KARACHI: Broad-based and robust growth has been witnessed in advances to private sector during the second quarter of this calendar year (CY17), supported by consistent monetary easing and positive prospects of real economy.

According to the Quarterly Performance Review (QPR) of the Banking Sector for the quarter ended 30th June, 2017, released by State Bank of Pakistan (SBP) on Friday, overall, banking sector has remained in sound and stable state. Banking sector has earned profit (before tax) of Rs 150.4 billion with strong Return on Assets (ROA) and Return on Equity (ROE) of 1.8 percent and 21.9 percent, respectively.

Outlook for third quarter of CY17 (3QCY17); the SBP is expecting that the upcoming quarter is likely to witness slack growth in banking assets amidst seasonal net retirements from the major sectors, ie, textile and sugar. However, the current momentum of growth in advances and low interest rate environment may provide some impetus to flow of financing to private sector.

Growth in investments, on the other hand, depends upon the government’s institutional choice and pattern of borrowing from the banking system, the report said and added that deposits are expected to grow in the coming quarter, but any deceleration in advances growth will have a bearing on deposit growth.

“Profitability of the banking sector is expected to remain modest under low interest rate environment. Rising interest earning from growing volume of advances is expected to keep the drop in profitability under check,” it added.

On the capital adequacy front, given high Capital Adequacy Ratio (CAR), the banking sector is expected to remain sound and resilient in the next quarter. Any slowdown in advances growth will push the credit risk weighted assets downwards which may improve the CAR. However, rising trend in market risk weighted assets, if continues, may slightly slow down the upward movement in CAR, the SBP reported.

As highlighted by the report, the key development of the quarter is broad based and robust growth in advances to private sector which is also the prime reason behind 8.3 percent growth in the asset base.

The gross advances (domestic) to private sector have increased by 6.1 percent in comparison to 4.0 percent growth recorded in the corresponding period of last year. Besides seasonal financing need for commodity procurement, the financing demand has come from various sectors including chemical/pharmaceutical, production and transmission of energy, agribusiness, food and allied products, construction, transport, storage, etc.

Moreover, the continued growth in auto financing has pushed consumer financing up. The surge in advances may be attributed to enabling macroeconomic conditions such as monetary easing which has lowered the cost of borrowing and positive feedback from the real economy – particularly the consistent activity in large scale manufacturing.

The asset quality of the banking sector has improved further as Gross Non Performing Loans (NPLs) ratio has moved down to 9.3 percent as of end June 2017 from 9.9 percent as of end March 2017 (and 11.1 percent as of end June, 2016).

Investments have increased by 5.6 percent and Government papers remain the prime attraction. There is a change in investment pattern, though, as banks have mostly invested in short-term MTBs. Continuous rise in investment in Government securities has further strengthened the already comfortable liquidity position of the banking system.

The deposit base of the banking sector has moved up by 6.5 percent, slightly lesser than 6.8 percent in Q2CY16. The deceleration in deposit growth is mainly caused by dip in financial institutions’ deposit – which are transitory in nature. On the other hand, the customer deposits – relatively more stable funding source and comprising 96.5 percent share in overall deposit base – has surged by 7.7 percent; higher than 6.0 percent during the corresponding period last year.

Banking sector has earned profit (before tax) of PKR 150.4 billion with strong ROA of 1.8 percent and ROE of 21.9 percent. Encouragingly, interest earnings (year-to-date) have increased by 1.0 percent in Q2CY17 (against 8.6 percent decline during the same period last year) on account of income on advances.

Capital Adequacy Ratio of the banking sector at 15.6 percent is well above the minimum required level of 10.65 percent and advocates that banks have enough buffers to meet additional financing of the market.