Much like Pakistan’s economy as whole, performance at its banks has been lacklustre. Marie Kemplay reports.
A $6bn bailout loan in July from the IMF may have staved off immediate economic concerns for Pakistan, and given investors some cause for optimism, but the country continues to suffer from chronic financial issues.
July’s IMF package is Pakistan’s 13th since the 1980s, as successive governments have failed to address underlying issues with the country’s economy. "Pakistan is facing a challenging economic environment, with lacklustre growth, elevated inflation, high indebtedness, and a weak external position," IMF representative, Ernesto Ramirez Rigo, commented in May 2019. “This reflects the legacy of uneven and procyclical economic policies in recent years aiming to boost growth, but at the expense of rising vulnerabilities and lingering structural and institutional weaknesses.”
Pakistan’s banks have also struggled to turn a profit in recent years. Its four largest banks by Tier 1 capital have all seen pre-tax profits decline year on year between 2016 and 2018. Underlying this, return on equity (RoE) and return on assets (RoA) at all four banks has also been declining. For example, MCB Bank, Pakistan’s largest bank by Tier 1 capital, has seen RoE decline from 18.18% in 2014 to 13.49% in 2018 and RoA from 2.63% in 2014 to 1.29% in 2018. For National Bank of Pakistan, the country’s second largest bank by Tier 1 capital, RoE increased year on year between 2014 and 2017 from 8.8% to 12.99%, but then fell in 2018 to 9.49%. RoA increased year on year between 2014 and 2015 from 1.04% to 1.17% but has since declined to 0.71%.
There is some hope that we may be at the start of a sustained improvement in Pakistan’s economy. The IMF’s first quarterly review in November 2019 reported that the country had comfortably met all of its performance criteria and signs of improved economic stability are steadily emerging. If economic stability overall improves, it can only be good news for Pakistan’s banks.
