Banks have moved into higher gear despite the ongoing pandemic and shrinking GDP in 2019-20.

Not only did they survive the unlikely and even unpredictable external shocks, they seem to have benefitted from economic chaos. Net profits of 18 of the 20 banks listed on the stock exchange increased 56 per cent year-on-year in the latest quarter.

“Banks came into this crisis with healthy balance sheets and comfortable liquidity and capital ratios,” Pakistan Banks’ Association (PBA) Chairman Muhammad Aurangzeb told Dawn in a recent interview.

‘We expect deposit growth numbers will go down now’

“The central bank came out with all these schemes for loan deferments etc. The executing agencies were banks. I’m glad as an industry we stepped up,” says Mr Aurangzeb, who is also the CEO of Habib Bank Ltd, Pakistan’s biggest lender.

Another possible reason for their soaring profits is that the asset side of balance sheets — money that other businesses and individuals owe to the banks — stayed robust throughout the pandemic as well as the earlier period of economic contraction.

If a borrower’s use of the loan deferment facility can be used as a proxy, it can safely be said that

an overwhelming majority of the banks’ asset-side customers are insulated from pandemic-induced cash flow disruptions.

For example, the deferred amount is just 12pc of HBL’s Rs900 billion total domestic portfolio, according to its CEO. In other words, a large majority of HBL borrowers chose to keep making loan repayments amid the pandemic although they had the option of penalty-free deferment.

“I’m not sure whether our clients faced any liquidity problems,” Mr Aurangzeb said while referring to a survey that HBL conducted among its borrowers in August. Of the 360

corporate and commercial clients of HBL, about 60pc reported that they were already at pre-pandemic operating levels. Additional 20pc said they would get to the pre-coronavirus level by the end of this year.

Similarly, 70-75pc of HBL’s corporate and commercial borrowers said their sales, profitability and export orders were going to be the same or better than last year’s.

“I was in Lahore last week where I met clients from the textile sector. They told me they have orders booked until June of next year. They are operating at full capacity. We are a big beneficiary of what has happened in India and Bangladesh. Orders are now coming to Pakistan,” he said.

The situation isn’t any different for Islamic banks either. Speaking to Dawn, Meezan Bank CEO Irfan Siddiqui said very few customers opted to defer their loan repayments during the pandemic. Only 6pc of the financing portfolio of the country’s largest Islamic lender was rescheduled under the SBP-approved facility.

“We initially thought our textile clients would need rescheduling because of export order cancellations. But today they’re telling us they’ve run out of capacity to meet orders. Why? Because India and Bangladesh are not producing,” said Mr Siddiqui.

Net non-performing loans at the end of the April-June quarter — the latest period for which the central bank has published industry-wide data — stood at Rs156bn, down 6.4pc from a year ago.

On the liability side — money that banks owe to their depositors — the banking industry is doing equally if not exceptionally well. Total deposits at the end of October amounted to Rs16.6 trillion, up 19.8pc on an annual basis.

According to Next Capital CEO Najam Ali, various loan schemes announced by the central bank to help individuals and businesses stay afloat during the pandemic have led to a sharp jump in deposits. In addition, higher remittances in recent months are also reflected in inflated deposit levels.

Deposits fuel profitability because banks use them to mainly invest in government securities.

“Banks’ deposits have increased because people don’t want to invest their money in businesses. We are expecting that deposit growth numbers will come down now,” said the Meezan Bank CEO.

Published in Dawn, The Business and Finance Weekly, November 9th, 2020