Banking Sector Records Impressive 125% Profit Surge Amid Economic Challenges, Reports SBP

Banking Sector Records Impressive 125% Profit Surge Amid Economic Challenges, Reports SBP

Karachi, September 18, 2023 – Despite facing economic challenges, Pakistan’s banking sector has witnessed a remarkable surge in profit by 125 percent during the first half of fiscal year 2023, according to a report released by the State Bank of Pakistan (SBP) on Monday.

During the period of January to July in the current calendar year, the profit after tax of banking companies soared to Rs 284.50 billion, compared to Rs 126.20 billion in the corresponding period of the previous year.

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The SBP’s report highlights that the first half of calendar year 2023 experienced a further buildup in macroeconomic stress, which had already started to emerge in 2022. Notably, the Large Scale Manufacturing (LSM) Index experienced a sharp decline, and the Business Confidence Index (BCI) remained pessimistic.

In this challenging economic backdrop, the banking sector managed to expand its asset base by 14.0 percent during the review period. However, this expansion was largely driven by investments, as advances recorded muted growth. Private sector advances contracted, while the public sector availed additional financing, primarily for commodity finance operations. On the funding side, deposits mobilization witnessed a revival during H1CY23, but banks continued to rely on borrowings due to the stronger expansion in their asset base.

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Despite these challenges, asset quality indicators improved due to better provision coverage for loan losses, resulting in a contained increase in gross non-performing loans (NPLs) during H1CY23. The profitability indicators witnessed a significant improvement, mainly driven by the growth in net interest income, as the increase in interest rates gradually translated into higher earnings from interest-earning assets during the review period.

The higher earnings also facilitated enhanced loan loss provisioning and improved the Capital Adequacy Ratio (CAR) of the banking sector to 17.8 percent by the end of June 2023, compared to 17.0 percent in December 2022. These improvements in solvency indicators indicate that the banking sector is resilient enough to withstand severe shocks to key risk factors and economic conditions, as demonstrated in various stress-testing scenarios.

In terms of financial market performance, H1CY23 witnessed relatively lower volatility overall, except in the foreign exchange market, which showed increased stress despite improvements in current account balances. As inflationary pressures built up and policy rates increased, financial conditions tightened further, and the equity market observed a subdued performance during the period under review.

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The SBP noted that the major driver behind the surge in earnings was higher net interest income, with rising interest rates leading to increased earnings. Non-interest income also contributed to the sector’s robust bottom-line performance during this period.

On the expenses side, provisioning was relatively higher in H1CY23, and operating expenses recorded significant growth, driven by branch expansion and elevated inflation. Nonetheless, the after-tax profit more than doubled, reaching Rs 284.5 billion in H1CY23 compared to Rs 126.2 billion in H1CY22.

A detailed analysis further revealed that net interest income (NII) grew by 67.3 percent in H1CY23, compared to a 23.6 percent increase in the same period last year. This growth in NII can be attributed to multiple increases in the policy rate during the review period, as well as steady growth in earning assets. However, interest expenses also more than doubled to Rs 1,882.1 billion, partially offsetting the substantial growth in interest income, as funding costs repriced earlier than earning assets.

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In summary, Pakistan’s banking sector has demonstrated resilience and remarkable profitability despite ongoing economic challenges, with net interest income and sound asset quality playing key roles in driving these impressive financial results.

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