Few economists could have imagined a pandemic as lethal and scary as the Covid-19 only a few years ago. More than 68 million people worldwide have already been infected with the virus and more than 1.6 million have died of the disease. Economic activities have been affected to such an extent that the World Bank and TShe International Monetary Fund have projected a contraction of 5.2 percent and 4.4 percent, respectively, in the global economy.

The economic impact of the pandemic has not been uniform across the world however. In Pakistan it has been relatively less severe. Still, for the first time since 1952, there has been a negative GDP growth (0.4 per cent). Despite setbacks in almost every other sector, the banking sector’s performance has been satisfactory over the first 11 months of 2020.

According to State Bank of Pakistan’s Mid-Year Performance Review (MPR) of the Banking Sector for the year 2020, the performance of the banking companies for the period January to June 2020 was satisfactory.

The review suggests that despite rising economic stress, driven by the Covid-19 pandemic, the assets of the banking sector witnessed a decent expansion of 7.8 percent. A robust increase in investments, funded by a surge in deposits, explains this growth. Advances, on the other hand, registered a mild downtick owing to the slack caused by the disruption in the business activities after the outbreak. The report suggests that in the absence of the supportive measures taken by the State Bank the contraction in advances could have been much bigger.

The report says the policy measures rolled out by the SBP facilitated the banking sector in conserving the capital, enhancing the lending capacity and increasing its loss absorption ability. As a result, despite some increase in credit risk, banking sector demonstrated improved profitability and enhanced resilience. The ratio of non-performing loans (NPLs) increased from 8.6 percent as of end December 2019 to 9.7 percent as of end June 2020. However, the report adds, the net NPLs to loans ratio, which is sometimes considered a better measure of credit risk, increased only marginally from 1.7 percent to 1.9 percent. There was a marked improvement in earnings as profitability jumped by 52 percent on year-on-year basis. This improvement resulted from higher interest income, deceleration in interest expenses and a rise in non-interest income. With better profitability, the soundness of the banking sector strengthened further as the capital adequacy ratio (CAR) increased to 18.7 percent in June-20 from 17.0 percent in December-19.

The review includes the results of the 6th wave of SBP’s systemic risk survey (SRS) conducted in July-August, 2020, which represents the views of the market participants. The survey results indicate that currently and for the next six months the respondents consider global risks and domestic macroeconomic risks to be important.

Financial analysts believe that the banking sector did well because of two reasons. First, the government policy of smart lock downs worked very well and compared to other regional countries Covid infection rate and death toll remained low. Second, the prime minister announced his Rs 1.2 trillion relief stimulus package at the right time.

Financial analyst Samiullah Tariq says the package enabled the banks, acting on the instructions of State Bank of Pakistan, to defer Rs 658 billion worth of loans to private sector. They also restructured Rs 216 billion loans. “It was because of this deferment and restructuring that the percentage of non-performing loans rose (only) by one percent,” he said. Samiullah says a clearer picture will emerge after June when the banks will start recovering their loans. That is when the exact amount of NPLs will appear in the financial statements. However, he says, 80 to 85 percent of the private sector borrowers have recovered their losses incurred during the first wave of Covid-19. As such, he says, the NPLs are unlikely to show a significant increase.

Samiullah says half of the banks’ portfolio investment is in government securities. Return on these investments is likely to decline significantly considering the central bank has reduced its policy rate from 12.5 percent to 7 percent over the last eight months. “In the first three quarters of CY20 banks’ profit showed a robust growth, but we feel that in the last quarter of this year and in the first quarter of next year we may see a decline in their profitability” he observes. He says the banks also have to pass on the reduction in interest rates to their borrowers and this can further affect their profitability.

The State Bank has also expressed confidence in its recent Monetary Policy Statement that the financial sector is likely to strengthen, with the current account in FY 21 Q1 recording the first quarterly surplus in more than five years. After remaining in positive territory for the first four months of this fiscal year, the cumulative current account through October reached a surplus of $1.2 billion against a deficit of $1.4 billion in the same period last year. This turnaround was supported by an improvement in the trade balance and record remittances. Exports have recovered to their pre-Covid monthly level of around $2 billion in September, October and November, with the strongest recovery in textiles, rice, cement, chemicals, and pharmaceuticals. Remittances have recorded strong growth of 26.5 percent (year/year) during July-October, primarily due to orderly exchange rate conditions, supportive policy measures taken by the government and the SBP, travel restrictions, and increased use of formal channels. Meanwhile, subdued domestic demand and low global oil prices have kept imports in check.

Regarding the second wave of pandemic, Samiullah says that while it is getting worse by the day no businesses or industries have closed down because of it so far. Considering that a vaccine is likely to be available soon, a complete lock down is very unlikely. Samiullah points out that so far all economic indicators are positive. However, he warns that if under pressure from the IMF, the government agrees to raise the gas and power tariffs the resulting negative impact on the economic growth could hurt all the sectors, including banking.

The author is a freelance analyst