Mid-Year Performance Review: Strong asset growth fuels banking expansion

Septemebr 18, 2024 (MLN): Pakistan's banking sector managed to grow at a decent pace of 11.5% in H1CY24. The expansion in the asset base was mainly driven by investments, showed 'Mid-Year Performance Review of Banking Sector' by the central bank.

Domestic advances increased by 0.6% in the reviewed period; however, this growth mainly came from public sector advances, which grew by 3.9%, while private sector advances contracted by 0.6% in the reviewed period.

In the wake of gradually improving macroeconomic conditions, however, the contraction in private sector advances was significantly lower as compared to 7.0% contraction witnessed in H1CY23.

On funding side, deposits increased by 11.7% in H1CY24. Besides, banks’ reliance on borrowings remained noticeable as well.

Asset quality dynamics remained steady as uptick in gross nonperforming loans (NPLs) remained subdued while total provisioning coverage further improved as the introduction of IFRS-9 led to creation of allowances for any prospective future losses in the regular portfolio.

Accordingly, total provisioning to NPLs ratio improved to 105.3% by end June-2024 (94.4% in June-2023), while the specific provisioning to NPLs ratio also improved to 85.5% by end June-2024 (83.6% in June-2023).

Earnings, nonetheless, slowed down owing to deceleration in net interest income; non-interest income, however, supported the profitability.

The solvency position of the banking sector remained strong as Capital Adequacy Ratio stood at 20.0% at end June-2024 (17.8% in June-2023).

Encouragingly, the banking sector, in different scenarios of stress testing exercise, shows sufficient resilience to withstand severe shocks to key risk factors and hypothetical adverse economic conditions.

Domestic financial markets witnessed relatively lower stress during H1CY24 as compared to H1CY23.

It was on account of gradually improving macroeconomic conditions and reduction in country risk premium, which kept financial markets volatility under check.

A relative stability in the FX market, which witnessed significant volatility in the corresponding period of last year, contributed to overall calm in the financial markets during the reviewed period, although equity market witnessed an uptick in the volatility.

However, money market continued to operate in an orderly manner as SBP monetary policy operations kept interest rates in the policy range.

The respondents in the 14th wave of the Systemic Risk Survey, conducted in July-2024, expressed confidence in the stability of the financial system and the ability of the regulator to manage any unforeseen shocks.

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