Banking system NPLs reach Rs359.3b

Thursday, 31 December 2009 15:33

Economic Updates - Pak Major Financial News

KARACHI - The non-performing loans (NPLs) of the banking system witnessed an astonishing rise of 64.8 per cent during CY08, reaching Rs 359.3 billion by the end of the year. This is the biggest increase in a single year since CY97, says SBP Financial Stability Review 2008-09, which was released on Wednesday. According to the report, the NPLs to loans ratio increased by 290 bps, from 7.6pc in CY07 to 10.5pc by end-CY08. As per SBP statistics, 31 out of 40 banks with asset share of 89.7pc in overall assets, recorded an increase in the NPLs to loan ratio. This suggests that the increase in NPLs is fairly widespread and is driven primarily by cyclical factors i.e. generated by the economic cycle instead of structural weaknesses in the banking system. The report says that irrespective of the reasons, the substantial rise in the volume of NPLs has had an adverse impact on the financial performance of the banking sector, given that it required banks to create provisions amounting to Rs 105.9b during CY08, which was Rs 46.0b higher than the provisioning amount of the previous year.   This is despite the concession given by SBP to consider the benefit of 30pc of the forced-sale value (FSV) of collateral for calculating provisioning requirements, as against the more stringent requirement for CY07. The effect of this benefit remained marginal as most of the banks could not fully meet the requirements of the directive before the finalization of annual financial statements. Nevertheless, latest available statistics suggests that some of the leading banks, taking a conservative stance, are not fully availing the FSV benefit , report said.  The distribution across banks indicates that 4 banks with asset share of 5.3pc have this ratio in excess of 50pc. In the previous year, there were only 2 specialized banks in this category with an asset share of 2.1pc only , report asserted. The report further stated that it is encouraging to note however that 29 banks, with asset share of 86.2pc, have their net NPLs to capital ratio at less than 19.4pc (average for the banking industry).

Moreover, none of the big five banks have this specific ratio in excess of the industry average. The report noted that implementation of the minimum capital requirements in a phased manner continues to strengthen the capital base. The aggregate risk-weighted capital adequacy of the banking sector as of end-CY08, despite the inclusion of the capital charge for operational risk under Basel II requirements, remained at the CY07 level of 12.3pc against the minimum requirement of 9.0pc. Bank-wise information indicates that only 3 commercial banks with market share of 10.5pc in total assets fell short of the minimum requirement, and that 2 of these banks have their CAR at more than 7.0pc. The distribution of CAR across banks also indicates that 24 out of 40 banks had their respective CAR at over 12.0pc in CY08. These banks can be termed as well-capitalized banks , report indicated.  The Report claimed that none of the systemically important banks faced any major challenge in terms of their financial stability indicators. The overall Financial Soundness Index is still positive. However, a few small and mid-sized banks are facing major challenges. The liquidity position of these banks is yet to recover from the liquidity stress of Q3-Q4 CY08 to their pre-shock level. Lagged impact of deterioration in asset quality can also be a challenge for them. Sensitivity analysis of various assumed shocks reveals that the banking sector in aggregate can withstand various shocks of a moderate to strong nature. Credit and concentration risks seem to be the primary concerns in safeguarding financial stability. Despite significant deterioration of the liquidity position of banks, liquidity risk continues to be low due to SBP s statutory liquidity requirements. Bank-wise information indicates the presence of a few weak banks, which may face severe financial problems in face of deterioration of one of the risks factors. Report foresees substantial comfort can be drawn from the favorable movement in some of the risk factors in CY09. For starters, the reversal of the monetary stance due to the easing off inflationary pressures, the gradual path of recovery of economic fundamentals, restoration of the regular functioning of the Karachi Stock Exchange and relative stability in the exchange rate are some of the positive developments. Deposits growth has started to pick up pace and banks asset composition has improved in the context of both credit and liquidity risk.

 SBP s requirement of increasing capital (net of losses) by Rs 1.0b during the year (as part of MCR) is likely to create further room for absorbing potential losses. Besides strengthening the capital base of the banking sector, the MCR may also pave the way for more mergers and acquisitions. In either case, the ongoing implementation of various vigilant policy measures is likely to strengthen the stability of the banking sector in CY09 , it said.   The size of the country s financial sector, which includes Banks, Non-Bank Financial Institutions (NBFIs), Microfinance banks, Central Depository of National Savings (CDNS), the Insurance sector, and financial markets, in terms of assets, has increased to Rs 8.2 trillion by end-June 2009 from Rs. 7.1 trillion at end December 2007. The report summarizes the developments over 2008 and the first of half of 2009 , it unveiled.  The report says that the stability of the financial system is largely derived from the predominant position of the banking sector, as other components of the financial system continue to grow at a more gradual pace. As opposed to the speculative tilt in conducting the business of banking in western economies, the underlying operating model of the banking sector in Pakistan fulfills the basic requirements of the function of financial intermediation: loans and advances are funded by a large and growing base of deposits, with virtually negligible reliance on borrowing, or the short-term wholesale market for financing assets.

The Report noted that the growth in deposits did slowdown to 9.4pc in CY08 after growing successively at an average rate of 18.1pc for the last 5 years, despite the increase of 17.2pc (in USD terms) in home remittances; a reflection of both the slowdown in the economy, preference for hard currency due to the prevalent environment of uncertainty, and competition from the National Savings Schemes (NSS) offering a higher rate of return than bank deposits.   These developments even overshadowed the potentially positive impact of introducing the minimum rate of return of 5.0pc on all PLS savings deposits by the SBP, w.e.f. June CY08, it said and added a visible increase in the currency to deposit ratio and a slowdown in the money multiplier during H2-CY08 also highlights the challenging operating environment of the banking sector. Notwithstanding, deposits growth has picked up pace in H1-CY09, growing by 8.2pc in H1-CY09 alone. But the impending transfer of government deposits from banks to a single treasury account maintained by the State Bank of Pakistan can potentially have a significant impact on those banks which have a large reliance on these deposits, it said.  While aggressive credit expansion in the last few years played its role in this visible deterioration of asset quality, the widespread rise in NPLs is seen to be a direct consequence of macroeconomic instability, and largely a cyclical rather than structural factor, it said and added that this assertion is supported by the slowdown in the growth of incremental NPLs in the first half of CY09 to Rs. 397.9b, as the process of economic recovery picks up pace.

Courtesy : The Nation