Banks’ exorbitant earnings


WEB DESK: The financial sector of Pakistan is having the time of its life at the moment. According to the latest SBP Quarterly Performance Review (QPR) released on 25th February, 2016, the banking sector of the country posted an after-tax profit of Rs 199 billion in 2015, indicating an increase of 22 percent as compared to Rs 163 billion during the preceding year. The profitability improved on the back of high net mark-up income, contributed not only by 21 percent year-on-year growth in interest earned on government securities but also by 13 percent saving on interest expense on deposits.

A 25 percent growth in non-interest income primarily due to high sales of PIBs also improved the profitability of the banking sector. Profitability indicators viz ROA (return on assets) and ROE (return on equity) also went up from 2.2 percent and 24.3 percent to 2.5 percent and 25.8 percent, respectively. Profits were also broad-based as 32 banks posted profits, whereas three witnessed losses compared to six a year earlier. With the improvement in private sector lending, utilisation of capital improved as reflected in slight reduction in Capital Adequacy Ratio (CAR) to 17.3 percent, which continues to remain well above the local benchmark of 10.25 percent and international benchmark of 8.625 percent.

The asset base of the banking sector registered an increase of 4.6 percent while asset quality also improved considerably as NPLs declined by Rs 24 billion (3.9 percent) while NPLs-to-loans ratio was reduced by 111 basis points to reach 11.4 percent during the year. The solvency profile of the banking system remained strong due to healthy profitability and equity injections by few MCR non-compliant banks.

An overall improvement in the performance of the banking sector last year is indeed a very welcome development for the economy of the country as a sound banking system is more well placed to mobilise deposit resources and place them at the disposal of entrepreneurs for fostering economic development. Such a relationship is well illustrated by the global financial crisis of 2008 which had dampened the growth rate in developed economies and still continues to haunt the policy planners in most of the countries.

Economic planners in Pakistan can, of course, claim credit for keeping its banking system viable throughout the international financial crisis and improving its functioning in the more recent past. However, while it is difficult to predict the banking sector’s developments with certainty, yet it is not difficult to see that banks are now better able to maintain their profitability and soundness on account of sizable mark-up income on high level of risk-free investments, rise in fixed investments and lower interest expense on deposits without worrying about the size of NPLs or CAR.

However, while the ordinary performance indicators of the banking sector are quite strong, but, on a closer look, they do not appear to be as ideal or convincing as manifested on paper. The balance sheet of the banking sector would clearly show that major profitability of this sector owes it origin to higher level of investment in risk-free high yielding government securities. This was due to increasing government needs to finance its budget deficit through the commercial banks necessitated by the restriction of the IMF to borrow from the SBP.

The job of scheduled banks was also made easier by high doses of liquidity injected by the SBP into the vaults of the commercial banks. Banks had not to make extra efforts to mobilise deposits or search for credible borrowers in the private sector. As a result, process of financial intermediation seems to have suffered and the banks earned huge profits without sharing them properly with the depositors. It is good to have better ROA and ROE but banks should also pay enough attention to the mark-up paid to depositors for enhancing saving rate in the economy.

Source: Business Recorder