LAHORE, Nov 23: The banking sector failed to grow in size and advance credit (to private sector) in the 3rd quarter of FY01 at the same pace at which it had grown and advanced credit during the first half of the year.

This was pointed out in a report on the performance of the banking sector during the first three quarters of FY01 prepared by the Pakistan Credit Rating Agency.

The excerpts of the report were made available to the press here on Friday.

The report says most banks registered impressive growth in size during the first two quarters of FY01 mainly due to the expansion in their deposit base. But they failed to sustain the growth in the 3rd quarter in the wake of the growing economic uncertainty and instability that ensued after the September 11 terror attacks on the US soil.

It says the first half of FY01 witnessed some increase in credit demand with consequential increase in the advances (by the banks). This trend was, however, not maintained in the 3rd quarter. Moreover, it says, the banks have generally preferred to deploy their funds in such less risky avenues as the government securities and TFCs in view of a sluggish economy. This trend, the report says, is likely to persist in the last quarter of the year.

“While this would improve liquidity in the (banking) sector, the asset deployment pattern would weigh down profitability. Another factor that could lower profitability is the declining spreads,” the report says. “Although the impact may be limited by the year-end, it could accentuate in FY02.”

Similarly, the report says, the profitability of the banks on account of the import/export and foreign exchange related business is also likely to suffer in the last quarter of FY01 due to the reduced volume of international trade.

The report says the asset quality of the loan portfolio of most banks has remained almost unchanged during the first half of FY01 and this trend is likely to be maintained. However, the report says, uncertain local operating environment as well as the global economic conditions, especially the declining textile exports, could put some strain on the quality of the loan portfolio.