KARACHI: The State Bank of Pakistan (SBP) has increased the required Capital Adequacy Ratio (CAR) for banks to 10.65 per cent, which will be implemented from the last day of the current calendar year, the third quarterly report of the central bank said.

The current CAR requirement of 10.25pc includes a capital conservation buffer (CCB) of 0.25pc. “The CCB will increase to 0.65pc by December 31, 2016, bringing the CAR requirement to 10.65pc,” said the SBP.

Pakistani banks have been sound in terms of CAR despite their poor performance on the economic front. Banks remained safe and profitable during the last couple of years mainly because of the government’s borrowing, which is both risk-free and high yielding for banks.

The SBP said the solvency profile of the banking system further strengthened in the third quarter of 2016 (July-September) as CAR improved to 16.8pc at the end of September from 16.1pc at the end June, well above the regulatory requirement of 10.25pc.

The rise in the eligible regulatory capital as well as the decline in total risk-weighted assets (RWAs) has helped improve the ratio. The eligible capital has increased 3.4pc and the downside movement in RWAs was due to the seasonal decline in advances.

The report said that given the strong solvency position, the banking system maintains a high level of capital, which makes it resilient towards any stress scenario.

“Against the required level of 3pc, the leverage ratio of the banking sector at 5.4pc as of end-September is at a comfortable level, but is marginally down from 5.5pc as of end-June,” said the report.

The central bank said the rising cost-to-income ratio has also affected banks’ overall profitability. “The cost-to-income ratio has increased to 52.2pc during Q3CY16 from 46.9pc during Q3CY15.”

“Some of this rising cost of the banking industry is connected with growth in human resources employed and investment in IT infrastructure,” said the report.

Bank-wise statistics reveal a broad-based contribution in banking profits as 29 banks posted profits while the count for loss-making banks increased to five in September from four at the end of the same month last year.

“Concentration of earnings has remained almost unchanged as the share of top five banks in total profits has touched 63.6pc in September 2016 as compared to 63.5pc in September 2015,” said the SBP report.

It said the impact of a declining interest rate reflected in the net interest margin (NIM), which reduced to 3.8pc at the end of September from 4.4pc at the end of September 2015.

Declining revenues on the lending activity, lower returns on a high stock of risk-free government securities and higher expense on repo borrowings have decelerated the banks’ net interest income (NII), leading to a decline in the NIM of the banking sector, said the report.

Similarly, the return on asset slipped to 2.1pc at the end of September from 2.6pc at the end of September 2015.

Published in Dawn, December 9th, 2016