Half-Yearly Performance Review of the Banking Sector, H1CY21

Mid-Year Performance Review of

the Banking Sector

(January - June 2021)

Financial Stability Department

State Bank of Pakistan

MYPR Team

Team Leaders
Muhammad Javaid Ismail	[e-mail]
Amer Hassan	[e-mail]
Team Members
Amjad Ali	[e-mail]
Aqeel Ahmed	[e-mail]
Faraz Karim	[e-mail]
Mariam Abbas	[e-mail]
Qaisar Mehmood	[e-mail]

Acknowledgements:

The team would like to thank various departments of SBP, especially Research Department (RD), Banking Supervision Departments (BSDs), Statistics and Data Warehouse Department (S&DWHD), Economic Policy Review Department (EPRD), Banking Policy and Regulations Department (BPRD) and Payment Systems Department (PSD) for data assistance, analysis and support.

Mid-Year Performance Review of the Banking Sector (H1CY21)

Contents

Summary	i
Part A: Performance of the Banking Sector	02
Assets	02
Advances	02
Investments	04
Deposits	05
Borrowings	06
Equity	06
Appendix A: Seasonality in Advances (Sector Wise - Private)	07
Part B: Soundness of the Banking Sector	08
Banking Sector Stability Map	08
Asset Quality	08
Liquidity	10
Profitability	10
Solvency	12
Part C: Financial Markets - Risk Assessment	14
Part D: Special Section: Performance of Microfinance Banks	18
Box 1: SBP's Systemic Risk Survey- 8th Wave	20
Part E: Banking Sector Outlook for H2CY21	23
Annexure (A - E)	24

Mid-Year Performance Review of the Banking Sector (H1CY21)| i

Summary1

Pakistan's economy has shown visible signs of recovery with 3.94 percent growth during FY21 due to timely adoption of pandemic containment measures and targeted policy interventions to support the economic activity in the country. The banking sector, which forms the major part of the financial sector, has exhibited resilience to COVID-19 pandemic shock due to strong capital and liquidity cushions. Earnings of the sector have remained steady during H1CY21, though profitability indicators showed some moderation due to low interest rate environment. Solvency of the banking sector remained robust with Capital Adequacy Ratio (CAR) at 18.3 percent - well above the regulatory minimum of 11.5 percent. The financial markets, which witnessed significant volatility in H1CY20, remained relatively calm during H1CY21, though exchange rate exhibited some volatility towards the end of reviewed period.

The banking sector recorded a healthy growth of 12.2 percent in H1CY21, which was mainly financed by 10.4 percent increase in deposits. While 18.7 percent increase in investments was the major driver of assets' growth, the 6.2 percent growth in advances also made a notable contribution to expansion in assets. The growth in advances has been driven by economic recovery as reflected in improvement in the LSM growth and a rise in business confidence index to a multi-year high in Jun-2021, while SBP's refinance schemes also supported the lending. The growth in advances was quite broad-based as most of the economic sectors availed additional financing. In particular, the corporates availed higher amount of fixed investment loans to finance their capital expenditures while the households increased borrowing in auto and mortgage categories. The improved performance of key economic sectors and an increase in the financing also boosted the asset quality indicators of the lending portfolio.

In terms of the 8th wave of the Systemic Risk Survey2 conducted in July 2021, the participants have reiterated their perceptions that the key risks for the financial system are mostly exogenous in nature. The respondents, however, expressed confidence in the ability of the regulators to ensure financial stability and opined that SBP's support measures had been quite effective in warding off the adverse implications of the pandemic. Though economic activity has gained momentum over the last year, it remains susceptible to the evolving pandemic situation, and changing geopolitical dynamics. In this backdrop, banks need to continuously monitor and manage their risks and meet the banking needs of the economy by prudently balancing the objectives of growth and financial soundness.

1. Analysis in this document is largely based on the unaudited numbers submitted by banks to SBP on quarterly basis. From the data convention perspective, H1CY and H2CY stand for the first and second half of a particular calendar year (CY), respectively. CY, generally, symbolizes the full calendar year, while QxCY, where x represents any of the four quarters of a CY.
2. The survey presents the views of independent participants from the financial sector, academia, and financial journalists about the present state and future prospect of financial stability in the country.

Mid-Year Performance Review of the Banking Sector (H1CY21) | 2

A. Performance of the Banking Sector

Introduction

Economic momentum further strengthened in H1CY21 as reflected by a healthy improvement in the index of Large Scale Manufacturing (LSM) and a rise in business confidence index to a multi-year high. Macro-financial conditions also remained supportive and financial markets performed normally. Similarly, banking sector's performance remained encouraging as the asset base expanded by 12.2 percent in H1CY21 as compared to 7.8 percent growth recorded in the corresponding period of previous year.

Chart 1: Assets and liabilities composition of the banking sector (flows)

(PKR Billion)					(PKR Billion)
		Advances		Investments		Others			Deposits		Borrowings		Others		Equity
3,300									3,500
2,800									3,000
2,300									2,500
1,800									2,000
1,300									1,500
800									1,000
								500
300
								-
(200)
	H1CY20	H1CY21					H1CY20		H1CY21

Source: SBP

The disaggregated analysis of assets reveals that growth in investments played a vital role (by contributing more than 70 percent) in asset flows during the reviewed period.3 Though advances contributed around 17 percent in total asset flows, yet the growth in advances was encouraging i.e. 6.2 percent growth in H1CY21 compared to 2.2 percent pandemic-plagued contraction in H1CY20. (Chart 1).

On the funding side, banks managed to mobilize around PKR 1.9 trillion worth of deposits during H1CY21 (10.4 percent growth in H1CY21 vs. 9.1 percent growth in H1CY20). In the wake of a notable increase in government's budgetary borrowing from the banking sector and rising private sector demand for financing, banks' reliance on borrowings significantly increased i.e. 32.6 percent growth in H1CY21 vs. 1.3 percent growth in H1CY20. Thus, the share of borrowings in total assets increased to 15.1 percent (12.5 percent a year

ago). Due to the continued improvement in deposit flows and investment of major proportion of these funds into government securities, Advances to Deposit Ratio (ADR) dropped to 43.1 percent by end Jun-2021 compared to 46.3 percent a year earlier.

Like conventional banks, Islamic Banking Institutions (IBIs) witnessed strong growth of

12.3 percent in the asset base during the first half of CY21, with expansion in assets primarily driven by financing. 4 Accordingly, the share of IBIs in the total assets of the banking sector rose to 17.0 percent by end Jun-2021 compared to 15.3 percent in Jun-20.

Advances

Disaggregated analysis of lending activity shows that the private sector advances (PSA) increased by

5.5 percent during H1CY21 as compared to a contraction of 2.4 percent in the comparable period of previous year.5 The uptick in advances was well above the average of (first half of) previous five years (Chart 2).

Chart 2: Private Sector Advances (Half-Yearly Flows)

(PKR Billion)				PSA		AVG
500			370		468
400									355
300
200	184
						128
100
0
-100
-200									(150)
	H1CY16	H1CY17	H1CY18	H1CY19	H1CY20	H1CY21

Source: SBP

There have been two prime drivers of this surge in PSA. First, economic recovery further paced-up in the wake of supportive economic conditions (e.g. low interest rates, resumption of economic

1. Investments (net) increased by 18.7 percent in H1CY21.
2. Around 45 percent rise in IBIs' assets flow was contributed by financing.

5 The contraction in Advances in previous year illustrates the impact of economic downturn driven by COVID-19.