Around the world, financial services professionals, particularly some bankers, are known for their haughtiness. Prestigious schools, inhumanly rigorous training as analysts, and parties at expensive clubs and yachts all contribute to that reputation. But the fact that they manage and allocate so much capital at least partly justifies it. The same arrogance has found its way into local bankers.
While banking has always been a lucrative business, partly due to a fiscally undisciplined government, the last few years have been incredible for the industry. Imagine growing at double-digit rates when you have a trillion-dollar base, all while maintaining huge margins. It was almost like the wisdom we heard about software-as-a-service companies on LinkedIn.
Between FY21 and FY24, Pakistan’s banking sector asset base has soared by Rs23.5 trillion to Rs51.7 trillion, an average year-on-year growth rate of 22.3 percent each quarter.
The composition of liabilities was far more interesting, with deposits increasing by a comparatively smaller Rs 10.1 trillion between FY21 and FY24. So where did the rest of the money come from to build that asset base? Loans from other financial institutions, including the State Bank, increased by Rs 8.9 trillion. In other words, a significant portion of the asset base growth has been driven by funding sources other than customer deposits.
Pakistani banks made Rs 119.4 billion in after-tax profits between April and June, according to an analysis based on the quarterly compendium
A decade ago, in the first quarter of fiscal 2015, the ratio of financial institutions’ loans to deposits and other accounts was 14.9%. By June, it stood at 40.6%. Recently, independent writers and members of the financial press have highlighted this glaring trend, with some banks aggressively using repurchase agreements to inflate their books.
In terms of profit and loss, the industry’s gross margin stood at Rs 1.96 trillion in the second quarter of fiscal year 2024, up 4.37% from the previous quarter and 30.2% higher than the same period last year. However, there are now finally some signs of easing as the SBP doubles down on monetary easing, recently cutting the policy rate by 200 basis points to 17.5%.
This is clearly reflected in key items including the net interest margin after provisions of nearly Rs 452 billion in the April-June period. While the figure was higher compared to the same period last year, it was lower than the previous three quarters. As a result, Pakistani banks earned Rs 119.4 billion in profit after tax, according to Data Darbar’s analysis based on the quarterly digest.
Not only does this represent a 13% year-over-year decline and a 29% quarter-over-quarter decline, but net income is actually the lowest it has been since the third quarter of fiscal 2022. Obviously, that’s not a great time horizon to begin with, as the past two years have been far too easy for banks, even by their own standards.
What is more disappointing, however, is that even during the sector’s best run, progress was actually rather hollow. The fact that investments relative to deposits stood at almost 97%, while advances relative to deposits did not even reach 40% is reason enough. But forget about these metrics, lest some captain step in and explain them in the context of our macroeconomic environment.
Instead, let’s focus on how deposits held by banks as a percentage of GDP fell to 29.4% in FY2024, the lowest level since FY2016 and 8.25 percentage points below the peak of 37.6% seen in FY2020. During this period, the industry has constantly boasted about mobilizing new funds from customers at conferences and on social media, but here we are.
To put our position against others into context, let’s look at the deposits-to-GDP ratio metric for 2021, the latest year for which World Bank data is available. While Pakistan stood at 32%, Egypt was way ahead at 80.8% and Bangladesh at 41%, despite its decline.
None of this is surprising, however, because anyone who has ever tried to open an account, whether personal or corporate, knows that you practically have to beg the staff to have the courtesy to accept the funds. The thing is that the decision-makers probably haven’t bothered to visit a branch in decades, at least not without the protocol of a swarthy sahab.
The author is co-founder of Data Darbar.
Published in Dawn, The Business and Finance Weekly, September 16, 2024
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