The State Bank of Pakistan (SBP) has released its Mid-Year Performance Review of the Banking Sector for the first half of 2024 (H1CY24), indicating a positive shift in Pakistan’s macroeconomic environment. The SBP highlighted the country’s recent upgrade in its sovereign credit rating, noting that the timely implementation of a new International Monetary Fund (IMF) program will be instrumental in reviving financial inflows.
According to the review, the banking sector demonstrated satisfactory performance during H1CY24, supported by a recovery in economic activity, easing inflationary pressures, and a narrowing current account deficit. These improvements allowed the SBP to reduce the policy rate by 450 basis points, with the most significant cut being 200 basis points in recent months, bringing the rate to 17.5%.
However, the banking sector’s outlook for the second half of 2024 will depend on the evolving economic conditions and policy adjustments. The SBP predicts that stable exchange rates and improving financial conditions will support the sector’s steady performance. The expansion of balance sheets is likely to be driven by increased investments, largely due to the government’s borrowing needs. Additionally, lending activities are expected to pick up in the last quarter of 2024, aided by seasonal factors and a recovery in economic activity.
The SBP projects that the sector’s earnings will remain stable, with a rise in earning assets, supporting solvency positions. Continued economic recovery is expected to boost both credit demand and repayment capacities, thereby enhancing banks’ credit risk profiles. The review, however, notes that the banking sector’s exposure to government borrowing will remain high in H2CY24, urging fiscal authorities to reduce dependence on the sector.
Despite potential challenges, the SBP maintains that the banking sector is resilient, with adequate capital buffers to withstand adverse economic shocks. Stress tests conducted on the sector also show that the large systemically important banks are capable of enduring severe macroeconomic shocks over the next two years.
The review also provides an assessment of the financial markets and includes findings from the latest Systemic Risk Survey (SRS), which reflects the views of independent experts on the risks to financial stability. The survey identified energy shortages, commodity price volatility, and foreign exchange risks as the top three concerns but expressed overall confidence in the financial system’s resilience.
In the first half of 2024, the banking sector’s balance sheet grew by 11.5%, primarily driven by investments in government securities. Private sector lending, though showing signs of recovery in long-term financing for SMEs, experienced modest growth. Deposits grew by 11.7%, with savings and current deposits playing a significant role in this expansion. Asset quality remained stable, with non-performing loans (NPLs) witnessing only a slight increase, while provisioning coverage for NPLs improved to 105.3% by the end of June 2024.
Earnings in the sector slowed slightly due to reduced returns on advances and compressed net interest margins. However, non-interest income, including fees and trading gains on government securities, supported overall profitability. Key performance indicators such as Return on Assets (ROA) and Return on Equity (ROE) fell to 1.2% and 20.4%, respectively, compared to higher figures in 2023. Despite this, the sector’s solvency remains robust, with the Capital Adequacy Ratio improving to 20.0%, well above regulatory requirements.
As macroeconomic conditions gradually improve, financial markets are experiencing reduced stress, indicating a cautiously optimistic outlook for the remainder of 2024.
