Banking sector to show resilience during crisis

This week's news from Barclays' global and commercial bank once again put the spotlight on Pakistan's banking sector.

The bank reported last year's profit rise of about 34 per cent in the so-called global emerging markets, helped by retail expansion in its newer markets such as Pakistan.

In recent years, the country's banking has remained an attractive part of the business and corporate sector.

A process of deregulation which began in the early 1990s ultimately paid off by creating attractive new opportunities.

Foreign banks such as the Royal Bank of Scotland came into the country as part of a global acquisition of ABN-Amro, the Dutch bank.

Others such as Standard Chartered Bank expanded stake in Pakistan with its purchase of Pakistan's Union Bank. Additional investment activity was led by investors from the Middle East as well as the Far East. A period of considerable success has already come together.

Now, with the fallout from the global economic slowdown, there is an obvious question ahead. Is Pakistan's banking success story now over? There are no clear answers to that question. On the one hand, the outlook ought to be bleak given the rapidly emerging challenges.

An economic slowdown in Pakistan has obviously had its impact on a range of sectors including banks.

Consequently, there are risks of larger losses for at least some businesses. These are likely to include a large chunk of those which rely on borrowings from banks to keep their business cycles intact.

Banks in Pakistan, just like in many other developing countries, are also set to suffer from a business slowdown. For instance, demand for new credit is almost certain to decline.

In the past, the Pakistani government has been among the biggest borrowers. That of course is also likely to change.

Under a loan programme signed with the International Monetary Fund (IMF), the Pakistani government has been forced to drastically cut its budgetary deficit. This essentially means a steep reduction in government spending.

As a result, banks are likely to see fewer opportunities than before in terms of doing business with the government.

To add to such pressures will of course be a push from Pakistan's central bank, known as the State Bank of Pakistan, which is likely to keep on pressing banks to reduce the gap between the interest rates given to depositors and the rates for borrowers.

The outcome of this environment points towards the inevitable direction. The likely outcome is of profits falling significantly in the year ahead and possibly beyond, when the world including Pakistan copes with the effect of the global economic slowdown.

But there is also a silver lining to what appears like a challenging situation. The banking sector's ability to withstand an economic shock is much better today for a few reasons.

Pakistani banks have gone through years of high profits, which has been a period that has improved their balance sheets. Consequently, banks are much better placed to withstand unexpected shocks.

This period of growth has also had the beneficial effect of improving the quality of human resources. Bankers with an eye on the national and global horizons now run Pakistani banks, as opposed to the time when the biggest banks were still nationalised and were run by government bureaucrats.

Going forward, further improvements are on the cards. The central bank has already ordered the smaller banks to improve their financial figures by 2013. This essentially means that a period of consolidation may well follow.

The writing on the wall cannot be ignored. Pakistani banks may be faced with some trouble for now in view of the prevailing environment. But the future is set to be more promising than the past.

- The writer is a journalist based in Pakistan.