The State Bank of Pakistan (SBP) has issued its annual flagship publication, the Financial Stability Review (FSR) for CY2023, which shows a robust 27 percent growth in the asset base and steady performance of the financial sector.
Supported by a 20-year high growth in deposits, the assets base of the banking sector grew by 29.5 percent in CY2023.
The banking sector remained solvent with steady financial soundness indicators. Backed by healthy earnings, the capital adequacy ratio of the sector stood at 19.7 percent – well above the minimum required level of 11.5 percent.
The asset quality, as measured by non-performing loans (NPLs) to total loans ratio, for the Banking Sector, Development Finance Institutions (DFIs) and Microfinance banks (MFBs), remained broadly stable over CY2023.
Digital transactions continued their strong growth momentum and Raast transactions gained further traction in CY2023. SBP launched the Person to Merchant (P2M) service in Raast to facilitate digital payment acceptance for merchants and businesses.
The SBP review highlights that the macroeconomic environment remained challenging amid rising inflation, weak FX inflows and pressures on external accounts and local currency, and low business confidence, particularly in the first half of CY2023. However, the policy measures and regulatory interventions that were taken to address growing imbalances coupled with securing of nine-month Stand-by-Agreement (SBA) from IMF helped in improving the macroeconomic conditions in the second half of CY2023.
Inflation started falling, economic growth recovered, and the exchange rate stabilized towards the year’s end. Against this backdrop, the financial sector exhibited strong growth and performance and maintained its financial soundness and operational resilience. The asset base of the financial sector expanded by 27.0 percent in CY2023, which was mainly driven by the banking sector.
While volatility in financial markets remained high, the financial sector particularly the banking sector remained resilient and grew by 29.5 percent during the review period, notes the Review. The growth in assets was primarily driven by investments in government securities while private sector advances contracted in the backdrop of stressed macro-financial conditions.
The expansion of the banks’ balance sheet was mainly funded by deposits, which posted a 20-year high growth in a high-return environment.
The credit risk, nonetheless, did not present serious concern as the non-performing loans (NPLs) to loans ratio marginally increased to 7.6 percent by end December 2023 from 7.3 percent in December 2022, and the provisioning coverage further improved to 92.7 percent. Earnings of the banking sector remained healthy on the back of high rates and expansion in earning assets, supporting the solvency position.
Accordingly, the capital adequacy ratio (CAR) improved to 19.7 percent by end December 2023, remaining well above the minimum regulatory requirement. The Islamic banking institutions continued to maintain growth momentum in CY2023 as well. With strong earnings and comfortable asset quality indicators, the resilience of the Islamic banks further improved. However, the microfinance banks (MFBs) sector continued to experience stress in CY2023.
The Review reveals that the non-bank financial sector also showed healthy performance during CY2023. The asset base of Development Finance Institutions (DFIs) and Non-Bank Financial Institutions (NBFIs) observed strong expansion. Moreover, despite a slowdown in economic activity, the insurance sector witnessed growth in assets and gross premiums.
The overall position of the non-financial corporate sector was encouraging as solvency indicators and repayment capacity remained satisfactory. Especially, the large borrowers of the banking sector exhibited stable repayment capacity and there were no significant delinquencies during the year under review.
The FSR also highlights the operational resilience of Financial Market Infrastructures (FMIs) during CY2023. The e-banking transactions continued to drive growth in retail payments. Importantly, SBP moved to implement the third phase of Raast’s person-to-merchant (P2M) mode to facilitate digital payment acceptance for merchants and businesses.
Keeping in view the rapidly evolving dynamics of risks to financial stability, SBP continues to proactively strengthen its regulatory and supervisory regime. Going forward, overall risks to financial stability appear to be manageable due to the anticipated moderation of macroeconomic stress and strong buffers and risk management capabilities of the banking sector.
The latest stress test results suggest that the banking sector has adequate resilience to withstand the severe but plausible macro-financial shocks in the medium term. However, policy continuity on structural reforms remains critical for both sustained improvement in the country’s macroeconomic fundamentals and the resilience and performance of the financial sector.
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