KARACHI: The banking sector’s after-tax profit increased by 28.7 per cent to Rs148 billion during January-September 2015 from Rs115bn in the corresponding period last year, said a quarterly report issued by the State Bank of Pakistan (SBP) on Wednesday.

“Examining the year-on-year growth, the profitability has improved on the back of high net mark-up income contributed not only by 25 per cent year-on-year growth in return on investments in government securities, but also 11pc decline in interest expense on deposits,” said the report.

The 39pc growth in non-interest income further improved the profitability of the banking sector, it said.

Bank-wise statistics revealed a broad-based contribution in banking profits, as 30 banks posted profits while only six banks registered losses in September as against nine in the same month last year.

The asset quality of the banking sector remained stable. During September, the level of nonperforming loans (NPLs) stayed at around Rs630 billion and NPLs-to-loans ratio marginally increased to 12.5pc from 12.4pc in June 2015.

Continuous cash recoveries have largely offset the shrinking volume of fresh NPLs. Moreover, the capital impairment (net NPLs-to-capital) ratio has also declined by 92 basis points to reach 10pc.

“All these indicators advocate limited risk to the future operating performance and equity of the banking system,” the report said.

The long-term advances in the public and private sector continued to grow. Both the small and medium enterprises (SMEs) and the corporate sector availed advances for fixed investments. As reported by banks, such financing was availed by transportation (commercial auto), communication (3G/4G licensing), power (coal power project), cement, and sugar sectors.

The deposit base of the banking sector fell 2.6pc to Rs9.7 trillion. This seasonal reduction is driven by 10.2pc (Rs336 billion) fall in non-remunerative current deposits (CD) which generally follow the trend in working capital advances.

On the contrary, saving deposits (SD) and fixed deposits (FD), which are remunerative, inched up by 2.8pc (Rs104bn) and 1.1pc (Rs24bn), respectively

There was a marginal rise of 2.1pc in the asset base of the banking sector during September. The Investments, made mostly in government securities, increased by 8.1pc while advances witnessed nominal seasonal decline of 0.4pc.

“The rise in asset base was funded by 38pc growth in borrowings (mainly from SBP) as deposits showed seasonal decline of 2.6pc,” said the report.

However, persistent low inflation — particularly commodity prices — may keep the financing need for the working capital subdued.

“Banks profitability may improve on account of sizeable mark-up income on high level of investments, likely increase in private sector advances, and lower interest expense on deposits due to prevailing interest rate environment,” said the report.

However, adjustments owing to provisions against bad debts by the year-end may limit the growth in profits.

Risks to the performance of banks largely emanate from their ability to generate low cost funds. “In order to finance the growth of both advances and investments, in the coming quarter, banks need to focus more on deposit mobilisation,” said the SBP report.

Published in Dawn, November 26th, 2015