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Pakistan 3rd in world in banking profitability: IMF

By Arshad Hussain

KARACHI: Pakistan’s banking sector is on the third position because of its higher profitability in the international banking markets, a report of the International Monetary Fund (IMF) said, which has attracted foreign investors, including multinational financial institutions.

On the IMF chart, Pakistan’s banking profitability is on third position after Colombia and Venezuela. On the IMF chart India is on 36th position and China is on 40th position.

Foreign banks’ interest in Pakistani banks is also on the rise, partly in response to the government’s plans to divest most of its shares in several domestic banks.

Mergers and acquisitions are on the rise, partly as a result of mandated increases in minimum required capital from Rs 1.5 billion at end-2004 to Rs three billion at end-2006, and further to Rs six billion in 2009.

Standard Chartered Bank has already completed a $487 million deal to buy a domestic bank, and ABN Amro and other foreign banks are also, reportedly, working to acquire local banks.

“Most financial soundness indicators (FSI) of the banking system have improved during December 2004 to June 2006” the IMF report said. “Pakistan’s banking system continued to strengthen since 2004.”

Pakistan’s banks maintained their ranking among the top half in a group of 44 emerging market countries in terms of indicators of capital adequacy and asset quality, but moved to near top of the ranking in terms of profitability from a position near the bottom in 2001.

The rise in earning and profitability indicators was particularly noteworthy, partly reflecting the high spread between deposit and lending rates (700 basis points).

Banks’ financial soundness indicators have improved, though this could be partly due to continued rapid credit growth. The expansion in bank credit to the private sector slowed down to 23 percent in 2005/06 from an average of 31 percent in the previous two years, but remained on the high side. The slowdown in credit during 2005-06 was broad based, affecting all types of borrowers, including households. The growing deposit base remained the primary source for credit expansion; banks’ foreign borrowing, other than for trade credit, remained negligible. Concentration of the banking system remains high.

As of March 2006, Pakistan’s five largest banks held 53 percent of the system’s assets and 51 percent of its loans, somewhat less than at end-2004.

Public banks still account for about 20 percent of total assets of the banking system (excluding the SBP). Monetary policy was tightened in July 2006; reserve requirements on bank deposits were raised for the first time since end-2000 and, two weeks later, the discount rate was increased to 9.5 percent.

Foreign investors’ interest in Pakistan increased significantly in 2005-06. The sale of the Karachi Electric Supply Company and the partial sale and transfer of management control of Pakistan Telecommunication Company (PTCL) generated large foreign exchange inflows and revitalized the privatization process. Foreign direct investment inflows, excluding privatization, rose by 70 percent. The successful March 2006 cash reserve requirements on demand deposits (CRR) were raised from five to seven percent, and the Statutory Liquidity Requirement on demand and time deposits (excluding CRR) was raised from 15 to 18 percent.

Placement of $800 million of 10-year and 30-year government bonds at very favourable terms was also indicative of strong foreign demand for Pakistani paper.

Progress on structural reforms was mixed. Reforms to broaden the income tax base and reduce rates continued, and the legal framework for investor protection was strengthened. However, reform of the power sector has stalled, and the schedule of higher regional electricity tariffs has not yet been implemented. Progress on trade liberalization has slowed down.

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