KARACHI, Jan 22: Despite improved profitability and risk management capabilities, political turmoil casts a dark shadow over banking industry of Pakistan, said the latest Asian Banker’s Asia Pacific Banking Industry Outlook Report.

“Pakistan’s turmoil will have serious political implications for the country’s 2008 economic outlook,” said the prestigious publication on banking and economy.

The report is the definitive annual analysis of what banks in 17 countries will face and the opportunities for financial industry in the coming year.

Former prime minister Benazir Bhutto’s assassination will lead to further uncertainty and investor nerve rattling, it said.

Rating agencies have already downgraded the country’s sovereign credit rating from positive to stable with further reviews scheduled pending the February elections outcome.

The banking industry witnessed the biggest boom in the financial history of the country as it tapped on opportunities to book record profits during last four years.The current financial year was difficult because of the imposition of emergency, reshuffling of judiciary, murder of Ms Bhutto and unexpectedly high commodity prices fuelling inflation. This extraordinary situation compelled the economic managers of the country to review the growth target from 7.2 per cent to 6.5 per cent.

However, the publication also sighted some positive and encouraging development in the financial sector of Pakistan. “Politics aside, growth in the financial services industry is strong. Sector profitability increased 15 per cent at the end of the third quarter in 2007, with larger banks faring better than their smaller peers,” the report said.

Bigger banks would also find a much easier time meeting new capital requirements, it added.

Consolidation among mid-tier players was expected in 2008, said the report.

The merger between Oman’s Bank Muscat and Saudi Pak Commercial Bank at the end of 2007 got the ball rolling, especially in the financing and post-construction phases of the new national trade corridor, which will link Pakistan’s major ports with its main industrial centers, it said. The report says the capital markets are likely to become increasingly liberalised in 2008. Improved brokerage and asset management capabilities will help banks chase fee income generating businesses.

Banks have also beefed up risk management measures, boding well for the year ahead, it said.

However, new accounting standards set to take effect at the end of 2007 may lead to a 10-15 per cent decline in profitability. Consumer lending margins for 2008 are expected to remain tight as banks scale back to avoid any increase in future defaults, the report concluded.