This surge in banks’ total assets, both in absolute and growth terms,was the most significant since 2007, says the State Bank of Pakistan’s Financial Stability Review (FSR) released on Friday.
Deposits increased by 9.4%, registering the highest half yearly growth during the last four years, it said,adding that net investments, with an increase of 22.4% during the first half of 2011, markedly outpaced the anemic growth of 1.04% in net advances.
The first-half yearly Review said that banks’ profits before tax were up by 31% during the first half of 2011 to reach Rs. 77 billion, with Return On Assets (ROA) of 2.1% (1.8 % in June-10) and Return On Equity (ROE) of 21.9 % (17.7% in June-10). During Jan-June 2011, banks remained fairly liquid on the back of growing share of Investments in government papers, it said, adding that further, banks’ capital adequacy ratio also observed improvement, reaching 14.1% by June-2011.
It said that concentration in profits have dropped (share of top 5 banks down from 95 % in Dec-10 to 78 % in June-11), ensuring that even smaller banks have a share, albeit marginal, in industry profits. ’Further, growing profits have also helped reduce the number of loss making banks, from 17 in June-10 to 8 in June-11,’ it said.
However, the Review cautioned that source of profits is shifting away from interest income through advances to investments in government papers. Specifically, returns from investments in government papers now accounts for almost 30 % of banks’ interest income, up from 24 % in June-2010, it added.
This suggests that growth in government borrowings has shored up banks’ earnings, the Review said and added that this trend is neither desirable nor sustainable, first because it compromises intermediation function and second as any sharp cut in discount rate can discernibly affect banks’ profits.
The Review stressed that there has been growing evidence of banks’ flight towards quality as net investments, mainly in government securities, now constitute around 34 % of banks’ assets compared with 28 % in June, 2010. ‘The share of net advances has witnessed a concomitant drop, from 47.6 to 43.9 % during the same period’, it said and added that unsurprisingly, Advances-to-Deposits ratio has further dropped from 63.0 % in June, 2010 to 56.7 % by June, 2011.
