- The performance of the Pakistani banks remained outstanding in 2006. The robust profitability, strong solvency profile, managed asset quality, better risk management practices and ongoing consolidation of banking system witnessed further improvement in almost all the key financial performance and soundness indicators. 
State Bank of Pakistan pointed out these facts in its Banking Sector Review (BSR) 2006 that was launched on Wednesday.
The growth trends in all the key components, to somewhat, continued to maintain the recent years’ pace, as a result, total assets surpassed Rs 4 trillion level and pre-tax profit set another milestone by crossing Rs100 billion mark. This has placed Pakistan among the top half in a group of 44 emerging economies in terms of capital adequacy and asset quality while, in terms of profits, Pakistani banking system has been ranked among the top ten. 
The banking system continued to invite the foreign investors’ interest in Pakistan and attract significant share of direct foreign investment. On the back of excellent results, banks maintained their dominance in the capital markets as their market capitalization has surged to one third of the total capitalization of the Karachi Stock Exchange (KSE).
Profitability of the banking system kept its momentum largely on the back of persistent growth in high yield earning assets and expanded business volumes. 
During the year under review, pre-tax and after-tax profit raised to Rs 123.6 billion and Rs 84.1 billion respectively. Resultantly, all the key profitability indicators kept on healthy trends. ROA of the banking system further improved to 2.1 per cent. ROE, however, slightly dropped to 24.2 per cent from 25.6 per cent due to proportionately greater increase in the banks’ equity base as a result of high retention of profits and fresh capital injections.
Though the non-interest income continued to provide support to the earnings, it was the Net Interest Income (NII) that extended a greater contribution to the higher profitability. The recent upward movement in cost of deposits put some strain on growing NII as interest rate variance on deposits of the commercial banks has increased to Rs 9.3 billion as against Rs 26.3 billion in CY05. While on the income side, the contribution of interest rate variance on loans decreased to Rs36.2 billion as compared to Rs50.2 billion in CY05. 
Further, the contribution of volume variance in interest income increased in CY06, thus increasing the NII by Rs36.7 billion.
In addition to the outstanding profits the fresh capital injections have further added strength to the solvency profile of the banking system. Capital adequacy ratio (CAR) of all banks increased to 12.7 percent in CY06 from 11.3 percent in CY05. Cross-sectional analysis showed that capital position of individual banks also strengthened and the number of banks having CAR at more than 10 percent increased to 32 from 30 in CY05.
On credit risk front, the banking system was able to contain the key asset quality indicators. Total NPLs of the banking system declined to Rs175 billion from Rs177 billion in CY05.However, the commercial banks witnessed an increase in their NPLs by around Rs 2 billion to Rs 138 billion during CY06. NPLs to loans and net NPLs to net loans ratio of all banks remained in the vicinity of 7 percent and 2 percent respectively. 
The banking system continued to broad-base its loans portfolio to diversify their credit risk and increased the financial services access besides generating more productive alternative avenues of earnings.
As compared to the last year, the loans portfolio of the banking system grew at a relatively lower rate of 18.8 percent (CY05: 24 percent). This slow down was mainly due to deceleration in credit to private sector which can be attributable to subdued demand for fixed investment, as the growth in working capital finance has actually accelerated. Resultantly, the share of fixed investment loans decreased to 21 percent from 23.2 percent in CY05, whereas share of working capital loans increased to 35.3 percent from 33.2 percent in CY05. 
The sluggish demand for fixed investment credit, in some sectors, may be due to reliance of corporate sector on retained earnings or foreign borrowings. Further, banks may have deliberately reposed to reassess and develop their risk management capacities for taking additional exposures in some of the sectors. Consumer finance though has been growing significantly in last couple of years its share in total credit (13.5 percent) as well as percentage of GDP (5.86 percent) is still lower, especially when compared in regional and international perspective. Higher growth, which has been hallmark of consumer finance in recent years, marginally decelerated in CY06. As for its asset quality, NPLs of consumer sector though are still lowest among all the borrowing sectors, registered increasing trend and its infection ratio increased to 2.2 percent in CY06.