The banking sector through CY13 faced tough challenges with external factors including law and order situation, political uncertainty, strikes causing closure of bank branches in distressed areas to name a few. State Bank of Pakistan require banks to have minimum capital of PKR 10 billion by December 2014, which will be a challenge for banks below the required threshold forcing another round of mergers and acquisitions. The CAR for the banking industry was 14.9 percent in CY13 as compared to 15.6 percent as on CY12. ADR for the banking industry was 48.6 percent in CY13 as compared to 52.6 percent as on December CY12. Despite facing the above challenges, banks have done well as doing business.
Banks in 2013 were not aggressive with their lending strategy. Large 5 banks preferred maintaining the current portfolio of retail and corporate customers and yield the maximum out of the current portfolio. Smaller banks faced a tougher challenge as asset quality including building a deposit base was the key. Smaller to mid-sized banks were seeking new relationships only on more strict lending criteria. Those who had a genuine need for financing either would find significant delays in the approval process or an approval based on stringent qualifying criteria at higher mark-up rate ranging between 14 to 18 percent on home loans, personal loans and automobile leasing.
In order to stimulate the economy and in the wake of declining inflation, SBP kept reducing the discount rate to encourage private sector credit, which otherwise was being invested in Treasury Bills earning a risk free rate of return. The current discount rate is stable at 10 percent, which have been increased once again in consecutive monetary policy decisions. This was to counter higher inflation. Despite reduction in rates, banks are not actively advertising their products and still find comfort in risk-free money market investments yielding a return of 9.8 percent approx. With respect to macro indicators, total assets of banks increased from PKR 9,711 billion in CY12 to PKR 10,537 billion in CY13. Deposits increased from PKR 7,294 billion in CY12 to PKR 8,318 billion as on CY13. Profit after tax for the banking sector reduced from PKR 178 billion in CY12 to 111 billion in CY13. Advances increased from PKR 3,804 billion in CY12 to PKR 4,047 billion in CY13.
Consumer loans vs corporate
Banks due to increasing trend of Non-Performing loans, are vigilant and would even consider declining a case which otherwise would be sound. There were numerous instances trough 2013 where such reasons for refusal become superficial. Consumer loans carry a higher spread compared to corporate loans and is generally driven through booking of clients to ensure that profitability through volumes. Due to prudent approach of the banking sector and focusing on asset quality banking NPLs reduced from PKR 615 billion in CY12 to PKR 585 billion in CY13.
Advances in corporate loans as mentioned above vary from bank to bank in terms of strategy. During 2013, large banks with an existing strong corporate portfolio were not seeking new relationships or marketing new clients. Walk in clients were usually preferred only if financials, projections and the business model showed any viable sense to the bankers. Small to mid-sized banks are still open to new client relationships to grow the banks, however, clients are only being considered who otherwise have good credit history with other banks. Advances through corporate loans increased from PKR 2,760 billion in CY12 to PKR 3,013 billion in CY13.
The bank wise consumer portfolio was recorded to PKR 250.26 billion in CY12 compared to PKR 273.16 billion in CY13. NPLs in the consumer sector reduced from PKR 43.71 billion in CY12 to PKR 37.19 billion in CY13 consequently reducing the infection ratio from 17.5 to 13.6 percent during the same period under review. With increased focus on the recovery of bad loans, banks have well established recovery units assisting banks. It is also said under present circumstances, banks would only offer consumer products to those who ideally do not need any financing options since they are self-sufficient with residual cash at their disposal.
Credit cards is a popular bank product, however, not much activity has taken place since 2012 in this line of business. According to SBP, advances against credit cards were PKR 23.15 billion in CY12 as compared to PKR 21.42 billion in CY13, infection ratio reducing from 21.5 percent to 10.5 percent during the same period under review. Credit cards carry the highest mark-up rate ranging between 34 to 42 percent.
Mortgage loan advances marginally increased from PKR 52.99 billion in CY12 to PKR 53.09 billion in CY13 with infection ratio increasing from 31.4 percent in CY12 to 28.5 percent in CY13. NPLs during the same period reduced from PKR 16.62 billion in CY12 to PKR 15.16 billion in CY13. It is estimated that Pakistan has a shortfall of 9 million housing units considering the population growth expected to increase year on year, mortgage loans will be demanded through the year if only banks are willing to lend at reduced rates through trend of declining interest rate to stimulate the economy.
Vehicle sales on rise
With the influx of cars and import of reconditioned cars, vehicle sales in Pakistan is on a rise, advances for automotive financing increased from PKR 45.34 billion in CY12 to PKR 55.82 billion in CY13, infection ratio reducing from 10.3 percent in CY12 to 6.6 percent in CY13. During 2014, banks need to focus on long term advances, focus more on export based industries, project based financing with focus on green field ventures, which is the need of the economy.
Furthermore, consumer financing needs to pick up. One area where Pakistan continues to lack is financial innovation and development of new products and services. We witnessed the K-Electric Sukuk and Engro Rupiya being the only two major developments in recent times. Bond market needs to develop where investors can take a long term view. One way to develop domestic markets is to look at more advance economies such as USA and Europe to follow best practices.