LAHORE - The calendar year 2016 was a tale of two halves for the banking sector where it realised a return of 1.2 percent in 1HCY16 followed by a robust return of 29.7 percent in 2HCY16, taking full year return to 30.9 percent.

Factors such as cumulative monetary easing of 75bps and expectations of continuation of super tax in budget FY17, kept the banking sector performance in check during 1HCY16. Robust price performance witnessed during 2HCY16 was largely driven by MSCI reclassification, where Banking industry had three representatives, pickup in inflation amid fading base effect and reversal in commodity cycle. Going forward, the movement of interest rates, pick up in loan book and performance of equity desk will be the key drivers of profitability.

As per the latest data published by State Bank of Pakistan (SBP), banking sector advances risen by 17 percent YoY/6 percent MoM to Rs5.6 trillion in December 2016 whereas investments are up 8 percent YoY/3 percent MoM to Rs7.2 trillion.

It is to be noted that sector deposits as of December 23, 2016 stood at Rs10.6 trillion which is up 15 percent YoY, whereas advances were up 12 percent YoY Rs5.3 trillion. Strong deposit growth bodes well for the sector as volumetric deposits growth remain the key earnings driver in a low interest rate scenario.

Improvement in advances growth also indicates increased credit demand, initiation of CPEC projects and improved macros. Banks are also focusing on high yielding consumer growth to support their margins and profitability.