May 18, 2021 (MLN):  The overall soundness of the banking system has weakened as the major indicators such as asset quality, capital adequacy and earnings declined on QoQ basis during 1QCY21. While liquidity of the sector remained robust.

According to the Quarterly Banking Sector Compendium issued recently by the State Bank of Pakistan (SBP), the Capital Adequacy Ratio (CAR) has declined to 18.3% in 1QCY21, down by 2% QoQ. While on yearly basis it moved up by 6% YoY from 17.2% in the same quarter a year ago.

However, it remained well above global and domestic minimum regulatory requirements of 10.5% and 11.5%, respectively.

The asset quality of the banks also deteriorated as Non- Performing Loans (NPLs) to total loan ratio during the quarter ended in March’21 inched up to 9.3%, showing an increase of 2% YoY and 1% QoQ. The stock of NPLs in public sector commercial banks has increased from 14.7% in 4QCY20 to 15.6% in 1QCY21, in local private banks from 7% to 7.2%, and in commercial banks from 8.6% to 8.8%, while in foreign banks it remained static at 3.3%. Besides, the provision coverage ratio (Provisions to NPLs) shrank by 1% QoQ to stand at 87.6%. This was 7% higher when compared with the same quarter last year. The net NPLs to net loan stood at 1.3%, up by 8% QoQ whereas the ratio of net NPLs to their capital was recorded at 5.9%, which was 5.3% in the previous quarter and 9% in the quarter ended in March’20.

The increased exposure to NPLs and a lower interest rate environment have dampened the profitability of the banking sector on a sequential basis during 1QCY21. Overall, the earnings after tax, when measured by returns on assets, have decreased by 10% QoQ to 0.9% in 1QCY21. This reduction is much more pronounced in foreign banks as it has come down from 3.8% in 4QCY20 to 1.8% in 1QCY21. Return on equity before tax has been reduced from 23.2% in the previous quarter to 21%.

Another distressing indicator is the increasing cost of operations as measured by the cost-income ratio. For public sector commercial banks, this was 48.7% in the previous quarter, which now stands at 55.3% in 1QCY21. For foreign banks, this has jumped from 17.4% to 30.1% during the period under review. Overall, the cost to income ratio of the banking sector soared to 54.8% by end of March’21 from 50% by end of Dec’20.

Despite the decline in major performance indicators, the liquidity in banks has improved as liquid assets to total assets ratio has increased to 55.4% from 54.8% in the previous quarter and 49.8% in the same quarter a year ago. The liquid assets to total deposits ratio also exhibited a marked recovery, expanding to 77% in March’21 from 69.3% in March’20 and 74.3% by end of Dec’20.

The SBP’s Compendium also suggests that the major performance indicators of the Islamic Banking Institutions (IBIs) also worsened during the quarter under review as their Non-performing finances (NPFs) to total financing ratio jumped to 3.5% from 3.2 in the previous quarter, similarly, IBIs’ after-tax ROE and ROA ratios declined to 21.3% and 1.3% respectively from 24.5% and 1.6% in the previous quarter. The liquidity of IBIs also declined as their liquid assets to total assets and liquid assets to total deposits ratios weakened to 27.8% and 35.3%, down by 3% and 2% QoQ respectively. However, the CAR of the IBIs improved slightly to 6.2%, up by 2% QoQ.

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