KARACHI - The earnings and profitability of the banking sector for 2008 (scheduled to be announced this month) is likely to increase by 20 percent and 16 percent respectively amid SBP decision of allowing banks to take 30 percent benefit of the forced sales value for pledged stocks and mortgaged properties on non-performing loans. However, banks' earnings in 2009 could receive a boost of around 5-7 percent, depending on the incremental NPLs ratio and the valuation of FSV as determined by approved value-seekers during the year under review. The short-term earnings would get a boost as there are no changes in the banking sector dynamics. Moreover, there remains a risk regarding the new measure's impact on risk management and whether this move could ease the current stringent risk management procedures. It is worthwhile mentioning here that earlier banks profit was expecting to decline by 4 percent while and after this measure sector profit is anticipated to post 16 percent growth. State Bank of Pakistan had issued a circular with respect to amendments in prudential regulations relating to provisions for loans and advance. According to the circular, banks would be allowed to take 30 percent benefit of forced sale value (FSV) for pledged stocks and mortgaged properties on non-performing loans (NPLs) effective Dec 31, 2008, a partial reversal of the previous FSV regulation in Oct 2007. Farhan Rizvi, Research Analyst at JS Research is of the view that at a time when banks profits were facing pressures from rising NPLs, the availability of FSV benefit would help improve 2008 earnings by around 18-20 percent from earlier estimates and would trigger short term rally in banking stocks. "While banks have been allowed FSV benefit up to 30 percent on all NPLs in the doubtful and substandard category, benefit on FSV would be limited to a maximum of 3 years from the date of classification in the loss category. This means that as of end Dec 2008, NPLs classified prior to Jan 1, 2006 would not be allowed to avail the new FSV benefit. The total NPLs of the sector as of Dec 31, 2005 stood at Rs192bn, and based on our discussion with various banking experts nearly 50 percent of those are no longer outstanding NPLs as of Dec 2008", he said. "There are no significant changes in the sector dynamics including risks that the sector currently faces. While short term earnings would get a boost, there would be no major change in the cash flow position while the risk of rising NPLs and slowdown in deposits and advances growth would remain intact", he added. According to latest numbers, the size of total NPLs as of Sep 30, 2008 stands at Rs278bn with a coverage ratio of 79 percent, while NPLs are estimated to rise to Rs302bn by Dec 2008. This assumption is based on the average quarterly increase in NPL during 2008 of Rs21bn accounting for the fact NPLs generally increase at a faster pace in the last quarter of the year.