Performance review of banking system

SBPs performance review of the banking system for the quarter ended 31st December, 2008 contains a comprehensive assessment of the financial sector of the economy including several challenges confronting the banking industry of the country. The asset base of the banking system grew by 2.6 percent during the quarter and this was well supplemented by 3.6 percent growth in deposits and seven percent rise in shareholders equity. However, the liquidity profile of the banking system remained constrained for most of the quarter and credit risk heightened in line with deterioration in macro-economic indicators. Non-performing loans (NPLs) of the banking system rose from Rs 278 billion at the end of September to Rs 313 billion by the close of December, 2008, increasing the infection ratio to 9.1 percent, satisfactory earnings, however, enabled the system to cover these loan losses. As a result, due to increased loan provisions in absolute amounts, net earnings of the banking system came under pressure. Fresh injection of equity, nonetheless, improved Capital Adequacy Ratio (CAR) of the banking system under Basel-II framework to 12.2 percent while profit after tax (PAT) of the banking system at Rs 63 billion was lower than the last couple of years. The pre-tax ROA also deteriorated to 1.7 percent as compared to 2.0 percent in September, 2008 and 2.2 percent in CY07.
Keeping in view the present depressing environment, the SBP, according to the review, has devised a comprehensive strategy and contingency plan for effectively managing troubled banks and coping with any liquidity stress besides attending to burgeoning NPLs and solvency issues. Considering the overall situation, in general terms, the State Bank is quite convinced that Pakistans banking system has effectively coped with the challenges emanating from the economic slowdown, both at home and abroad, due to strong resilience built over the years and effective regulatory and supervisory regime. However, going forward, the impending economic slowdown may dampen the growth rate of the banking industry in the coming quarters. The present tough environment will heighten the credit risk and affect earnings due to increased loan losses and constrained incomes. Overall, however, the system was expected to remain profitable though this phenomenon may not be widely shared across the board by the market players.
While deposits were likely to grow at a steady pace, low demand for banks advances will shift the asset mix away from advances to government paper. The consequent respite in liquidity may have a positive bearing on the interest rates. The performance review of the banking system for the October-December, 2008 quarter is a routine but well written document of the State Bank which covers all the major developments of the financial sector. The main utility of the review lies in the fact that a serious analyst would find all the latest material related to the financial sector at one place, together with the challenges it faces and the direction it is headed in. From the present review, it is quite clear that the banking industry of the country which was very buoyant in the immediate past is encountering certain problems now. The biggest problem appears to be an unusual increase in NPLs which has not only reduced the profitability of the banking system but has created liquidity stress and several other issues impacting the health of the system. Thankfully, the loan loss provisions enforced by the State Bank have stood in good stead at a difficult time. Though these requirements have dented the net earning capacity of the banking industry, yet the harm to the system has not been as great as in most of the other countries. Some of the analysts attribute the rising level of NPLs to poor risk management, the banking system has, however, fared better and absorbed the inevitable shocks and this in itself is an achievement in an environment of rising interest rates and shrinking industrial output levels.

G20 Summit & shaping future

IT has been four months since the heads of states of 20 rich countries met in Washington to hammer out a consensus on how to save global economy from recession. The economic indicators of all the G20 countries have since worsened. Today, they are meeting again in London, still groping in the dark on how to put back global economy on the path to recovery. While a synchronised global economic downturn calls for a coordinated policy response, it is difficult to envisage a common approach pursued by all countries as they do not have common ?economic structures. It does not come as a surprise that leaders are split in finding a common cure for the economic malaise. What is suitable for America might not necessarily be useful for Germany. ?Despite the differences, the G20 leaders can make significant decisions to restore the stability of the international financial system. There is general agreement on the need for greater supervision and regulation of financial institutions and markets.
The world needs a robust set of rules by which banks and hedge funds have to play. These are testing times for all countries, but the temptations of erecting high import barriers to protect their own economies should be quashed. Though every member of the group understands that protectionism is counterproductive, each of them faces sufficient political pressure at home to give in. ?The World Bank, in its latest report has warned that, in the absence of international support, as many as 84 developing countries could face major funding issues this year. Without strong and well-funded multi-lateral institutions, many of these countries would be forced to cut social spending. While there is consensus on boosting financial strength of the International Monetary Fund and the World Bank, developing countries including China will ?be unwilling to participate in restructuring ?these institutions. Many erstwhile powerful nations have yet to make way for emerging economies to have a greater say in these institutions. Long gone are the days when the world economy hinged on critical decisions by the group of seven rich industrial nations. The transition from G7 to G20 reflects the progress the developing countries have made over the past two decades. The West might still be the all- powerful group, but going forward, it is the developing countries that could define and reshape the future.

—Khaleej Times