KARACHI – The State Bank of Pakistan (SBP) has released its annual flagship publication, the Financial Stability Review (FSR), for fiscal year 2022. The report is published in accordance with the requirements prescribed in Section 39(3) of the State Bank of Pakistan Act, 1956. It presents the performance and risk assessment of various segments of the financial sector, including banks, non-bank financial institutions and financial markets, financial market infrastructures and non-financial corporations.
Pakistan’s economy had a turbulent year as existing economic imbalances were exacerbated by the unfavorable external environment. Domestic headwinds, including the double deficit, high inflation, catastrophic floods, the delay in completing IMF program reviews, as well as global challenges such as soaring commodity prices and monetary tightening by major central banks in advanced economies, manifested themselves in the deteriorating macroeconomic conditions. Nonetheless, the financial sector showed resilience to these stresses and recorded stable performance. The financial sector’s asset base grew 18.3 percent in FY22 – mostly supported by the banking sector. The FSR notes that the SBP and the government have taken various policy steps to address the widening imbalances, including further interest rate hikes and macroprudential measures related to consumer finance, as well as administrative measures to contain the external imbalance. As a result, the current account deficit improved towards the end of the year while economic momentum slowed. Against this backdrop, FY23 GDP grew a meager 0.29 percent.
The FSR highlights that the banking sector saw strong asset growth of 19.1 percent in FY22, despite heightened volatility in financial markets. This expansion has been driven mostly by investment while progress has slowed. As deposits slowed significantly, banks’ reliance on borrowing remained significant. Encouragingly, credit risk remained contained as the gross NPL ratio fell to 7.3% by the end of FY2022 from 7.9% at the end of FY21, while the net NPL ratio was down from 0.7% in the prior year rose slightly to 0.8 percent, remaining at one of the lowest levels in the past two decades. Banks’ after-tax profits improved in FY22, mainly due to the increase in interest income. As a result, FY22 ROE improved to 16.9 percent from 14.0 percent last year. The curbed defaults and higher profitability supported banks’ solvency as the capital adequacy ratio was 17.0 percent – well above the minimum regulatory requirement of 11.5 percent. The Islamic banking segment also saw robust growth of 29.6 percent in FY22. Asset quality indicators improved and earnings recovered year-on-year. However, microfinance banks remained under pressure as asset quality indicators deteriorated and post-tax losses emerged. The FSR shows that the non-financial corporate sector experienced a modest decline in profits due to heightened economic stress and a rise in tax and funding costs. Nonetheless, the overall financial position of the 100 listed companies remained stable and the corporate sector generally continued to meet its obligations to financial institutions. Financial market infrastructures (FMIs) remained resilient in FY22.
Importantly, in the CY22, SBP implemented the second phase of Raast, which enables instant and free person-to-person (P2P) money transfer. At the same time, a comprehensive licensing and regulatory framework for digital banks has also been enacted to prudently promote digital financial services (DFS). The FSR emphasizes that a comprehensive prudential and safety net framework is also in place to maintain public confidence in the banking system and protect the soundness of regulated institutions. SBP’s supervisory framework proactively monitors and assesses both firm-specific and system-wide risks to financial stability and takes proactive actions to address those risks. During the reporting year, SBP took a number of actions to further strengthen the framework in line with market conditions and new best practices. Going forward, the dynamics of financial stability would depend on evolving conditions at both the international and domestic levels. The results of the latest macroeconomic stress tests suggest that the banking sector in general, and large systemically important banks in particular, are expected to be resilient to withstand assumed severe macroeconomic shocks. However, SBP is aware of the prevailing risks. With the tools and capabilities at its disposal, SBP stands ready to take the necessary and timely actions to safeguard financial stability and support economic growth by ensuring the smooth supply of credit and financial services to the economy.
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