Despite the slowdown of the economy coupled with reduced interest rates, most banks foresaw a limited impact on profitability in the first half of 2020 but a stronger impact could be witnessed for the remaining year in case the situation prolongs.
This was concluded in a survey carried out by the State Bank of Pakistan on views about the risk arising for the banking industry in the virus hit environment.
The survey captured the respondents’ general views about the implications of the outbreak of COVID-19 for the banking sector and the economy, as well as possible preventive measures to safeguard against adverse financial implications.
The detailed responses involved information about the banking sector exposure, implications for profitability, and their views about key economic sectors most likely to be affected by the spread of Covid-19.
Assuming the worst-case scenario, respondents were asked about their Business Continuity Plans (BCP) including the availability of alternative delivery channels. The survey results showed that:
- Most respondents were concerned about the adverse implications of the coronavirus outbreak for the economy and the banking sector of Pakistan.
- The key economic sectors most likely to be affected by the pandemic include electronics, textiles, and travel-tourism & transport.
- The majority of the banks have put in place effective plans and contingencies to ensure uninterrupted provision of financial services, said the Financial Stability Review (FSR) of State Bank of Pakistan (SBP) for 2019.
Stress tests conducted in the FSR suggests that the banking sector should remain resilient to the COVID-19 shock under most reasonable scenarios, reflecting strong capital and liquidity positions of a majority of banks.
Overall, it is encouraging that the strong capital buffers built over the years have significantly enhanced the resilience of Pakistan’s banking sector.
Going forward, the pace and extent of global and domestic economic revival are inextricably tied to the trajectory of COVID-19.
Banks Profit Record Growth in 2019
The profitability of the banking sector rebounded with the rise in after-tax profit by 14.34 percent in 2019 to Rs. 170 billion after experiencing moderation in the last few years.
The key thrust came from interest earnings, both on advances and investments. The interest rate impact dominated the volume of earning. The non-interest expenses of the banking sector increased by 16.10 percent in 2019 compared to 11.00 percent in 2018.
The profitability increased during the year despite higher taxes on banks’ profits.
Moreover, the income generated from investing in additional government securities attracted another 2.5 percent tax. As a result, the tax contributions of the banks increased by 43 percent over the year, while tax as a percentage of profit before tax increased by 5.6 percent to 44 percent over the year.
In terms of performance last year, the FSR suggests that after some strains due to sluggish growth during the early part of the year, financial sector stability started to improve towards the end of 2019.
The consolidated asset base of the financial sector expanded by 11.74 percent during 2019, higher than the 7.46 percent growth recorded in the previous year. The major contribution to this growth came from the banking sector, the largest segment of the financial sector.
Financial markets—after remaining volatile in the first half of CY19—observed stability in the second half as operations in the foreign exchange market smoothed after the transition to a market-based exchange rate system. The equity market also showed a significant recovery towards the end of CY19, after having been quite volatile earlier in the year.
A key highlight of the FSR is that the banking sector has remained resilient, with robust solvency backed by healthy profitability. The Capital Adequacy Ratio (CAR) improved to 17 percent, well above global and domestic minimum regulatory requirements of 10.5 percent and 11.5 percent, respectively.