SBP quarterly report: Banking sector assets rise by 8%

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KARACHI: Assets of the banking system grew by 7.7% to Rs7.1 trillion during October-December 2010 mainly because of investments in government papers and seasonal credit requirements of the private sector due to soaring input prices, said the State Bank of Pakistan (SBP) in a report.

The SBP, in the Quarterly Performance Review of the Banking System released on Tuesday, said during the October-December quarter, banks remained fairly liquid on the back of growing share of investments in government papers. Furthermore, banks’ capital adequacy ratio improved from 13.8% to 14%.

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 report said.

Credit risk remained a challenge for banks as they accumulated fresh non-performing loans (NPL) of Rs53.7 billion, pushing the infection ratio from 14% to 14.7%, though bulk of the incremental NPLs was confined to a few banks, the report said.

Results of stress tests showed that the banking system is resilient to shocks emanating from a challenging macroeconomic and business environment, it added.

JS Global Capital analyst Mustafa Bilwani said that the increase in assets in the banking system was the result of a continuous increase in the interest rate during the October-December quarter. In this period, the SBP increased the interest rate from 12% to 14% which also pushed up the Karachi Interbank Offered Rate (Kibor), he added.

“The growth in bank profits that we saw in the October-December period primarily showed a one-sided growth because banks were investing in government papers and not giving loans to the private sector owing to the high risk factor,” he commented.

Bank profits up 23 per cent

According to the report, profits before tax of banks were up by 23.1% during 2010 to reach Rs111.2 billion, with return on assets of 1.7% (1.3% in 2009) and return on equity of 16.7% (13.2% in 2009). However, profits continued to remain heavily concentrated among big five banks.

It said that net investments, with an increase of 14.3% during the quarter, outpaced the subdued growth of 5.7% in net advances. Within private sector credit, lending to textile and sugar industries accounted for two-third of the credit offtake of Rs196 billion.

On the funding side, deposits increased by 8.5%, registering the highest quarterly growth in the last three years.

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% of banks’ assets compared with 19.3% 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% in September 2008 to 61.4% by December 2010, the report added.

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