RECENT TRENDS IN AFGHANISTAN'S BANKING SECTOR

UNCLAS SECTION 01 OF 02 KABUL 003483 SENSITIVE SIPDIS DEPT FOR S/SRAP AND SCA/A TREASURY FOR MKAPLAN, AWELLER, JCASAL E.O. 12958: N/A TAGS: EFIN EAID PGOV PREL AF SUBJECT: RECENT TRENDS IN AFGHANISTAN'S BANKING SECTOR ¶1. (SBU) Summary: A USAID-funded banking supervision advisor reported October 29 on recent trends in Afghan bank deposits, loans, and profitability at a meeting with Emboffs. The advisor stated overall deposit growth has stalled and that there is no evidence indicating any major deposit withdrawals in the run-up to the August 20 Presidential Election. This information contrasts with reports the Treasury Attach received from senior Central Bank officials and several commercial bank CEOs who had claimed withdrawals were significantly up prior to the election. The USAID-funded advisor said four banks experienced drops in deposits of over 10 percent in August, but that three of these four banks had had unusual rises in deposits in July, so the August declines brought their deposits down to more normal levels. ¶2. (SBU) The advisor also reported loan growth has slowed significantly during the first half of 2009, but there is no deterioration or improvement in the quality of loans. Bank profitability in Afghan solar year (SY) 1388 (3/2009-3/2010) is down from SY1387 (3/2008-3/2009). The advisor noted three new banks -- Bakhtar (created from the reformed Afghan Development Bank), Ghazanfar, and Maiwand -- influenced the median profitability ratio. Like other experts, he predicts consolidation among Afghan banks. End summary. DEPOSITS IN AFGHAN BANKS STALLED ¶3. (U) Embassy Treasury, USAID, and ECON officers met with a USAID-funded banking supervision advisor October 29 regarding deposit levels and the profitability of Afghan banks. ¶4. (SBU) Deposit growth in the banking sector has essentially stalled, but, according to the bank supervision expert, there is no evidence of net major deposit withdrawals due to the uncertainties surrounding the August presidential election. The data used for this finding, however, are collected on a monthly basis and sharper fluctuations, e.g., from one week to the next, would not be captured. The expert reports the monthly data available show the following: -- Quarterly changes in deposits (2008-2009): Deposits were up 17.1 percent September 2008-December 2008 and 26.1 percent December 2008-March 2009 before falling 8.3 percent in March-June 2009 (largely due to one bank) and then rising 9.5 percent in June-September 2009. -- The number of banks recording deposit increases: twelve banks in September-December 2008; eleven banks in December 2008-March 2009; thirteen banks in March-June 2009, and twelve in June-September ¶2009. -- The large drop in aggregate deposits in the quarter ending June 30 was primarily due to a decrease in U.S. Army deposits at a single bank (Afghan International Bank). Despite the drop in aggregate deposit levels, however, thirteen of Afghanistan's seventeen banks managed to achieve increased deposits over that period. ¶5. (SBU) The USAID banking supervision expert reported that scanning the month-by-month data for the most recent quarterly period (June-September 2009),there is no evidence of abnormal deposit withdrawals. -- Monthly changes in deposits, June-September 2009: the June-July period posted a 1.0 percent rise in deposits; July-August, a 1.6 percent increase; and August-September a 6.7 percent jump in deposits. The number of banks with increased deposits totaled nine in June-July; eleven in July-August, and thirteen in August-September out of Afghanistan's total of seventeen banks. ¶6. (SBU) Even in the slow-growth month of July, nine of the seventeen banks had increased deposits. In August, when the election took place, there were four banks that experienced a decline in deposits of over 10 percent. However, three of those four banks had unusual percentage increases in July and the declines in August brought those banks' deposits down to previously prevailing levels. LOANS TRENDING SLIGHTLY DOWNWARD ¶7. (SBU) Loan growth in 2009-10 is reportedly significantly slower than in 2008-2009. -- Slower growth quarterly in gross loans: After recording 5.0 percent growth in September-December 2008, loans grew only 2.2 percent in December 2008-March 2009, and 2.1 percent in March-June ¶2009. -- Absolute changes in loans (AFN million): loans rose 2,482 AFN September 2008-December 2008, 1,132 AFN December 2008-March 2009, KABUL 00003483 002 OF 002 and 1,109 AFN March-June 2009. ¶8. (SBU) The banking supervision advisor stated that loan quality showed no discernable trend: -- Adversely-classified loans (substandard loans) as a percent of gross loans were 1.6 in December 2009, 3.5 in March 2009, and 2.9 in June 2009. -- Non-performing loans as a percent of gross loans were 1.2 in December 2009, 1.1 in March 2009 and 0.7 in June, 2009. ¶9. (SBU) The advisor reported Afghanistan's bank examiners review 100 percent of the loans on each examination and often adjust the banks' classifications. He noted that as of this year, on-site teams visit all banks twice a year -- once for a full scope examination and a second time for an intensive loan review. Banks with a large number of small-balance loans (First MicroFinanceBank and BRAC) are exempt from the 100-percent review and instead undergo portfolio reviews on a sampling basis. ¶10. (SBU) In the coming months, USAID plans to add another advisor to the bank supervision team. This change will allow the team to dig deeper into the bank examination process. Over the past year, six banks received enforcement actions, three of which have now complied and are healthier as a result. MOST AFGHAN BANKS PROFITABLE ¶11. (SBU) Currently, ten of the country's seventeen banks are profitable. This number was the same in the first five months of SY 1388 (March through July of 2009) as in the previous year. However, profitability at the banks was down during the first five months of SY 1388. Banks are "asset sensitive," i.e., their net interest income is negatively affected by a drop in market interest rates. In addition, three new banks -- Bakhtar Bank, Ghazanfar Bank and Maiwand Bank -- influenced the profitability ratios. Overall, new banks are not expected to be profitable for the first 2-3 years of existence. The advisor stated bank profitability of will receive increased emphasis in upcoming examinations. BANK PRIVATIZATION: UNCLEAR PATH AHEAD ¶12. (SBU) The advisor noted BeringPoint proposed a plan to consolidate the two state-owned banks (Bank-e-Mille and Pashtany Bank) several years ago. Despite a solid business case for consolidation and eventual privatization, the Afghan Parliament has yet to authorize such a move. Efforts to promote privatization have repeatedly stalled and appear unlikely to move in the near-term. EIKENBERRY