The hollow boom of the financial sector

Around the world, financial services professionals — particularly some variety of bankers — are known for their haughtiness. Prestigious schools, inhumanely rigorous training as analysts, and partying at expensive clubs and yachts all help build that reputation. But the fact that they handle and allocate so much capital at least somewhat justifies it. The same arrogance found its way through the local bankers.
Though banking has always been a lucrative business, in part due to a fiscally indisciplined government, the last few years have been unbelievable for the industry. Imagine growing at high double digits when you have a base in trillions, all while maintaining great margins. It was almost like the wisdom we hear about software-as-a-service companies on LinkedIn.
Between FY21 and FY24, the asset base of Pakistan’s banking has ballooned by Rs23.5 trillion to reach Rs51.7tr — an average year-on-year growth rate of 22.3 per cent each quarter.
The composition of liabilities was a lot more interesting, with deposits increasing by a comparatively lower Rs10.1tr between FY21 and FY24. So, where did the rest of the money come from to build that asset base? Borrowings from other financial institutions — which includes the State Bank — increased by Rs8.9tr. In other words, a significant chunk of the growth in the asset base has been fuelled by sources of funding other than customer deposits.
A decade ago, in Q1FY15, the ratio of borrowings from financial institutions to deposits and other accounts was 14.9pc. As of June, it stood at 40.6pc. Recently, independent writers and members of the financial press have highlighted this glaring trend where some banks are aggressively relying on repurchase agreements to inflate their books.
On the profit and loss side, the gross markup of the industry clocked in at Rs1.96tr in the Q2FY24, up 4.37pc over the preceding quarter and 30.2pc compared to the same period of the previous year. However, there are now finally some signs of tapering off as the SBP doubles down on the path of monetary easing, most recently cutting the policy rate by 200 basis points to 17.5pc.

Rehan Ahmed

This is clear across major line items, including the net interest income after provisions of almost Rs452bn in April-June. While the figure was higher compared to the same period of the previous year, it was lower than in the preceding three quarters. As a result, Pakistani banks earned Rs119.4bn in profit after tax, according to Data Darbar analysis based on quarterly compendium.
Not only does this represent a decrease of 13pc year-on-year and 29pc quarter-on-quarter, but the net income is actually the lowest since Q3FY22. Obviously, that’s not a great time horizon to begin with since the last couple of years have been a bit too easy for banks even by their own standards.
However, what’s more disappointing is that even during the best run for the sector, the progress was actually quite hollow. The fact that the investments-to-deposits stood at almost 97pc while the advances-to-deposits even failed to touch 40pc is reason enough. But forget these metrics lest some captain obviously jumps in and explains them in the context of our macroeconomic environment.
Instead, focus on how deposits held by scheduled banks as a percentage of GDP fell to 29.4pc by FY24 — the lowest since FY16 and down 8.25 percentage points below compared to the peak of 37.6pc seen in FY20. During this period, the industry has constantly bragged about mobilising new funds from customers at conferences and social media, yet here we stand.
To contextualise our position vis-a-vis others, let’s look at the metric of deposits to GDP ratio from 2021, the latest year for which World Bank data is available. Where Pakistan stood at 32pc, Egypt was miles ahead at 80.8pc and Bangladesh 41pc, despite its slide.

None of it is surprising, though, because anyone who has ever tried opening an account — whether personal or corporate — knows how you have to practically beg the staff to extend the courtesy of taking your funds in. It’s just that those making decisions have probably not bothered to visit a branch in decades, at least not without the protocol of a brown sahab.
The writer is the co-founder of Data Darbar
Published in Dawn, The Business and Finance Weekly, September 16th, 2024