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Thursday, 28 February 2008

Pakistan banking system improving but vulnerable to political risks - Fitch

MUMBAI (Thomson Financial) - Fitch Ratings said the Pakistani banking system has, over the last decade, gradually evolved from a weak state-owned system to a slightly healthier and active private sector driven system.
It however added that the resolution of the current volatile political environment and its likely impact on the economy would be a key driver in determining the fortunes of the Pakistan banking system.
Fitch noted that the private sector controls nearly 80 pct of the system assets, as opposed to the early 1990s when 90 pct of the system assets were controlled by the government.
The Pakistani banking system is made of 53 banks, which includes 30 commercial banks, four specialised banks, six Islamic banks, seven development financial institutions and six micro-finance banks. The four largest commercial banks account for 44.2 pct of system assets, while eight second-tier banks account for a further 35 pct. The system grew at a compounded annual growth rate (CAGR) of 17.8 pct between 2001-06. Loans too grew at a strong CAGR of 24.2 pct during the same period, before slowing down to only 2 pct during the first nine months of 2007 amidst greater political uncertainty, which in turn affected economic sentiment.
Fitch noted that Pakistan's banks have historically enjoyed low cost of funds as a result of their large low cost deposit base resulting in some banks enjoying interest spreads of around 7.5-8.5 pct.
Asset quality, which constrained banks' performance in the 1990s, has since improved with the reported gross NPL ratio declining to 7.7 pct at the end of the first nine months of 2007, from a staggering 23.5 pct in 2000.
Fitch further noted that the liberalised environment of the past few years drove M&A activity in the banking sector, resulting in 36 transactions between 2001-07.
'Such M&A activity may continue provided there is political stability. Likely players would include foreign banks seeking a footprint in Pakistan or a consolidation among smaller local banks, where the process may be shareholder driven,' Fitch said.
It added that bigger banks are unlikely to pursue an aggressive deposit/asset growth strategy, especially against the backdrop of the current political environment.
Fitch said the bigger players are more likely to focus on consolidating their existing position and enjoying the high interest spreads, which the agency believes could prevail at least in the short term.

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