BANKING SECTOR OVERVIEW:
The banking system, as a whole, remains healthy despite the economy going through a period of economic difficulty. The banking sector absorbed the build-up of non-performing loans in the system while maintaining profitability and robust balance sheets. Much of the credit for this must go to the SBP for the policies it has pursued over the last decade to ensure that banks are adequately capitalized and adhere to prudent risk management.
The investments, especially the Government papers, which declined in both absolute rupee terms as well as a proportion of total assets during the first FY08, registered a slight increase during the last quarter. ...view middle of the document...
The worsening business and economic environment somewhat increased the credit risk, which compelled the banks to adopt cautious lending strategy, particularly in consumer sector where the advances have been decreasing since the start of CY08. Some new loans have been issued of which a significant portion of these were disbursed to public sector enterprises (PSEs). Thus advances have shown a declining trend.
This rise in NPLs observed across all the banking groups except specialized banks, where NPLs have actually decreased. NPLs have been on the rise mainly due to poor economic performance of the economy and the FSV benefit therefore resulting in worsening of asset quality ratios.
Interestingly, in the wake of economic slowdown, banks seem to facilitate the businesses through rescheduling/ restructuring of loans; the Textile sector being the major beneficiary. Latest banking industry numbers show an effort to keep balance sheets clear of NPLs by recognizing and providing for NPLs on criteria that are more stringent. This approach might look costly in the meantime but in the long run it ll definitely benefit banks by providing a cushion to withstand losses.
FINANCIAL PERFORMANCE FINANCIAL YEAR 2009
The bank s profit after tax grew by 1.6% to Rs 15.536 billion as compared to last year. In a careful analysis, we see that bank has been able to withstand economic lows while still maintaining its profitability.
The net interest income grew by 16% to Rs 28.483Billion as compared to YF07 of Rs 24.463 billion. The interest earned in this year was 29% higher than previous years but it was matched by more than proportionate increase in interest expense by 37%. The main reason for the higher costs of funds is due to increase in the minimum rates of 5% return on deposits. Previously banks have saved a lot due to no protection of consumers on the returns. Furthermore, the returns on NSS (National Savings scheme) have also increased as part of tight monetary policy. These higher rates on NSS gave strong competition to deposits and also huge drains from the system. Also, this growth in net interest income is less than the industry average of 19.7%, thus the bank should take steps in this regard.
The Non interest income fell by 1.1%, though the industry average grew by 21%. Major decreases were seen in dividend income, Gain on Sale of securities and Income from Foreign Currencies. In most part of the last quarter the stock markets were closed due to shortage of liquidity and lack of investor confidence. These resulted in losses in values of securities and eventually the trade gains vanished due to collapse of stock markets. To match this revenue, the Non-markup expenses were up by 30.4%. So all in all, the Non-markup activities wore away profits. Wages, part of Non-markup expense was higher due to inflation in this year for the common reasons of fuel, power and food price hikes.
Return on Assets ratio stood at 3%, which is...