Most commercial banks recorded impressive profitability growth in the first half of 2020, posting healthy 52% year-on-year profit growth across the banking industry.
According to the mid-year performance review of the State Bank of Pakistan (SBP), the profitability of the banking sector increased significantly with after-tax profits of Rs. 125.8 billion for the H1CY20, a remarkable increase of 52% (Rs. 43 billion) compared to the same period last year.
This is the highest income level on record in one half since the first half of 2004, says SBP. The favourable interest rate environment favour an increase in the net interest margin (INI) and higher profits from the sale of government securities.
The review suggests that, despite the high economic strains caused by the COVID-19 pandemic, banking sector assets experienced a decent 7.8% expansion in the first half of 2020. A sharp increase in investment, funded by an increase deposits, explains this growth.
In contrast, Advances saw a slight decrease due to the economic slowdown due to the interruption of business activities after the outbreak. However, without the SBP support measure, the current disparity in Advances could have been much larger.
The NPL ratio fell from 8.6% at the end of December 2019 to 9.7% at the end of June 2020. However, the ratio of net non-performing loans to loans, which is a measure of credit risk, increased slightly from 1.7%. % to 1.9%.
The performance of the banking sector at H2CY20 depends on the trajectory of COVID-19, the economic recovery and a changing political environment. While financial conditions in the form of interest rates and asset prices remain favourable, the recent upward trend in viral infections presents a difficult scenario. Globally, the situation also remains uncertain, especially in major trading economies such as the United States, the European Union and the Middle East.
In this context, the prospects for progress in the private sector suggest a mixed picture. The Large Scale Manufacturing Index (LSM) rose 3.66% (year on year) in July-August 2020. A seasonal rebound during H2CY20 may also boost demand.
However, downside risks persist due to the possibility of another wave of illnesses that could trigger the reimposition of strict lockdowns. Likewise, the looming uncertainty over the recovery of external markets could contain demand for export-oriented sectors such as textiles.
In addition to demand for credit, if downside risks crystallize, borrowers’ repayment capacity could weaken and lead to a further increase in bad debts.
Banking investments should remain solid during the second half of the year 20. The uncertainties linked to the pandemic will take time to disappear. Therefore, the behaviour of risk averse banks may keep loan flows moderate.
Therefore, government securities may remain a preferable alternative. The profitability of the banking sector could be under strain over the next half-year, mainly due to the prevailing low interest rate environment.
However, the gains from appreciation of government securities, if realized, may to some extent offset the impact, and the rise in zero risk-weighted government securities will likely strengthen the fund adequacy ratio. own (RCA) of the banking sector. .
Like the rest of the world, Pakistan is also experiencing the second wave of COVID-19. Therefore, banks should closely monitor associated developments and assess the implications of how this further escalation of the pandemic could affect the quality and creditworthiness of their assets.