The State Bank of Pakistan reported this banking sector achievement in its half-yearly review released on Monday.
According to the SBP, profitability indicators of the banking sector improved in H1CY23. The after-tax ROA rose to 1.5 percent (0.8 percent in H1CY22 and 1.0 percent in CY22) while ROE increased to 26.0 percent from 12.9 percent in the corresponding period of last year.
The major push to earnings came from higher net interest income, as the rising interest rates translated to higher earnings while noninterest income also augmented the bottom line during the reviewed period.
On the expenses side, provisioning was relatively higher in H1CY23 and operating expenses also recorded sharp growth due to branch expansion as well as elevated inflation.
The SBP has issued today the Mid-Year Performance Review (The Review) of the Banking Sector for 2023. The review covers the performance and soundness of Pakistan’s banking sector for the period January to June 2023 (H1CY23).
It also briefly covers the performance of financial markets as well as the results of the Systemic Risk Survey (which represents the views of independent experts about key potential risks to financial stability). The Review highlights that the macroeconomic environment continued to remain challenging during the first half of CY23. Domestic financial conditions tightened while the operating environment remained under stress due to elevated inflation and prolonged uncertainty.
Nonetheless, the banking sector’s balance sheet expanded by 14 percent during H1CY23. The expansion in the asset base was mainly driven by investments in government securities. Besides a strong inflow of deposits, banks’ reliance on borrowings remained noticeable during the period.
The Review also notes that advances of the banking sector recorded a muted growth during H1CY23; private sector advances contracted while the public sector availed additional financing mainly for commodity finance operations.
Encouragingly, asset quality indicators improved: net non-performing loans (NPLs) to loans ratio lowered to 0.45 percent at the end June-23 (0.68 percent in Jun-2022) as banks set aside the higher amount of provisioning from steady earnings.
Profitability indicators witnessed noticeable improvement as return on assets (ROA) improved to 1.5 percent in H1CY23 (1.0 percent for CY22).
The higher earnings in turn also helped to improve Capital Adequacy Ratio (CAR) of the banking sector to 17.8 percent by the end of June 2023 (17.0 percent at the end of December 2022).
With further improvement in solvency indicators, the ability of the banking sector to
withstand a set of severe hypothetical shocks further improved as indicated by the latest stress testing results.
Finally, the Review also covers the results of the 12th wave of SRS (July 2023), which suggests that the key potential risks faced by the financial system include foreign exchange risk, increasing domestic inflation, and political uncertainty. The respondents, however, expressed confidence in the stability of the financial system and ability of the regulators.