VZCZCXRO5651
PP RUEHDBU RUEHPW RUEHSL
DE RUEHBUL #3483/01 3051300
ZNR UUUUU ZZH
P 011300Z NOV 09
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 2682
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY 0928
INFO RUCNAFG/AFGHANISTAN COLLECTIVE

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