KARACHI - Banking sector of the country is likely to post 23 per cent decline on year-on-year basis in the first quarter of fiscal year 2009. Higher provisions are expected to remain the major cause for this decline. Bank of Punjab (BOP) is being expected to remain on negative zone during the quarter under review with the total loss of Rs.2.93 billion, reflecting a huge decline of 176 per cent on Year on Year basis. BOP seems the most affected from provisions as the bank has already accounted for Rs7.6 billion provisions during 1HCY08, while more provisioning is expected in the remaining period of CY08. BOP would remain the laggard due to higher provisions and administrative issues, which is also causing the shrinkage in deposit base. Askari Bank (AKBL) is forecasted to be second most affected bank in terms of decline in the profitability, as the bank is expected to post decline of 97 per cent on Year on Year basis in the quarter ended on Sep-30, 2008. United Bank Limited (UBL) is the only top ranking bank, being expected to post 5 per cent profit after taxation growth on Year on Year basis in the quarter under review, mainly on the back of higher advance growth of 10 per cent in first half of CY08 and comparatively lower provisioning. During first quarter of FY09, National Bank of Pakistan (NBP) provisions may reach to Rs6.6 billion, which is less than higher provisions of around Rs9.6 billion of the BOP. A report primed by the InvestCap said that Pakistan banking sector remained under pressure during the first quarter of FY09 mainly due to the economic slowdown. Moreover, monetary tightening also caused liquidity crunch which increased the cost of funds for the banks as exemplified by Habib Bank Limited (HBL) offering 12 per cent p.a for 1-year maturity on HBL advantage account. Nevertheless, banking deposit declined by 2 per cent on quarter on quarter basis during 1QFY08. Money market rates reflect the need for liquidity, especially at Sep-end as short term rates were significantly higher. Despite the strong demand for credit from the corporate sector, advances growth remained modest at 6 per cent QoQ. Banks remained cautious towards lending in the consumer segment as default risk is perceived to be high due to the inflationary environment. Therefore, banks with higher consumer exposure such as UBL, Bank Al-Falah (BAFL) and NBP are expected to face higher NPLs. The report said that top tier banks with ample liquid assets are expected to benefit from liquidity crisis through better management of their cash (money market operations). The report said that Faysal Bank (FABL) has already booked Rs927mn in third quarter CY08 on the back of NITs final dividend of Rs6.5/unit. Likewise, NBP is also expected to book dividend income of Rs2.1bn (Rs6.5/unit) for third quarter CY09 (tax adjusted EPS impact of Rs2.12). The report added that apart from top tier banks, it was being expected that consolidation mode to set in on the Pakistan banking industry as the regulators have increased capital requirements. The latest policy change which requires banks to restrict ADR up to 70 per cent (deadline: 31 Mar-09) is going to trouble banks i.e. BOP, AKBL and FABL with respective ADRs of 85 per cent, 80 per cent and 91 per cent. Moreover, these banks are also required to rush for capital injections to meet the MCR as defined by the SBP. As these banks have lower reserves on their balance sheets therefore, their ability to increase paid-up capital by way of giving bonuses is also restricted. Thus, mergers and acquisitions seem to be a viable option for these banks going forward. Keeping in mind the downside risk of the market after the elimination of the floor on 27 Oct-08, it is forecasted that lower downside risk in NBP, UBL and BAFL, the report said. Analyst held a view that the profitability of the bank may fluctuate slightly in the near future but in the long run it may increase. The key banks included NBP, ABL, MCB, UBL, BAFL, HBL, BOP and AKBL have been taken to draw the aforementioned financial result of banking sector of Pakistan.