New areas of investment and instruments are adding up to banks' profitability in financial industry where a cut-throat competition is on.. With excess liquidity in the market, banks employ various strategies to increase their profitability and market share.
With the State Bank of Pakistan (SBP) providing more relaxation, banks are coming out with numerous products and instruments to avail full advantage of the economic and financial liberalization of the market.
Banks can now issue derivatives, hedging, swaps (currency including cross and interest rate swaps). However, the SBP would be issuing specific guidelines as a part of the grand financial package to banks in the foreseeable future.
Margin financing, reduction in L/C limit, export refinance rate and the minimum capital adequacy requirement have been conspicuous achievement of the SBP to bring up the financial market up to international standards.
With interest rate swaps mid derivatives already being offered to MNC's and local blue companies, banks are devising strategies to coin products for individual customers with high net worth to meet and to satiate the requirement of growing need of this segment.
Banks are competing very aggressively in the consumer-banking where lies tremendous opportunity for growth. Banks have introduced various products including personal loans, business finance, mortgage, auto loans, credit cards and insurance to increase profitability.
These assets products have registered a growth of 57 per cent over the last year. According to the SBP report from January-August 04, advances of Rs144.7 billion up to 3.53 times from Rs42.71 billion disbursed in the same period during 2003.
The key borrowers were private companies and consumers that are in the market for consumer goods. This includes auto, personal, electric items, house and insurance. Housing loan is moving rapidly although such money has still to enter the market with enormous potential of middle class segment.
Banks, including local and foreign, are targeting different segments in order to carve a niche for themselves. Consumers have benefited from these innovative products catering to middle class and upper income group, as the competition gets intense. However, some consumers have faced some impediments while availing their products so as to benefit themselves.
As a part of the holistic strategy and providing safety to the account holders and depositors, the SBP has directed all banks including the foreign banks, DFI's to enhance their minimum paid up capital to Rs2.00 billion from Rs 1.00 billion by the end of 2004.
The SBP also elaborated that banks need to increase their paid up capital by Rs500 million by December 2004 and the remaining amount by December 2005. An American bank (American Express) has already announced its exit strategy from the Pakistani market. However it will provide travel related services to its consumers with its huge presence in the travel service industry.
Mergers and acquisitions will be on the cards in the coming years with major banks going for consolidation strategy with few market players in the banking industry, This would provide a chance to the banks to increase their profitability and capital requirements so as to provide better service to its valued customers and compete in the market efficiently.
These reforms have been carried out to adopt international standards that are part of Basel Capital Accord-2. These steps have been significant in order to avoid history of bankrupt banks including the Mehran, the NDFC, the Platinum, the BEL, the Indus Bank, which sent ripple in the financial market of the country and wrong message to foreign investors of the uncertain health of the financial market.
The SBP has issued directives to the banks to comply by the regulations and raise the capital requirement. Banks not complying by the paid-up capital requirement of Rs2.00 billion by the end of Dec-2005 will be ruthlessly penalized and licenses would be cancelled and the SBP would not allow banks to carry out their financial services in the market.
Moreover, banks would not be allowed to conduct business in forex markets and collecting deposits in FE-25. However, banks would be allowed to operate in the money and inter-bank market to meet their day-to-day requirement.
The capital adequacy ratio for banks has also been implemented to bring the financial market in line with the international standards. This is a significant step taken by the SBP to improve both quality of investment decisions of the banks and improve the market values of investment portfolios of the banks. This would enhance the image of Pakistan's financial industry globally.
These controls and regulations will bring about quality in the investment portfolios of banks. In addition to this, market value of these investments in new instruments issued by the banks will carry strong message in the financial markets not only local but also in international markets as well. If these measures are implemented quickly, we will be witnessing changed financial environment in Pakistan.
Although, banks are reporting high profits with net interest income going up by 5.4 per cent, deposit rates have gone down with weighted average rate of return staying just at 1.07 per cent, depositors are getting negative rate of return. With inflation moving up to 8.73, the government is in a fix how to control this vicious cycle.
According to Shaukat Tarin, Chairman of the Union Bank, "Banks are fully cognizant of the current interest rate position. Depositors are getting negative rate of return.
From 14 per cent in mid-2001, Treasury Bills have touched 1.29 per cent in August -2003. It pushed down lending rates drastically. Banks had no option but to rationalize their deposit rates driven by market conditions."
The pro-business ambience has helped the thrust, which can be witnessed, with the SBP raising interest rates on T-Bills yield to 2.6163 %. This bolstered the abundant liquidity to move into the stock market.
Banks are having record Net Interest Income [NII] soaring to new highs. Banking industry analysts foresee the trend in NII to grow for 3-quarters. But, banks overall investment in stock market will be hampered resulting in reduced yield.
The central bank has imposed restriction on banks for investing in stocks to 20 per cent of their capital investment. Few banks saw their NII going down, while other saw their NII shooting up remarkably.
Deposits grew by Rs69 billion and investments rose by Rs73 billion. The borrowing season has started from September as sugar cane, cotton growers and ginners are in dire need for loans from the banks.
Textile spinners and sugar mills are now utilizing bank facilities of working capital finance to meet their needs to purchase commodities, Banks advances ate rising fast; banks average lending rates have declined to 5.37 per cent. However, signals are already their from the central bank interest rates would go up very soon by the end of October or November.
