KARACHI: Banking sector maintained its growth trajectory during the first half of 2019 on account of decent increase in deposits thanks to the amnesty scheme, according to the State Bank of Pakistan’s (SBP) latest report on Monday.

The SBP in its latest ‘Mid-Year Performance Review of the Banking Sector, January-June 2019’ publication reveals that deposits accelerated to 6.8pc during the reviewed period, up from 5.7pc in 1HCY18.

“A good portion of the inflows came during the month of June 2019, among others, under the government amnesty scheme,” noted the document.

“While macro stabilisation measures have started to show favourable results, particularly on external front, the economic activity is expected to remain muted,” it continued.

The report said non-performing loans sharply increased by Rs88.3 billion during the first half. Meanwhile infection ratio (non-performing loans — NPLs — to total gross loans) jumped to 8.8pc by June end, as against 8pc. As a result, NPLs stood at Rs768bn by end of the reviewed period.

In addition, owing to perceived weakening in repayment capacity of firms and recent pickup in NPLs, ‘banks may remain risk averse’ in their lending behaviour, said the report.

Earnings are likely to remain decent in the half year ahead, due to higher interest earning and expected pickup in banks’ investment in government securities, it noted.

However, rise in credit risk due to deterioration in asset quality, in the face of tighter macro financial conditions, may put earnings under some stress, it added.

“Banks need to put in place capital enhancement plans in light of the regulatory Capital Adequacy Ratio (CAR) benchmark increasing to 12.5pc by Dec 31,” said the report.

Private sector financing demand is likely to remain subdued during the second half while SBP is expected to increase government reliance on banks for meeting its financing needs.

The banks’ expected investment increase in government securities will enhance their funding requirements whereas deposits will remain the key source of funding. The rise in Minimum Savings Rate (MSR) is likely to induce depositors to opt for more savings and fixed deposits, while banks may face challenges in mobilising low-cost deposits, the publication says.

Among advances, the flow of private sector advances observed a broad-based slowdown owing to subdued economic activity and continued monetary tightening, while that of public sector declined due to lower utilisation of commodity financing and retirement of energy sector’s.

The document notes the asset quality saw some deterioration, with increased volume and share of NPLs, particularly in agriculture and energy sectors.

While investments observed a marginal rise, banks renewed their interest in Pakistan Investment Bonds due to favourable interest rate dynamics. “The overall risk profile of the sector remained satisfactory.”

Earnings of the banking sector improved owing to increase in net interest income, which improved all the profitability indicators.

The resilience of banking remained robust as CAR at 16.1pc was well above the local and international minimum benchmarks of 11.9pc and 10.5pc, respectively.

Published in Dawn, October 22nd, 2019