KARACHI, Dec 29: Financial institutions registered the highest profitability during calendar year 2005, as return on assets (both before and after tax) was the best during the last 16 years, said the Financial Sector Assessment 2005 issued by the State Bank.
The detail assessment said that while Non-Performing Loans (NPLs) to total assets ratio declined from 27.8 per cent in CY2000 to 8.5 per cent in CY2005, earning asset to total asset ratio increased from 75.4 per cent to 82.2 per cent during the same period.
“As a result, the profitability (return on assets after tax) of the financial institutions, which was negative during 2000 and 2001, recorded a continuous uptrend in 2000 onwards, reaching 1.8 per cent in 2005 – significantly higher than 1.25 per cent internationally acceptable benchmark,” said the SBP.
The assessment also reveals that the ownership structure of the financial sector underwent a rapid shift from public to private sector, as the share of the latter in overall assets of the financial system jumped from 33.8 per cent in 2000 to 61.1 per cent in 2005.
Since the nationalisation in 1970s, it was the first time in 2004 when private sector acquired the majority share at 56.6 per cent in the overall assets of financial sector. The share of private sector consolidated further and reached 61.1 per cent in 2005.
This was primarily achieved through (a) privatisation of state-owned financial institutions, including two big-commercial banks and all the state-owned closed-end mutual funds; (b) relatively faster growth in the assets of existing private-owned institutions; and (c) net outflows in Central Directorate for National Savings (CDNS) instruments.
“The overall size of the financial sector, measured by financial assets, increased at a robust average annual growth rate of 14.8 per cent reaching Rs5.2 trillion in 2005 from Rs2.8 trillion in 2000,” said the assessment report.
The assessment report further revealed that as per cent of GDP, size of the financial sector improved from 73.2 per cent in 2000 to 79.0 per cent in 2005.
However, the financial sector assets to GDP ratio, after showing the highest level of 81.8 per cent in 2003, declined in 2004 and 2005. This fall in relative size of the financial sector was primarily because of net outflows in the CDNS instruments during 2004 and 2005.
Excluding CDNS, financial sector assets to GDP ratio showed a continuous uptrend during the period under review.
In terms of institutional composition, the dominance of scheduled banks in the financial sector further strengthened; as their share increased from 63.7 per cent in CY01 to 70.4 per cent at the end of CY05.
Besides rapid growth in profitability and business expansion, transfer of assets from Non-bank Finance Institutions (NBFIs) on account of mergers and acquisitions, has also contributed in raising the share of the banking sector.
The SBP assessment said that the net outflows in National Savings Schemes (NSS) instruments in CY04 and CY05 led to decline in the share of the CDNS.
“Among the different financial institutions, CDNS was the only exception that lost it share in the financial sector from CY03 onwards,” it said.
