KARACHI: Profits of banks, excluding Habib Bank, declined two per cent in July-September on an annual basis, according to a research report.

The prevailing low interest rate environment hurt banks’ investments in government papers. Banks have been demanding an increase in the policy rate to enhance their profits. Up to 88pc of their investments are in government papers.

A number of research reports said banking profits were down due to the maturity of high-yielding Pakistan Investment Bonds (PIBs). PIBs do not offer a high yield anymore while the government has also limited the sale of these bonds for the last 18 months.

The government is borrowing from banks mostly by selling market treasury bills whose cut-off yield is slightly above the policy rate of 5.75pc.

The government’s policy prompted banks to diversify their lending. The private sector borrowed Rs748 billion in 2016-17.

However, the increased credit off-take by the private sector in the last fiscal year seems to have vanished now.

According to the latest data issued by the State Bank of Pakistan on Tuesday, the private sector’s credit off-take during the first four months of the current fiscal year is negative. This means the private sector is retiring past loans instead of making fresh borrowings.

Bankers believe the private sector has stopped borrowing as domestic investors are watching the changing political situation closely.

“If the finance minister is not in the country, and the entire ministry is unable to take decisions, how can the private sector take the risk to invest?” said Aamir Aziz, an exporter of finished products to Europe.

“Net interest income of the banking sector was up 5pc to Rs113bn due to 14pc growth in deposits while net interest expense increased 13pc to Rs93bn, which kept the profits of banks under pressure,” Topline Securities said in a report.

A senior banker said deposit growth will decline this year due to reduced remittances and increased investments in the US currency.

Recently, a top banker and the Exchange Companies Association of Pakistan general secretary said the public is buying the US currency to save it in either bank accounts or lockers.

The increasing gap in the dollar rates in open and banking markets attracts investors as they believe the value of the greenback may go up against the rupee.

Published in Dawn, November 8th, 2017