KARACHI: The asset base of the banking sector expanded 8.3 per cent in the second quarter of 2017, which is the highest growth rate recorded in corresponding quarters since 2008.

However, banks’ profitability declined in the first half of 2017, according to the quarterly performance review of the banking sector issued by the State Bank of Pakistan (SBP) on Friday.

The report said the banking sector’s profitability experienced some contraction in January-June on an annual basis. Pre-tax earnings of Rs150.4 billion are 7.3pc less than the profits recorded during the same period a year ago. This decline is mainly attributed to 7.1pc increase in administrative expenditures, 13.4c decline in other income and 1.1pc dip in net interest income.

The report said the upcoming quarter is expected to witness slack growth in banking assets amidst seasonal net retirements from major sectors such as textile and sugar. However, the current momentum of growth in advances and low interest rate environment may provide some impetus to the flow of financing to the private sector, the report added.

According to the report, net advances escalated 9.2pc followed by 5.6pc rise in investments during the second quarter. “The relatively higher growth of advances has pushed the advance-to deposit ratio up to 48.7pc in April-June from 47pc in the second quarter of 2016,” said the report.

Key financing demand came from chemical and pharmaceutical, production and transmission of energy, and agribusiness sectors.

The financing flow seems to be well connected with economic activity as growth in the major segments of large-scale manufacturing (LSM) sector index (2016-17) coincides with several key borrowing sectors for the quarter, said the report.

The LSM index for 2016-17 reveals that the major growth segments have been iron and steel (20.5pc), electronics (17pc), automobile (11.2pc) and food, beverages and tobacco (11.5pc).

Although the overall off-take of long-term advances decelerated to 5.1pc in April-June from 9pc a year ago, the private sector still picked up a sizeable portion (70.7pc) of loans in this category.

Out of total investment worth Rs449.2bn in the second quarter, banks invested Rs425.1bn in government papers, indicating the direction of banks’ investment strategy.

Banks’ investment in shares/listed equity declined 3.6pc (Rs9.5bn), which appears to be a result of the recent volatility in the equity market.

Deposits of the banking sector increased 6.5pc (Rs764.3bn) in the second quarter, although growth slightly decelerated from 6.8pc observed in the same three-month period a year ago. A closer look into the data reveals that customer deposits, which comprise 96.5pc of total deposits and are stable in nature, surged 7.7pc.

“In a nutshell, the analysis of banking soundness indicates that some low-to-moderate level risks appear on the horizon, especially regarding profitability and, to a lesser extent, capital adequacy,” said the report.

Growth in investments depends on the government’s institutional choice and pattern of borrowing from the banking system. Deposits are expected to grow in the coming quarter. But any deceleration in advances growth will have a bearing on deposit growth, said the report.

Profitability of the banking sector is expected to remain modest under the low interest rate environment. Rising interest earnings from growing volume of advances is expected to keep the drop in profitability under check, said the report.