Bank profits up as World Bank predicts low growth
AS the banking sector rolls on to primarily provide government with cash against a piece of paper called a 'bond', the private sector remains starved of Working Capital to work with. The result is that manufacturing is slowly, very slowly, slowing down. The long to medium-term prospects of this situation do not auger well for Pakistan, and the first indication of this clear possibility came in the World Bank Report on the sub-continent when it was predicted that by the year 2020 India would be growing by 9.0 per cent, Bangladesh by 6.7 per cent, and Pakistan by a mere 3.7 per cent. Mind you the excuse of terrorism is, thankfully, decreasing and now as we sail towards calmer waters there still are a few political milestones that need to be passed.
But before we dwell on those, let us take a look at the latest State Bank of Pakistan figures out last weekend. The Quarterly Performance Review of the banking sector ending December 31, 2015 and released on Thursday last (data flow takes it time in Pakistan), showed a quarter to quarter increase in the deposit base of the banking sector of 6.9 per cent (12.6 per cent year on year). This they claim is because of growth "driven" by current account of fixed deposits. Let us reduce this high-sounding jargon to simple language. It means that on paper, and on paper alone, the government has filled the stomach of bank figures with more and more ' bonds', which in my view will turn out to be junk bonds. This banks call 'their assets'. What about the cash people deposit in banks? The fact remains that most of it went to finance government. The remaining that came in because of an increased flow from recoveries from Non-Performing Loans settlements filled in the coffers. Thus increased deposits and these funds all went to government. What does this really mean as to what is happening in the market. As manufacturing slows down a lot of enterprises, scuttled by a lack of Working Capital, are closing and returning banks "stuck up advances" as bankers call them. This money the ' junk bonds' suck up. The problem is that IF and WHEN our dear country wants to become a manufacturing hub again, there will just not be a banking system geared to provide them with much needed Working Capital, let alone Project Loans.
Mind you this is the very reason the World Bank thinks that when this time does hopefully comes, Pakistan will not be in a position to grow. So with a fast growing population that is definitely ill-equipped with appropriate education and an environment full of fatalistic views about life, do Pakistani banks feel they will have the money to fuel a recovery to a 'fast-track' economy?
Now back to the SBP Report. The main claim is that the asset base of banks have grown by 4.6 per cent. If these junk bonds are the ' asset base' then are we not on thin ground. Let us assume that the 'junk bond' base support is removed, what asset base do banks have? On this I consulted a high official of the SBP and he smiled bank and said: "Sheikh Sahib, it is better to remain silent".
That is the problem with what is wrong. Why must we remain silent about core issues? The fact is that banks today have starved the private sector of much needed cash to work on. The SBP Report claims that private sector advances have grown by 7.8 per cent. Good, but then let us analyse the details of these advance. These are seasonal crop and infrastructural contract advances against government guarantees that have been raised against government bonds. Imagine. It is like one left hand telling the other left hand that there is no need for a right hand. This is called, in western chartered accountancy courses, as "The Classical Accountants Hand of Sleigh".
Now who in this current government has such an accountant's bent of mind? Makes me wonder! If private sector advances were growing by such glowing figures, just why has manufacturing depressed by 2.8 per cent? The answer I have tried to put before the reader above. All these figures mean that Pakistani banks will be enjoying impressive profits flushed with government bonds and increasing settlement of 'stuck up advances' (NPLs) with very short-term advances to season crop buyers and infrastructure project payments against bond guarantees.
In the Year 2015 the after-tax profits grew by an unbelievable 22 per cent to a whooping Rs. 199 billion rupees. The profit alone means they sucked away Rs. 1,000 per living Pakistani. Has the poor man become poorer in real terms? All you have to do is analyse the per capita income of a Pakistani and see the percentage of his income that flowed towards the coffers of private banks.
The SBP Report tells us that the 'Return on Assets' has increased from 2.2 per cent to 2.5 per cent, and this it is clarified is a "broad spectrum" phenomenon. Naturally with little connection to the manufacturing sector and guaranteed returns against government bonds, the returns have to increase. So which political milestones need to be crossed before we can sail into calmer economic waters? Firstly, Pakistan has to grow out of oneman, or one-family, rule and head towards better governance. For that political and economic devolution is a must. This is being resisted by the status quo. Only in this way can local economies pick up pace and a more truthful and representative way of life adopted.
Till then all we will have are glowing profits of banks based on 'junk bonds', a centralized power structure, little education for the poor, and decreasing manufacturing strength. We will have more and more projects, with empty yet fancy claims, that will win future elections. In the longrun it are the poor that will suffer, and in the process a few of the weaker banks will collapse. The SBP Report has for the first time indicated towards that too.