace
Credit growth in Pakistan is expected to gain momentum in 2018-19 driven by robust growth in both private and public sector credit demand, according to rating agency Moody’s.
“We expect lending to the private sector to grow between 12 to 15 per cent during 2018, a result of the improved economic conditions. This is despite a widening fiscal deficit (5.8 per cent of GDP for 2017), which the banks will continue to partly finance,” said Constantinos Kypreos, a Moody’s Senior Vice President.
Loan growth and deepening financial penetration is expected to be supported by state initiatives, such as branchless banking. Regulations amended to allow customers to open bank accounts through biometric devices at agent locations, as well as through mobile phones, to facilitate remittances are expected to boost growth on both assets and liabilities. A central bank-initiated policy targets a 17 per cent share of private-sector credit for SME financing compared to 9 per cent at year-end 2016. The policy initiative has set minimum portfolio targets for banks; introduced risk coverage and refinancing schemes for SMEs; established g a registry to allow SME borrowers to obtain credit using pledged assets as collateral; and prudential incentives such as a relaxation of general provisioning and capital requirements.

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