The banking industry witnessed a reduction of Rs 9 billion in its profit during the nine months of 2016 mainly due to decade-old level of discount rates which squeezed their income driven from interest.
According to the State Bank of Pakistan (SBP), the banking industry profit has decreased to Rs 139 billion by end of September 2016 as compared to previous year in which it stood at Rs 148 billion.
Last year in 2015, the banking industry made its highest profit of Rs 199 billion. However, it seems difficult for the banking sector to touch this level again since the industry needs to make a profit of Rs 60 billion in the fourth quarter as against an average quarterly profit of Rs46 billion in 2016.
During the period, the policy rates remained unchanged at 5.75 percent for seven months and 6 percent for the other two months. However, these are the minimum limits of interest rates as banks charge KIBOR (currently 6) plus 2 percent against lending excluding services charges.
Not only the stagnant interest rates have affected the profitability of the banking industry, but non-interest avenues such as profits driven through government papers, T-Bills and PIBs, also dropped significantly.
Banks at large do invest major money of their depositors in government papers which are safer for fixed and easy returns. However, the profit rates of these papers also went down in line with policy rates.
Also, the rising cost of the banking sector due to operational expenses and the yearly super tax have eroded the profit of different sized banks by a slight margin.
The assets of banking sector grew in the first nine months of 2016 by 7 percent or Rs 991 billion. It currently stands at Rs 15,134 billion.
The industry investments, deposits and advances also saw growth in nine months but growth under these heads have not been sustainable and saw a decline in the third quarter of 2016.
Accordingly, investments of banking industry increased by Rs744 billion to stand at Rs 7,625 billion and advances increased by Rs 236 billion to stand at Rs 5,502 billion.