KARACHI, Dec 17: The State Bank on Monday issued first ‘financial stability review’ carrying detailed information, including concerns over rising non-performing loans (NPLs), and huge write-offs made in 2006.

The SBP appreciated the satisfactory performance of the banking sector during the last three years and pinned hope for further improvement sighting potential for the growth of the sector.

“Changes in the level of NPLs indicate that the banking sector has written-off NPLs worth Rs42.5 billion during CY06, compared to Rs17.1 billion during CY05,” said the SBP report.

While the amount of written-off loans along with the recovered amount of NPLs helped banks reduce the overall level of NPLs, a significant inflow of fresh NPLs is a cause for concern, said the SBP.

“These concerns are further augmented by the NPLs data for the first half of CY07, which indicates a fresh inflow of Rs49 billion of NPLs in first six months of the year 2007, the highest level since 2004,” said the report.

Despite significant deceleration in recent years, the NPLs-to-loans ratio is still high at 19.3 per cent in H1-CY07.

The report said the private banks were playing a leading role in the banking sector. It said a prominent development in recent years is the shift in the ownership structure of the banking sector.

As a result, local private banks have emerged as leading player with an asset share of 72.9 per cent in the banking system.

In terms of assets, both public sector banks and foreign banks are losing their market share to local private banks.

The State Bank was concerned that the banking industry was still dominated by few large banks that have the major shares.

“Declining, but still high, concentration in the banking sector, suggests that the stability of the industry primarily depends on few large banks with a dominant share of asset and deposits,” said the SBP report.

Specifically, 10 largest banks hold 74.2pc of the total banking sector assets and 77.8 per cent of total deposits of the banking sector as of end June 2007, it added.

The report also indicated that foreign banks and foreign investment in the banking sector enlarged during the three years.

The declining asset share of foreign banks should not be viewed as a negative development, said the SBP.

“In fact, foreign direct investment in the banking sector is on the rise with foreign shareholding at 43.4 per cent as of end CY06,” it added.

Additionally, most of the foreign banks operating previously as branches of their parent offices are now operating as locally incorporated subsidiaries.

In terms of financial soundness indicators, CY06 was the third consecutive year of strong financial performance of the banking industry.

A 17 per cent year-on-year increase in assets pushed the overall size of the banking sector to Rs4.3 trillion by end CY06 (which further increased to Rs5.0 trillion by H1-CY07).

The SBP reported that the potential credit risk has also increased in recent years as advances of the banking sector have more than doubled in the past three years, including an increase of 20 per cent during CY06.

“As a consequence, the share of loans in the overall assets of the banking sector reached 55.8 per cent in CY06, the highest level during the last 10 years, before declining to 50.5 per cent during H1-CY07,” it said.

The overall size of Pakistan’s financial sector, which has grown rapidly, particularly in the last few years in response to the mounting financing needs of the country, has increased by almost Rs900 billion (32 per cent growth over December 2005) to reach Rs6.9 trillion up to June, 2007.