Market Risk Likely To Rise: SBP Observes ‘Slight’ Slow Down In Banks’ Profit Growth

Saturday, September 13, 2008 at 11:43 am

KARACHI:The State Bank of Pakistan has said that the market risk has been contained against any major solvency concerns for the banking system. As inflationary expectations and trade imbalances continue to put pressure on the rupee and interest rate, market risk is likely to rise in future.

“In the first quarter of the current calendar year 2008, the profitability and assets growth of the banking system also showed the signs of slight slowdown after achieving vibrant growth over last four years,” the SBP said in its ‘Quarterly Performance Review’ of the Banking System for March 2008.

However, the results of the stress tests signified that the system maintained its strong resilience against unusual but plausible shocks in major risk factors, it said.

According to the review, the banking system posted a before-tax profit of Rs 28.1 billion in the first quarter ended March 2008, compared with Rs 33.1 billion for the corresponding first quarter of 2007.

It said that growth in total assets of the system was also slower than corresponding quarters of previous years, as in first quarter–March 2008–growth stood at 1.3 percent compared with 4.0 percent for March 2007 and 2.3 percent for March 2006.

The central bank said that overall solvency of the banking system stayed above satisfactory levels and firm. The market risk, however, remained quite contained to pose any major solvency concerns. During the first quarter of current calendar year 2008, market risk, emanating mainly from interest rate risk, increased slightly.

Interest rates shifted upwards, following increase in SBP policy discount rate by 50 basis points to 10.5 percent in the first week of February, 2008, the SBP said in the report. On exchange rate risk side, rupee-dollar exchange rate, which remained stable during last year, depreciated to the level of Rs 70 to a dollar by May 2007 in the interbank market.

The statistics of the quarter under review and the latest available information on domestic operations of the banking system suggest that, after a vibrant growth over the last four years, the banking system had started to show signs of stabilisation. Further, equity exposure of the banking system decreased to Rs 42.76 billion in March 2008 from Rs 59.39 billion in CY07, with LPBs continuing to hold the major portion.

The report said that the slack-down in economic activities and allied macroeconomic indicators were affecting the loan repayment capacity of the borrowers. Therefore, non-performing loans (NPLs) of the banking system, which had been gradually increasing for the last two years, further inched up for the period under review.

It said that a recent trend of gradual rise in NPLs presented caveat for the system, which so far had been able to cover the additional infections through its strong earnings.

“Moreover, the tight monetary policy started to reflect its signs in squeezing liquidity indicators and the surplus liquidity, within the banking system, further contracted,” the SBP said in the report. It added that nonetheless, banking system very effectively managed its asset/liability profile without facing any serious liquidity concerns.

However, according to the report, strong demand for bank credit from corporate sector helped advances of the banking system to grow at fast pace of 4.3 percent. During the first quarter, SMEs and consumers reduced their borrowings from the banking system.

Unaccompanied by concomitant growth in the deposits (0.8 percent), growth in advances caused banks to reduce their investments by 6.8 percent. Moreover, the contraction in spread between returns on fresh advances and returns on fresh deposits and the higher base effect also dampened the return ratios.

Market Risk Likely To Rise: SBP Observes ‘Slight’ Slow Down In Banks’ Profit Growth

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