KARACHI: The financial sector’s asset base expanded by 27 per cent in 2023, mainly due to the banking sector’s investments in risk-free, high-yielding government securities.

“While volatility in financial markets remained high, the financial sector, particularly the banking sector, remained resilient and grew by 29.5 per cent during the review period,” said the State Bank of Pakistan’s Financial Stability Review (FSR) for 2023, released on Friday.

The report said asset growth was primarily driven by investments in government securities, while bank advances to the private sector contracted due to stressed macro-financial conditions.

The review highlighted that the macroeconomic environment remained challenging amid rising inflation, weak foreign exchange inflows and pressures on the country’s external account and local currency, and low business confidence, particularly in the first half of CY2023. “However, the policy measures and regulatory interventions that were taken to address growing imbalances coupled with securing of nine-month Stand-By Arrangement (SBA) from IMF helped improve the macroeconomic conditions in the second half of 2023,” said the report.

The report said the expansion of the banks’ balance sheets was mainly funded by deposits, which posted a 20-year high growth in a high return environment.

“The credit risk, nonetheless, did not present serious concern as non-performing loans (NPLs) to loans ratio marginally increased to 7.6 per cent by the end of December 2023 from 7.3 per cent in December 2022, and the provisioning coverage further improved to 92.7 per cent,” said the report.

The banking sector’s earnings remained healthy on the back of high rates and expansion in earning assets, supporting the solvency position.

Accordingly, the capital adequacy ratio (CAR) imp­roved to 19.7pc by the end of December 2023, remaining well above the minimum regulatory requirement.

Published in Dawn, July 6th, 2024