Arooj Zulfiqar

The State Bank of Pakistan (SBP) has released its Mid-Year Performance Review for the Banking Sector for the first half of 2024 (1HCY24), assessing the performance, soundness and key risks within the sector. The report also provides insights into the financial markets and presents the findings of the Systemic Risk Survey (SRS), which gathers independent expert opinions on current and emerging risks to financial stability. "The review reports a notable 11.5% expansion in the banking sector's balance sheet during 1HCY24, largely fuelled by increased investments in government securities as demand for bank credit from the government remained high. However, advances grew at a modest pace, mainly due to private sector retirements, though a slight recovery was seen in long-term financing for small and medium enterprises (SMEs). The decline in private sector advances was considerably less compared to the first half of 2023. Moreover, on the funding side, deposits grew by 11.7%, with saving and current deposits providing significant momentum.

However, the strong asset growth meant that additional funding was necessary, leading to continued reliance on borrowing by banks. Additionally, the report highlights that asset quality remained satisfactory, with only a slight increase in gross non-performing loans (NPLs). Importantly, the coverage for NPLs improved, reaching 105.3% by June 2024, aided by the implementation of IFRS-9 (International Financial Reporting Standard), which prompted banks to set aside provisions for performing loans. Despite these positive developments, overall earnings slowed down due to a decline in returns on advances and a contraction in net interest margins. Nonetheless, non-interest income — driven by fee income and trading gains on government securities — helped sustain profitability. Key performance indicators such as Return on Assets (RoAs) and Return on Equity (RoEs) saw declines, with RoA dropping to 1.2% from 1.5% in June 2023 and RoE falling to 20.4% from 26.0% in June 2023.

Despite these challenges, the solvency of the banking sector remained robust, as the Capital Adequacy Ratio (CAR) improved to 20.0%, well above the regulatory minimum. The review also noted that with gradual improvements in macroeconomic conditions, the domestic financial markets experienced reduced stress during the first half of 2024. According to the 14th wave of the Systemic Risk Survey conducted in July 2024, the top risks identified by participants included the ongoing energy crisis, volatility in commodity prices, and foreign exchange risk. However, respondents expressed confidence in the stability of the financial system and the regulators' oversight capabilities. In conclusion, the SBP's mid-year review underscores the resilience of Pakistan's banking sector amid challenging economic conditions, highlighting both positive growth trends and emerging risks that require close monitoring.

Credit: INP-WealthPk