KARACHI: Banks’ profitability declined, return on assets fell and deposits grew just 0.1 per cent in Jan-March, according to the quarterly performance review of the banking sector released by the State Bank of Pakistan (SBP) on Tuesday.

The banking sector posted an overall profit after tax of Rs49 billion in the first quarter of 2017 against Rs52bn a year ago, reflecting negative earnings growth of 7.2pc.

Despite a historically low policy interest rate, banks still rely heavily on investing in government papers. But the returns on government papers have been slashed drastically that curtailed banking profits.

Low interest rates and a build-up of low-yielding stock of short-term government bonds have moderated the profitability of the banking sector, said the report. Accordingly, the return on assets reduced to 1.9pc in Jan-Mar against 2.3pc a year ago, it added.

The SBP report said that deposits, which constitute a key funding source for the banking sector, increased 0.1pc in the first quarter in contrast to 0.6pc contraction in the same quarter of 2016.

The report said the flow of funds has largely been in savings (Rs54bn) and current account-remunerative (Rs44bn) categories.

Gross advances grew 2.4pc during the first quarter against 0.78pc a year ago. Most of the growth originated from Islamic banking institutions that added Rs102bn of fresh loans in the quarter under review, the SBP said.

The major thrust in volume terms came from sugar, automobile/transportation, electronics and electrical appliances sectors, it added.

In terms of segments, corporate financing -- working capital, fixed investment and trade finance – showed relatively higher year-on-year growth in Jan-Mar. “Encouragingly, the private sector has availed the major share (78pc),” said the report.

The report said the index of large-scale manufacturing (LSM) witnessed the growth of 10.46pc in March (quarter-on-quarter growth of 15.04pc). Food, beverage and tobacco, automobiles, cement and iron and steel were major contributors.

The report said that all categories of consumer finance – credit cards, auto finance, mortgage finance and personal loans -- have seen positive growth. Auto financing has been on the rise for the last few years and its share in consumer financing has also been increasing. Higher growth in auto financing is due to the increased interest of banks in secured financing where margins are relatively higher. In the backdrop of declining interest rate environment, it is also attractive for consumers, the central bank said.

Similarly, mortgage financing portfolio is continuously growing since the third quarter of 2014. “Presently, the ‘search for yield” motive of Islamic banks and preference for Shariah-compliant mortgage products by customers have resulted in Islamic banks achieving the highest share in this sub-segment,” it said.

Mortgage financing provides immense opportunities to banks and it is imperative that they take measures for enhancing its share in the overall loan portfolio.

During the second half of 2016, the government shifted its reliance for budgetary borrowing from commercial banks to the central bank. This resulted in shrinking of treasury investments of the banking sector.

However, this trend reversed in Jan-Mar as the government borrowed Rs268.1bn from commercial banks while retiring Rs121.1bn to the SBP. Most of the growth (12pc) has been in treasury bills, which are short-term in nature. Resultantly, the investment-to-deposit ratio (IDR) inched up from 64pc to 68.2pc in a single quarter. Banks’ investments in other avenues (term finance certificates, bonds, debentures and other investments) also increased during the first quarter of 2017.

Published in Dawn, June 14th, 2017