Banking sector’s profitability to topple with little risk to financial stability: Fitch Research

October 10, 2018 (MLN): Fitch Solutions Macro Research has forecasted loan growth to slow down to 14% by the end of this year as a consequence of slowing economy and rising real interest rate.

The research house brought to light its stance on the Pakistani banking sector in a report which affirms their expectations that banking sector’s profitability will continue to decline over the coming quarters due to rising real interest rates and slowing growth, which will likely weigh on loan growth and asset quality.

“The Pakistani banking sector continued to show healthy levels of capitalization, strong profitability, and declining non-performing loans (NPLs), but we believe that the peak of the credit cycle has likely passed,” the report said.

Loan growth accelerated to 19.5% on a year-on-year (YoY) basis in June, from 18.4% (YoY) in December 2017, but total asset growth slowed sharply to 9 .7% YoY, from 15.9% YoY over the same period.

The analysts further added that as credit growth begins to wane, they expect the sector’s performance metric to deteriorate.

Strong Capital Adequacy, Liquidity, and Improving Asset Quality

Keeping into consideration the significantly higher capital buffers reported by the banking sector and relatively healthy levels of NPL provisioning and liquidity, the research house has established that there is little risk to financial stability over the coming quarters.

That being said, the analysts at Fitch have noticed a decline in profitability, which is expected to continue over the coming quarters as economic and credit growth slows and as the SBP tightens monetary policy further to stem the decline in the Pakistani rupee.

“Overall, the data paints a picture of a banking sector that remains on a sound footing but we expect banks to face downside pressure on profitability from rising interest costs, which looks set to trigger a slowdown in loan growth and further declines in asset growth,” the document stated.

IMF Bailout to prevent crisis

However, on a brighter note, the research house sees little risk of an outright banking crisis as external support in the form of an IMF bailout is likely to be secured, allowing for a soft landing in the sector.

According to the report, the worst-case scenario of a balance of payment crisis appears likely to be avoided as the government comes to some form of agreement with the IMF.

“This should help prevent a destabilizing currency collapse and an outright recession, which would lead to a surge in NPLs as corporate profitability tanks, particularly in the import-dependent sectors,” they said.

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