The State Bank of Pakistan (SBP) on Friday said the financial sector had shown resilience to internal and external headwinds and achieved stable performance as the financial sector’s asset base grew 18.3 percent in calendar year 2022. The banking sector grew 19.1% in 2022. Its assets were mainly driven by investments, while credit risk remained contained as the gross NPL ratio fell to 7.3% by the end of fiscal 2022.
The observations were made in the Financial Stability Review (FSR) for CY22, the central bank’s lead annual publication, issued under Section 39(3) of the SBP Act 1956, said a statement released here.
The report presents the performance and risk assessment of various segments of the financial sector, including banks, non-bank financial institutions, financial markets, financial market infrastructures and non-financial corporations.
The FSR for CY22 noted that Pakistan’s economy had a turbulent year as existing economic imbalances were exacerbated by the unfavorable external environment. The review identified the double deficits, high inflation, catastrophic floods and delay in completing IMF program reviews as major challenges on the domestic side, while global challenges, including soaring commodity prices and monetary tightening by major central banks in advanced economies, is manifested in deteriorating macroeconomic conditions.
The FSR noted that the SBP and the government have taken various policy steps to address the growing 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. The review also pointed out that against this backdrop, GDP grew a meager 0.29 percent in fiscal year 2022/23. Notwithstanding heightened volatility in financial markets in fiscal 2022, the banking sector saw strong asset growth of 19.1 percent, the FSR stressed, adding that this expansion was mainly driven by investment while progress slowed. As deposits slowed significantly, banks’ reliance on credit remained significant and credit risk remained contained as the gross NPL ratio fell to 7.3 percent by the end of FY2022 from 7.9 percent at the end of FY21 , while the net NPL ratio edged up to 0.8 percent from 0.7 percent a year earlier, remaining at one of the lowest levels in the past two decades.
The review found that banks’ after-tax profits improved in fiscal 2022, mainly due to the increase in interest income, and that ROE improved to 16.9 percent in fiscal 22 from 14.0 percent in the prior 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 review highlighted that the Islamic banking segment also posted robust growth of 29.6 percent, asset quality indicators improved and profits recovered year-on-year, and financial market infrastructures (FMIs) remained robust, while microfinance banks continued were under stress as asset quality indicators deteriorated over time -tax losses. The FSR found 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 condition of the 100 listed companies has remained stable and the corporate sector has generally continued to meet its obligations to financial institutions, it said.
SBP implemented the second phase of Raast in 2022, enabling 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 promote digital financial services (DFS) in a prudent manner.
The FSR noted 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. The supervisory framework proactively monitors and assesses both firm-specific and system-wide risks to financial stability and takes proactive measures 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 emerging best practices, the statement said.
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 demonstrate resilience to withstand perceived severe macroeconomic shocks. The SBP assured that it is aware of the prevailing risks and, with the tools and capabilities at its disposal, is ready to take the necessary and timely measures to maintain financial stability and economic growth by ensuring a smooth supply of the economy with to support credit and financial services.
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