HE 20 commercial banks listed on the stock market posted a combined profit after tax of Rs118 billion in 2012 against

Rs107 billion a year earlier, showing a nine per cent growth The recently released financial figures of the banking sector for the year ended Dec 31, 2012 pointed out that lower provisioning by 28 per cent year on year ( o !, and 2" per cent higher non#interest inco$e, co$pensated for the three per cent o decline in net interest inco$e (%&&!' (owever, co$bined profits for the fourth )uarter of 2012 (*+, 12! clocked in at -s2. billion, representing a dip of 18 per cent over the earlier )uarter (+o+!, as %&& declined by two per cent, while provisions spiked by *8 per cent +o+, in line with traditional yearend book cleanups' -a/a 0afri, a banking sector analyst at brokerage 12D 3ecurities, says that while 2012 was a good year for banks overall, a se)uential decline in *+, 12 results $ay e4tend into 2013' The 5ig#6 banks (758, %59, (58, :,5, 158 and 51;8!, with co$bined assets of -s.00 billion, posted a net profit of -s<6 billion in 2012, up by a $odest nine per cent o ' et, they accounted for $ore than 80 per cent of earnings of listed co$$ercial banks' &n *+, 12, the co$bined net profit of the sector a$ounted to -s21 billion, representing a sharp drop of 12 per cent +o+, with provisions rising by .3 per cent +o+, also in line with yearend trend' :any sector watchers stress that the banking sector finds itself stuck between a rock and a hard place' 8ow private sector credit off take, shrinking spreads, and invest$ent in govern$ent papers are i$peding sector growth' =>ur banking sector needs $aturity,? :r 1li -a/a, e$inent banker and for$er president of the %ational 5ank of 9akistan, told Dawn' (e observed that 20 $illion bank accounts in a country of 180 $illion people is $uch too s$all a nu$ber' (e said that in rich econo$ies, banks derived only a )uarter of their aggregate revenue through net interest inco$e, while the other three#)uarters ca$e fro$ fee#based transactions and other sources' =>ver here, it is the other way round, as 80 per cent of the revenue is generated by %&&'?

&n order to grow and prosper, banks would have to introduce fee#based products and tap s$all and $ediu$ enterprises, and the huge undocu$ented econo$y, where all transactions are @cash#basedA with no place for banking, would have to be roped in, he said' 3ector analysts recall that in 1pril 2012, the 3tate 5ank of 9akistan (359! had announced a 100bps increase in the $ini$u$ profit rate on savings accounts, fro$ five to si4 per cent, effective :ay 1 of that year' =1s e4pected, it resulted in a shrinkage of net invest$ent $argins of banks, which was revealed in their financial state$ents for 2012,? says 2hurra$ 3cheh/ad of 1rif (abib ,orporation' Though staggering fro$ the blow, $ost banks $anaged to find a way around the law by calculating si4 per cent on @$ini$u$ $onthly balance,A since the 359 had stopped short of stipulating whether the rate was to be applied on $onthly average or $ini$u$ balances' 1 circular by the central bank on :arch 1. clarified that point, and directed banks =to pay $ini$u$ profit at si4 per cent per annu$ on all local currency saving deposits on average $onthly balances effective 1pril 1, 2013?' :r 3haukat Tarin, for$er finance $inister and currently serving as advisor to 3ilkbank, says that in fi4ing the rate on average $onthly balances, the pendulu$ has swung fro$ one side to the other' =>n one hand, the discount rates have been slashed fro$ 1* to <'. per cent' 5ut on the other, the rate on saving deposits has been raised fro$ five to si4 per cent, and that too on average $onthly balances' This has, in effect, widened the gap between the two to si4 per cent,? he told Dawn' (e opined that profit on deposits should be linked with discount rates' (e also called for =prudent banking,? where banks $ay be restrained fro$ heavily investing in govern$ent papers, as al$ost a half of the banksA deposits are currently invested in T#5ills' (e thought that one way to discourage such a practice was to levy a higher ta4 on inco$e derived by banks fro$ their invest$ent in T#5ills' Bhile he e4uded opti$is$ on the future of the banking sector as the econo$y i$proves, :rTarin ad$itted that going forward, s$aller banks would have to give in to $ergers so as to be able to swi$ in the sea of financial proble$s'

5anks are generally sour over having to pay interest on average balance' 1nalysts point to 359 figures that show that the deposit rates were increased to si4 per cent in 1pril 2012, but lending rates had declined in eight $onths, fro$ :ay 2012 to 0an 2013, fro$ 13 per cent to 11'6 per cent respectively' &n the sa$e period, discount rates were reduced fro$ .'< per cent to .'* per cent' 1ll of this suggested that in the eight $onths, banksA spreads contracted fro$ "'1 per cent to 6'2 per cent' &n ;ebruary 2013, the spreads hit an eight#year low at 6'18 per cent' =The last ti$e such levels were witnessed was in 1pril 200., conse)uential to a "'*< per cent average lending rate whereas average deposit rates stood at a $eager 1'.. per cent,? said :uniba 3aeed, an analyst at &nvest,ap' -a/a 0afri, an analyst at 12D 3ecurities, said that the regulatory change would particularly affect banks with significant chunk in savings accounts' 1s per 359 data, total deposits with banks in 0anuary 2013 stood at -s6'61 trillion, of which around 38 per cent were in saving accounts' 3ector watchers say that banks $ay gru$ble' et in spite of the cut, 9akistani banks are enCoying the highest spreads in the 1sian region, as co$pared to 3'21 per cent in &ndia, three per cent in ,hina, and Cust about 2'1" per cent in Thailand' >ther than the obvious hit on spreads, the 359As $otivation in issuing new directives on rates on averages balances appears to be to pro$ote savings#to# deposit ratio, increase financial $arket depth and inter$ediation, and encourage banks to focus on higher Dyielding private sector credits, which have been stagnant for the last few years'