Banking Sector Shows the Highest Ever Profit Growth in H1 2020 - Android

A majority of commercial banks have made impressive growth in profitability in the first half of 2020, showing a healthy… Read More

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A majority of commercial banks have made impressive growth in profitability in the first half of 2020, showing a healthy profit growth of 52 percent year-on-year by the entire banking sector.

According to the Mid-Year Performance Review by the State Bank of Pakistan (SBP), the profitability of the banking sector rose significantly with profit after tax at Rs. 125.8 billion for H1CY20, making a remarkable rise of 52 percent (Rs. 43 billion) over the same period last year.

This was the highest level of earnings ever recorded in any half-year since H1 2004, SBP claims. The favorable interest rate environment facilitated higher net interest income (NII) and larger gains on the sale of government securities.

The review suggests that—despite elevated economic stress driven by the COVID-19 pandemic—the assets of the banking sector witnessed a decent expansion of 7.8 percent during H1 2020. A robust increase in investments, funded by a surge in deposits, explains this growth.

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On the other side, Advances observed a mild downtick owing to the economic slowdown due to the disruption in the business activities after the outbreak. However, without the supportive measure of the SBP, the current disparity in Advances could have been much larger.

The ratio of Non-performing loans (NPLs) increased from 8.6 percent as of end-December 2019 to 9.7 percent by end-June 2020. However, the Net NPLs to loans ratio, which is a better measure of credit risk, marginally increased from 1.7 percent to 1.9 percent.

The performance of the banking sector in H2CY20 depends upon the trajectory of COVID-19, economic recovery, and an evolving policy environment. While financial conditions in the form of interest rates and asset prices remain supportive, the recent uptrend in virus infections presents a challenging scenario. Globally, the situation also remains uncertain, especially in key trading economies such as the United States, European Union, and the Middle East.

In this backdrop, the outlook for the private sector advances suggests a mixed picture. The Large-scale Manufacturing (LSM) index has increased by 3.66 percent (on a year-on-year basis) during July-August, 2020. A seasonal uptick during H2CY20 may also stimulate demand.

However, the downside risks remain due to the possibility of another wave of the disease which may trigger the re-imposition of strict lockdowns. Similarly, looming uncertainty regarding recovery in the foreign markets could subdue demand from export-oriented sectors such as Textiles.

Besides demand for credit, in case of crystallization of downside risks, the repayment capacity of the borrowers could weaken and might lead to a further rise in NPLs.

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Banks’ investments are likely to remain strong during the second half of CY20. The pandemic related uncertainties would take time to subside. Hence the risk-averse behavior of banks may keep lending flows subdued.

Consequently, government securities may remain a preferable alternative. The profitability of the banking sector may come under stress in the next half of the year, mainly, from the prevailing low-interest-rate environment.

However, revaluation gains on government securities, if realized, may offset the impact to a certain extent, and the rise in zero risk-weighted government securities will likely strengthen the Capital Adequacy Ratio (CAR) of the banking sector.

Just like the rest of the world, Pakistan is also experiencing the second wave of COVID-19. Therefore, banks need to keep a close watch on the associated developments and assess the implications of how this re-escalation of pandemic could affect their asset quality and solvency.

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