KARACHI: The State Bank of Pakistan (SBP) said on Thursday that a number of factors, including increasing inflation and volatile commodity markets, are a threat to financial stability in the next six months.

“The second wave of SBP Systemic Risk Survey suggests that external sector pressures, fiscal sector vulnerabilities, growing domestic inflation and volatile commodity markets are the potential risks to financial stability over the coming six months,” stated SBP’s Half-Yearly Performance Review (HPR) of the Banking Sector for 1HCY18 issued on Thursday.

The report said the overall risk profile of the banking sector has improved in 1HCY18, mainly due to strengthening of capital adequacy and improving asset quality: Capital Adequacy Ratio inched up to 15.9 per cent and Non-Performing Loans ratio came down to 7.9pc — lowest since 1HCY08.

But the banks’ after-tax earnings declined by 14.7pc due to lower gain on sale of securities, one-off provisions and increase in administrative expenses. Meanwhile, asset growth of the sector has moderated to 4.7pc during the half year compared to 10.6pc growth in 1HCY17, said the report.

With healthy increase in advances and slowdown in deposit growth, Advances to Deposit ratio improved to 53.1pc in 1HCY18 from 48.7pc in 1HCY17 and 47pc in 1HCY16.

Over the last few years, advances’ growth has picked up, enhancing their share in the overall asset base. “The momentum continues during the reviewed half year with 12.3pc increase in gross advances, which contributed 93.3pc of the overall growth in assets during 1HCY18,” said the report.

The publication noted advances to the private sector have been the key contributor to the asset growth with sugar, energy and cement sectors along with individuals (ie sole proprietorships) being the major borrowers. Deposits observed slight deceleration but remained the mainstay of funds for the banks.

However, FCY (foreign currency) borrowings by banks rose in 1HCY18. There is an increase of 307.9pc (Rs51.3 billion) in ‘secured borrowings-others’ and 25.9pc (Rs103.7bn) in “unsecured borrowing-others”. The report said these mainly comprise of borrowings from foreign correspondent banks, loans from multilateral agencies and rediscounting of foreign documentary bills purchased by the banks. Nevertheless, borrowings in “others” categories constituted only 18pc of the total.

The deposits of the banking sector have remained the mainstay on the funding side but in the period under review, they saw a decelerated growth of 5.7pc (Rs744bn) compared to 6.6pc (Rs775.4bn) in same period last year.

A number of factors explain the lower inflow of deposits include; deceleration in money supply (M2) in the wake of rising current account deficit; the cost-cutting strategy of few banks to limit remunerative deposits; financial transaction taxes (over a specific threshold); and scaling back of operations by few banks in overseas market, said the report.

Published in Dawn, September 28th, 2018