PAKISTAN BANKS SHOW SURPRISING COST EFFICIENCY

When using the cost-to-income ratio Pakistan banks surprisingly appear to be fairly efficient. We would like emphasize that a possible explanation for the decreasing cost-to-income ratios may be that income is increasing at apace much greater the rate of increase in costs. Moreover, the expenses necessary for technology related expenses on their agenda for the coming years. Therefore, we can certainly expect these ratios to increase.

Non-performing loans

LEVEL OF NON NPLS ON A DECLINE IMPROVED ASSET QUALITY

The level of non-performing loans (NPLs) ultimately remains the best measure of assessing assets of quality.NPLs as a percentage of total loans have been decreasing consistently and are very low at current levels. More encouragingly is the fact that the NPLs on an absolute level have actually been decreasing which means that they are either recovered or written off. Judging from the levels of write offs the latter option does not seem very likely .Overall, all these indicators suggests that asset quality is undergoing structural improvement .This improvement in a asset quality has come in line with improving margins in the sector which alleviates the fear of that the improving of asset quality maybe due to weaker price. Generally we are of the view that the increasing competition may drive banks to aggressively price loans and some compromise in asset quality is inevitable. Going forward we do not view NPLs to decline any further and they will keep on growing as the loans grow. SLOWER GROWTH IN LOANS EXPECTED IN THE FUTURE

We also believed in recent spurt in bank loans growth has stabilized and we will not see spectacular growth to continue any longer , however the generally improving condition indicates that level of NPLs are not going to deteriorate too much.

LOAN LOSS PROVISIONING

COVERAGE RATIO HIGH FOR MOST PAKISTAN BANKS

The picture in terms of provisioning levels of NPLs with most banks having coverage ratios( loan lossreserves-to-NPLs) in excess of 50%.In this regard Pakistan would certainly rank among better provisioned sectors in the region .Therefore, in the event of a sudden deterioration in the asset quality these banks have a reasonable cushion in the form of provisioning to rely on which will save the equity to erosion .

PAKISTAN IS AN UNDERBANKED SECTOR

The analysis provides an indication that with loans at such low proportion of GDP there is an immense potential for growth in bank advances. Moreover, consumer banking is also growing in importance as banks fear losing their favourable margins. Pakistan banks show surprising cost efficiency.

The cost-to-income ratio has posted a declining trend over the years. The growth in operating costs has lagged the growth in revenues, which have compounded at an increasing rate, thus causing the cost-toincome ratio to decline. Looking at individual banks, larger banks like UBL and MCB have cut back on their expenses and aggressively sought to increase cost efficiency. Whereas, the ratio has increased for BAFL because of aggressive branch expansion. Going forward, as margins get squeezed we see further pressure on the cost ratios lo rise. In a regional comparison, Pakistan banks have lower cost-to-income ratio primarily due to higher margins and not as a result of operating efficiency.