KARACHI: The banking sector, which accounts for around three-fourths of the financial sector, performed well during the calendar year 2016 with the growth momentum of advances picking up further, while the private sector emerging as the main beneficiary, said the Financial Stability Review, issued by the State Bank of Pakistan, on Friday.
But the report went on to point out that the “fundamentals of the external sector are weakening”, which poses one of the risks to the financial system identified in the report.
The report said the asset quality has improved with a decline in infection ratios specifically, gross advances have increased by 12.81 per cent in CY16 compared with 8.12pc the preceding year, while non-performing loans ratio to total loans has come down to a decade-low level of 10.01pc.
Banks’ profitability has, however, moderated, after seeing exceptionally high growth in the last few years. The return on assets and equity (ROA and ROE) is at 2.1pc and 23.8pc level in CY16, respectively, compared to 2.5pc and 25.8pc in CY15.
The liquidity position remains comfortable while the capital adequacy ratio (CAR) at 16.2pc remains high, albeit with some downward adjustment, primarily due to advances growth.
The SBP report also notes the increase in CAR requirements due to higher Capital Conservation Buffer (CCB) over 2017-19.
In line with international best practices, the review also assesses the resilience of the banking sector to adverse scenarios by means of macro-stress testing. The results exhibit that the banking system is, generally, able to withstand adverse shocks.
“Financial markets, in general, have performed smoothly without any considerable disruption during CY16. Volatility in the money, foreign exchange (FX) and equity markets has remained relatively muted,” said the report.
The review, however, draws attention to some developments that need attention. For instance, the fiscal consideration has continued to drive the liquidity need in the money market; though, prudent management by SBP has kept the market running smoothly.
“The activity in PSX with high growth in KSE-100 index has outperformed various global benchmarks, yet rising Price-Earning (P/E) ratio in short span of time indicates some role of sentiments behind the market movements,” it said.
An attempt has also been made in the review for assessment of financial soundness of the household (HH) sector, despite data limitations.
“A consistent rise in per capita income and high participation of youth in the labor force are obvious positives for the HH sector. Concomitantly, high unemployment rates for females, low-level of savings and a high-level of borrowing (as percentage of HH income) pose risks to the financial soundness of the lower income quintile of the households in the future,” said the report.
According to the review, the listed corporate companies are mostly relying upon their own resources for funding due to strong profitability, and adequate cash flows from operations. From the risk management perspective, rating culture needs to be developed in the corporate sector while concerted efforts are needed for utilising alternative financing avenues, the review recommends.
The large value payments continue their growth momentum; e-banking is fast replacing the paper based modes and the downtime of automated teller machines (ATMs) has significantly improved. The rising interdependencies of different FMIs, although necessary and valuable from efficiency perspective, do pose supervisory challenges, the review notes.
The review posits the outlook of the financial sector, in CY17, to remain largely positive amid the highlighted risks.