Banking Sector Overview

BANKING SECTOR OVERVIEW:

The banking system, as a whole, remains healthy despite the economy going through a period of economic difficulty. The banking sector absorbed the build-up of non-performing loans in the system while maintaining profitability and robust balance sheets. Much of the credit for this must go to the SBP for the policies it has pursued over the last decade to ensure that banks are adequately capitalized and adhere to prudent risk management.

INVESTMENTS:
The investments, especially the Government papers, which declined in both absolute rupee terms as well as a proportion of total assets during the first FY08, registered a slight increase during the last quarter. Actually, the heightened credit risk on account of deterioration in macroeconomic fundamentals and already constrained liquidity profile induced the banks to shift their preference towards risk-free Market Treasury Bills (MTBs)

The banking system is marked with a high concentration as a fewer number of banks hold a major share of the system s total assets and deposits. This concentration has been following an overall declining trend as the medium sized banks gradually gained market share. However, due to unusual liquidity stress that affected mainly the small and medium sized banks, the market share of five large banks increased.

DEPOSITS:
The deposits in the industry are generally showing an upward trend, though the growth is slow. The industry has been witnessing a gradual shift in deposits from savings to term deposits for quite some time. This trend emerged largely in response to SBP s policy incentives to encourage the mobilization of longer terms deposit so as to reduce the maturity mismatches. Consequently, fixed deposits gained a significant share of savings deposits since 2004. Other factors like general rise in interest rates and innovative deposits scheme have also augmented depositors preference for terms deposits.

ADVANCES:
The worsening business and...