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Banks enter new year cautiously optimistic

To remain profitable in 2017, banks will have to focus more on core banking along with improving delivery of services. They will also have to make internal controls stronger to ensure full business rule compliance to sustain the gains of the recent past.

Senior bankers say individuals and businesses can expect better banking services in the upcoming year.

There are some areas on which banks will be more focused. These are:

Senior bankers say individuals and businesses can expect better banking services in the upcoming year

(1) development of internal controls against money laundering, fraud and cyber security vulnerabilities (2) deepening and broadening the bank credit market and contributing more towards financial inclusion (3) tapping business opportunities in the CPEC related projects (4) sustaining the gains of banking sector consolidations and (5) building capacities to align banking operations with new dynamics of the commodities, stocks and real estate markets.

“These and maybe a few other things are already on top bankers’ mind. Banks are going to do lots of things in each of these areas”, said a senior official of the Pakistan Banks Association. “Political and macroeconomic stability at home and in the region, and emerging realities in global and regional financial markets, will also weigh on whatever we do.”

Islamic banking, as such, and agricultural, SME and micro financing by both Islamic and conventional banks, also look set to make a better showing in 2017, top bankers say.

In the past few years, weak internal controls at banks were at the root of a few actual and attempted money laundering, banking fraud and grave violation of banking regulations, cases.

Closer liaison between the Federal Investigation Agency and the SBP, and a watchful national media and judiciary helped in keeping such white-collar crimes to the minimum. But the lessons learnt, led the SBP to push banks towards greater self-discipline and stronger internal controls to combat the above stated risks.

Simultaneously, the central bank also asked banks to come up with a master-policy to align all their internal policies with the broad objectives of the central bank’s policies in each and every area of banking, including treatment of banking staff and delivery of quality services to customers.

“In 2017, you will see individual banks, the Pakistan Banks Association and the SBP working more closely to meet one basic objective: providing clean, qualitative and more inclusive banking to all,” says an official of the Association.

For the last few years, banks’ credit flow towards agriculture, SMEs and micro-enterprises has increased. “This trend is going to remain in sight and will have to be strengthened,” according to a former president of United Bank Ltd.

Deepening of the credit market is a big challenge that, if met properly, will give banks lots of business opportunities in 2017.

It’s a challenge in terms of being prepared to take the step in terms of being responsive to market needs. Banks that meet this challenge are going to tap lots of potential credit demand.

Companies are becoming more organised, getting registered to qualify for concessional credit under various schemes and trying to participate in big business through the CPEC related, and non CPEC public and private sector, projects.

Housing construction and real estate development, iron and steel manufacturing, pharmaceuticals, food processing, agro-based industries, chemicals, fertilisers, technology-driven start-ups, transport, marketing and distribution, networking, retail and wholesale businesses are taking root and expanding fast.

“Some of them are cash-rich, others are not. The latter creates a direct credit demand and even for the former, bank funding is welcome where employing corporate cash is less profitable,” says a senior executive of Habib Bank Ltd.

How well banks can lend more to the private sector and reach out to potential clients, and how efficiently they can participate in the project financing business coming up via the CPEC infrastructural projects, will determine their profitability in 2017 and beyond, top bankers say.

In nine months of 2016, growth in banking profits has already shown signs of weakening due to historically low spreads and falling yields on government debt papers.

Those banks that relied heavily on excessive investment in government bonds in previous years realised in 2016 that doing this by ignoring private sector credit demand was an unwise policy.

Almost all banks corrected themselves because of which private sector credit flow saw a boost. But they will have to continue this correction, and others will have to follow course, if banks want to remain profitable in 2017, banking sector analysts believe.

They also say that since commodities, stocks and real estate markets are undergoing some key changes, banks will have to keep an eye on them and re-align their operational strategies accordingly to make money through investment in these areas.

The recent sale of 40pc stake of the Pakistan Stock Exchange to a Chinese consortium, for example, is going to deepen the country’s bonds market, attract new and more informed investors into the stock market.

Ongoing efforts to regularise the real estate sector and the growing use of web portals for land and housing units’ price finding, along with chances of growth in the business of real estate investment trust (REIT) are going to have a big impact on the way banks invest in real estate and offer housing finance and land development loans.

Similarly, the commodities markets in Pakistan are becoming more interlinked with regional and international markets, while even domestically, price finding and deal making in commodities is undergoing key changes as on-line business activity grows and as the Pakistan Commodity Exchange continues to spread it wings.

Published in Dawn, Business & Finance weekly, January 2nd, 2017