Allied Bank

During the year 2012, Pakistan’s economy remained confronted with numerous structural challenges impeding the pace of economic recovery and contributing in macro-economic instability.

Fiscal imbalances, worrisome external account deficit, prolonged energy shortages and dismal law and order situation were the key factors that resulted in gloomy economic conditions. As a result, Foreign Direct Investment (FDI) inflows witnessed significant reduction and the exchange rate parity remained under increased pressure. The slow pace of global economic recovery and high oil prices further escalated the structural challenges on the macroeconomic front.

The growth in real Gross Domestic Product (GDP) has remained below 4% during the last 5 years, which is insufficient to cater to the growing needs of a developing nation. During fiscal year 2012, industrial sector emerged from the aftermath of floods of previous year but posted only a marginal growth. However, resilience in both agricultural and services sectors helped real GDP grow by 3.7% during fiscal year 2012.

The country’s fiscal situation remains in quandary with deficit running as high as 8.5% (including power/commodity arrears) of GDP in fiscal year 2012. During the first half of fiscal year 2013, inflow of Coalition Support Fund (CSF) contained the fiscal deficit in line with the stipulated annual target of 4.7%. Nonetheless, high subsidy expenditure and low revenues have stretched the budget deficit above target. With bulk of non-tax inflows including 3G licenses, Etisalat arrears and Eurobond offering in question, the burden of heavy budgetary financing falls upon domestic sources, putting further demands on borrowing from the banking system and also increasing inflationary pressures in the economy.

The country’s external account remained fragile throughout the fiscal year 2012 with current account deficit of USD 4.6 billion compared to a surplus in previous year, mainly due to huge trade deficit. Although law and order situation and political uncertainty restricted Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI), healthy growth in inward workers’ remittances supplied some cushion. Though robust workers’ remittances continue to support country’s external account, the reimbursement of CSF arrears turned current account in surplus during first half of fiscal year 2013.

Nonetheless, heavy burden of loan repayments to International Monetary Fund (IMF) have led to a decline of USD 1.5 billion in foreign exchange reserves by December 2012 from USD 15.3 billion at the end of June 2012, exerting pressure on the exchange rate.

After hitting a bottom at 6.9% yearon-year (YoY) in November 2012, the Consumer Price Index (CPI) increased during December 2012 to settle at 7.9%, but remains on the lower side from 10.1% in January 2012 on the back of lower food and notified gas prices. Core inflation (non-food & non-energy) remained higher than general CPI, at 10.6% YoY in 2012.

Further, CPI inflation is expected to move upwards going forward on the back of an expansionary fiscal and monetary policy and a weaker exchange rate. Heavy government borrowings have resulted in average broad money (M2) growth of 14.5% YoY in 2012.

The private sector credit, though recently improved slightly, remained subdued. The recent downward trend in CPI inflation along with muted private sector credit provided State Bank of Pakistan (SBP) with the impetus to reduce discount rate by 250bps during first half of fiscal year 2013, bringing it to single digit at 9.5% Recent IMF commentary regarding monetary and fiscal policy issues, low foreign exchange reserves, high inflationary expectations and lack of progress on structural issues including energy sector would steer future monetary policy decisions.

However, no major monetary policy shift is expected till a newly elected government is in place. Aggregate deposits of scheduled banks increased at an average rate of 13.8% YoY to reach Rs. 6,683 billion during 2012 while advances registered YoY growth of 10.4% to reach Rs. 3,857 billion on consolidated basis. Private sector credit growth remained constrained, in contrast to Investment book of banks which exhibited YoY average growth of 30.9% to a cumulative balance of Rs. 3,889 billion during 2012. Banking sector’s Non-Performing Loans (NPLs) have marginally increased by 0.6% YoY to Rs. 617 billion as at September 2012 against Rs. 613 billion as at the end of September 2011, with portfolio infection ratio (as measured by Gross NPLs / Gross Loans) slightly down to 16.6% from 16.7% during the corresponding period last year.

Banking sector spreads remained under pressure due to interest rate reduction of 450 BPS since August 2011 and Saving Accounts minimum rate fixation by State Bank of Pakistan (SBP) at 6% from May 2012, adversely impacting the banking sector’s profitability during the outgoing calendar year. However, the sector’s earnings growth was assisted by the increasing non-interest income. Any further reduction in discount rate will put additional downward pressure on banking sector margins and almost erode the profitability of the lower tier banks. Continuous focus on enhancing non-interest income and balance sheet volume growth will be required by the sector to offset impact of margin compression.

On the macro-economic front, electioneering and limited foreign flows will force the government to continue borrowing from banks, reducing credit availability to the private sector and further worsening the country’s borrowing to GDP ratio.

Under the above mentioned tough business environment, our goal remains focused on ensuring steady profitability stream. Your Bank continued to strengthen branch and alternate delivery channel infrastructure and also simultaneously focused on enhancing control environment, to enable Your Bank to operate under the increasingly tough and competitive operating environment. At the same time, continuous efforts were directed towards ensuring and improving the asset quality in light of the constrained private credit growth environment and difficult economic conditions.

During the year 2012, Your Bank was able to successfully utilize its expanded branch network outreach for achieving substantial growth in deposits. However, in view of the prevailing macro-economic issues, Your Bank focused on cautious growth in its advances portfolio. Further, during the year 2012, strategic focus on continuously strengthening our core banking systems, credit and other allied financial control systems remained Your Bank’s top priority.

Your Bank has also implemented state-of-art Anti Money Laundering (AML) and Know Your Customer (KYC) automated systems during 2012. Your Bank will also continue to strive towards further improving and enhancing customer service experience, product innovation and development, efficiency in processes and delivery channels and continuous upgrade of policies and procedures in light of the latest COSO and Internal Controls over Financial Reporting (ICFR) framework.

Khalid A. Sherwani
Chief Executive Officer
Dated: February 14, 2013