Banks’ profitability is under stress, as predicted by the State Bank of Pakistan in its last quarter report for 2016 on the sector.

Senior executives of three of the top five major commercial banks told this writer that private sector credit flow remained weak in the first two and a half months of 2017. “No big change can take place in the remaining two weeks,” one of them said. He identified this factor as one of the reasons why banks “do not expect to earn much profit in this quarter.”

However, some other bankers, including heads of two mid-tier banks, relied on a slight increase in banks’ lending rates and end-quarter corporate and government borrowings to keep profits from falling too fast during the current quarter.

The banking industry, as a whole, has grown used to excessive lending to the government; that’s why a big increase in cumulative CAR is still far away

The true picture, however, will begin to emerge in May when banks will publish financial results for January-March.

In 2016, banks’ net mark-up income had declined 2.2pc showing the impact of a lax monetary policy and low banking spreads. But provisioning against bad loans had also fallen resulting in a slight increase in post-provisioning net mark-up income.

“During this quarter provisioning will remain flat showing no big change as most of the bad loans have already been regularised,” says a senior executive of state-run National Bank of Pakistan.

Between July and December 2016, credit to private sector had expanded by Rs375bn.

But from January onwards banks have seen more credit retirement than credit intake, bankers say citing net low credit demand from agriculture sector and high net credit retirement by industries and services businesses.

The government has so far (up to March 15) not made big borrowings from banks on net basis. Bankers say under these circumstances they can hardly see robust growth in their net interest income.

Despite a surge in private sector credit flows in 2016, the advances to deposit ratio (CAR) of banks inched up to 46.6pc, from 46.4pc in 2015. “So, the volumetric increase was still far less than required. Banks’ financial intermediation remained weak,” asserts a former SBP deputy governor.

However, individual banks which showed impressive progress in improving their CAR in 2016 claim the trend is unchanged during this quarter as well.

Meezan Bank’s financing to deposit ratio, for example, rose to 55pc from 44pc as its yearly financing shot up to Rs312bn in 2016 from Rs208bn in 2015. Among traditional banks, Bank Alfalah’s CAR increased to 62pc last year from less than 54pc in 2015.

During this quarter as well, such banks are extending bigger loans, not only to the private sector but also to public sector enterprises. They are the ones that will make big profits and will show improved CAR, senior bankers say.

But banking industry, as a whole, has grown used to excessive lending to the government (investing in government debt papers). That’s why a big increase in cumulative CAR, or a huge surge, is still far away.

Senior bankers say whereas they expect the closing of this quarter as just normal, lots of activity awaits them in the next quarter.

Net government borrowing from banks is sure to rise during the next quarter, bank treasurers say citing net heavy retirement in the first quarter as a sign.

The private sector, too, will go for big borrowing between April-June because, except for consumer, commerce and business loans, net private sector lending has remained depressed in the first quarter, according to senior bankers.

In 2016, net investment by banks (mostly in government debt papers) totalled Rs628bn.

“With the start of this year, fresh investment has remained weak and divestment in long-term debt papers like PIBs and Sukuk continues,” says the treasurer of a large local bank. “This is going to change, however, as the government is expected to make net heavy borrowing in April-June, after having retired lots of debt during this quarter (up to March 15).”

The SBP data shows that the federal government’s bank borrowing so far in this fiscal year (between July 1 and March 3) remained negative by Rs137bn. “Before the close of the fiscal year in June, we’re expecting large net government borrowings on the basis of yearly trends and in light of the government’s need to fill in fiscal gaps,” says the treasurer of another large local bank.

Bankers say that in addition to higher consumer, retail sector and SME lending, they are currently providing huge loans to companies in the energy, sugar and cement sector. In the next quarter demand from the fertiliser and agriculture sector is expected to remain strong.

Banks’ non-mark-up income from dealing in foreign exchange plunged last year to Rs14bn from about Rs23bn due to low volatility in the forex market. These factors are present during this quarter as well and earning on this account is expected to remain flat, senior bankers say.

But most bankers hope improved dividend incomes due to growth in corporate profitability —which is also reflected in increasing non-interest income.

The demand for non-lending banking services is going up as the domestic economy expands and corporate and business sector requires additional inland transfer of money, banking certificates, consultancy services, etc.

Published in Dawn, Business & Finance weekly, March 20th, 2017