Banking sector shown steady performance, resilience during H1CY23: says SBP Mid year Review

KARACHI:Pakistan’s Banking sector showed steady performance and resilience during the first half of 2023 despite challenging macro-economic environment as the banking sector managed to expand its asset base by 14 % while asset quality, profitability and solvency also registered positive growth.

It was stated in Mid-Year Performance Review of the Banking Sector for 2023- issued by State Bank of Pakistan on Monday that covers the performance and soundness of Pakistan’s banking sector for the period January to June 2023 (H1CY23).

The Review highlights that the macroeconomic environment continued to remain challenging during the first half of CY23 while domestic financial conditions tightened and the operating environment remained under stress due to elevated inflation and prolonged uncertainty.

The Review indicated that banking sector’s balance sheet expanded by 14.0 percent during H1CY23 to reach Rs.40,796.7 billion. The expansion in asset base was mainly driven by investments in government securities, it added noting that besides a strong inflow of deposits, banks’ reliance on borrowings remained noticeable during the period.

On the funding side, banks’ deposits showed a noticeable revival in mobilization activity increasing by 14.2 % during H1CY23 to Rs. 26.8 trillion by the end of June-2023 as compared to 9.3% increase in the corresponding period of the previous year (H1CY22).

Customers’ deposits contributed 82.8 percent in the overall increase in deposits while the rest of increase came from financial institutions’ deposits. Further analysis indicates that the highest growth was observed in current account deposits at 16.1 % followed by savings 9.8% and fixed deposits 8.5%.

The Review also noted that advances of the banking sector recorded a muted growth during H1CY23 and private sector advances contracted while the public sector availed additional financing mainly for commodity finance operations.

The overall advances- both domestic and overseas- of the banking sector increased by 2.5 percent during H1CY23 to Rs. 12,965.0 billion. Domestic advances increased by 2.3 percent while overseas advances increased by 6.3 percent during H1CY23.

“Encouragingly, asset quality indicators improved and net non-performing loans (NPLs) to loans ratio lowered to 0.45 percent at end June-23 (from 0.68 percent in Jun-22) as banks set aside higher amount of provisioning from steady earnings,” the review stated.

Profitability indicators witnessed noticeable improvement as return on assets (ROA) improved to 1.5 percent in H1CY23 as compared to 1.0 % ROA for CY22. The higher earnings in turn also helped to improve Capital Adequacy Ratio (CAR) of the banking sector to 17.8 percent by the end of June-2023 which was recorded at 17 % at the end of December 2022.

The Review stated that with further improvement in solvency indicators, the banking sector, in different scenarios of stress testing exercise, shows sufficient resilience to withstand severe shocks to key risk factors and economic conditions.

Like the overall sector, Islamic Banking Institutions (IBIs) observed a noticeable expansion of 12.3 percent in the asset base during H1CY23, said the review while attributing the growth mainly driven by investments followed by financing.

The share of IBIs in the total assets of the banking sector slightly improved to 19.9 percent by the end of June 2023 compared to 19.5 percent in June 2022.

The Review briefly covers the performance of financial markets as well as the results of the Systemic Risk Survey which represents views of independent experts about key potential risks to financial stability.

Financial markets in general showed relatively lower volatility during H1CY23, however, foreign Exchange (FX) market on average showed increased stress despite improvement in current account balances.

In the face of building inflationary pressures and an increase in policy rate, financial conditions tightened further and the equity market observed lackluster performance during the period under review.

The Review also covered the results of 12th wave of Systemic Risk Survey (SRS) conducted in July 2023, which suggested that the key potential risks faced by the financial system include foreign exchange risk, increasing domestic inflation and political uncertainty.

The respondents, however, expressed confidence in the stability of the financial system and ability of the regulators, it added.