AFTER showing quarterly growth of less than 1pc in the first three quarters of 2013, banks’ net loans finally recorded a handsome 7.9pc increase in the last quarter, chiefly due to expansion in private sector credit.

This, however, could not lift their year-end advances-to-deposit ratio (ADR) from 48.6pc — the lowest in history.

Bankers say the growing portfolio of advances would improve the industry’s ADR by the end of 2014, and pointed to a 50pc year-on-year rise in private sector credit in July-February 2013-14, and a more recent increase in lending to the government sector.

Banks’ low ADR levels had a negative impact on the industry’s profitability last year, with after-tax profit falling 6pc.

“Possibly higher ADR this year should boost up profitability,” says the chief financial officer of a local bank.

But it’s too early to say whether this can happen, because many bankers doubt that even a seven or 8pc growth in advances would be able to keep pace with the current 12pc growth in deposits, which will rise even faster on heavier forex inflows that are in the pipeline.

Senior bankers also say that last year, a fall in after-tax profit of heavyweight National Bank of Pakistan (NBP) resulted in the decline in the industry’s overall profits, offsetting the impact of growth in profits of some individual banks.

“Unlike last year, not some but almost all local private banks are making profits, and the NBP too looks set to improve its earnings. On balance, the banking sector will show a modest growth in profits,” says the head of a local bank.

In 2013, one thing that badly hit the profitability was that state-run banks resorted to heavier provisioning and swifter write-offs of bad loans, which exceeded Rs14 billion. This was a huge sum as percentage of their advances.

Against this, local private banks’ provisioning and direct write-offs of bad loans stood at Rs21 billion, but this made up a much smaller percentage of their stock of advances.

“Precisely speaking, this aspect is going to change in 2014. You won’t see much fresh write-offs in state-run banks, and that will be good for profitability,” says a member of the NBP’s board of directors. “We’ve asked the management to keep the loan portfolio from falling into the category where write-off becomes the only option.”

One big problem in the banking industry is that it is still dominated by five big local banks.

“Deposits of these banks [which make up no less than 62pc of the industry’s total] grow faster because of certain advantages,” says the head of operations of a mid-sized bank.

NBP attracts the bulk of government deposits, and all five large banks generally mobilise large deposits because of their extensive branch networks.

“The problem is that the big five banks are inherently overcautious in making new loans. As a result, their combined ADRs remain low. That’s true for profits as well.”

In 2013, the biggest change in banking operations had been a marked decline in banks’ net investment growth — down to 7.4pc from a staggering 29.8pc in 2012. This happened as yields on treasury bills and bonds fell during the year after monetary easing, and as the government also borrowed more from the SBP than from commercial banks.

Besides, banks also cut their investment in non-banking financial institutions, and lent more to private sector businesses.

Senior bankers say heavy participation of banks in the most recent auction of long-term bonds indicates a shifting approach.

“The government is trying to replace short-term banking debts with long-term debts. On the other hand, banks have finally realised that short-term seasonal lending to the private sector, combined with long-term locking of funds in government securities, isn’t a bad idea,” says the treasurer of a local bank.

Towards end-March, the government sold Pakistan Investment Bonds of more than Rs500 billion.

Bankers say in the foreseeable future, one important thing they will have to handle efficiently will be developing banking services to cater to the demands of the expanding domestic economy, and their documentation drive.

“Earnings from lending to, and investment in, the government sector or private businesses shall remain the core of our profitability. But as the economy expands and as mega projects in the public sector come up, we’ll have to offer more tailor-made banking services like project consultancy, third-party credit appraisal, inland transfer of money, lockers, property valuation etc,” says an executive of HBL.

Currently, banks make less than 30pc of their profits through non mark-up sources. “This percentage may remain unchanged for some years, but going forward, opportunities for increasing volumes of non mark-up income will rise, and smart bankers will have to seize them anyway.”

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