KARACHI    : Bank deposits have increased 19% to reach Rs11.9 trillion in June after the country saw increased circulation of money in the system, a local brokerage house reported on Tuesday.

“We attribute this to a 17% year-on-year Broad Money (M2) growth in June 2017,” Topline Securities’ analyst Umair Naseer said in a note to its clients.

Deposit growth remained higher than expected and could act as a catalyst in supporting profitability of the banks in times of tough Net Interest Margins (NIMs).

“Advances also grew in tandem, increasing by 21% to reach Rs6.1 trillion. Such growth in advances was last seen in June 2006.

“This phenomenal growth is due to additional liquidity available with banks, unattractive yields prevailing on government securities and improving macroeconomic indicators,” he said.

Despite this above average growth, advance to deposit ratio (ADR) of the sector stood at 52%, which is still well below the levels seen in 2008 when it stood at 84%.  Investments on the other hand grew by 8% to Rs8.1 trillion as investment to deposit ratio (IDR) declined to 68% in June 2017 versus 71% in May 2017.

Furthermore, breakdown of broad money numbers shows that the government has borrowed Rs1.4 trillion (Jun 30, 2016 to Jun 23, 2017) from central bank against net retirement of Rs382 billion in the same period last year.

“Borrowing from the central bank is inflationary in nature and if it persists for long duration, it could lead to higher inflation and interest rates (positive for banks). It also reduces the crowding out effect of private sector credit,” he said in the report.

“High deposit growth rate, expected reversal in interest rates from 2018 and reducing loss ratio bodes well for the sector,” Naseer added.

At present, the interest rate is standing at over four decades low 5.75% by the central bank.

A banks’ separate index in Pakistan Stock Exchange; BKTI (KSE Bank Index) is down 8% in calendar year 2017 to date (market down 3%), which has opened up valuations.

“Topline Banking Universe is currently trading at a price-to-earnings ratio and price-to-book ratio of 9.1-time and 1.3-time with Return on Equity of 14%.The sector offers dividend yield of 7%, which is higher than the prevailing risk free rate,” Naseer concluded.