KARACHI: Since early 2014, banks reaffirmed their strategy to multiply earnings at minimum risk, limiting scope for the private sector to rely on bank credit.
In the past, banks used to be actively involved in lending to the private sector, along with investment in government papers.
Banks earned large profits in 2013, but incentives provided by the government through issuance of its long-term papers changed banks’ strategy and approach for money making.
While inflation fell from 7.9 per cent in January to 4pc in November, the banks sensed the future path of interest rates. They started investing heavily in long-term government papers.
According to a research report by Topline Securities, performance of the banking sector (weight of 24pc in benchmark KSE-100 Index) remained in line with the index performance as banking sector is expected to be a key beneficiary of economic recovery.
The sector’s outlook also improved due to increased exposure in higher yielding PIBs.
Since December 2013 to December 2014, banks remained short of liquidity. They witnessed severe liquidity shortage in the money market. This abrupt change was largely due to banks’ renewed interest in government securities.
The banking sector is still short of liquidity as State Bank injected Rs585bn in the previous week.
According to the State Bank’s annual report, banks obtained liquidity from SBP 156 times during the first half of the year, against 76 visits to deposit liquidity with the SBP.
However, liquidity conditions improved by the end of the fiscal year, as higher than expected external inflows not only reduced government borrowing from the banking system, but also shored up external accounts.
This increased liquidity could not be maintained as banks’ eagerness for long-term Pakistan Investment Bonds set new records.
According to another report of Shajar Capital, attractive returns on PIBs have already received good response from the banking sector as they invested R1.7 trillion during 11 months of CY14 versus Rs600 billion invested in the corresponding period of last year.
“The zero risk weight of PIBs further made the case attractive as Capital Adequacy Ratio of banks improved from 14.9pc in December 2013 to 15.5pc in September 2014,” said the report.
The State Bank reduced the interest rate by 0.5pc which produced huge profits in the shape of ‘revaluation gains’ for the banks having large size of PIBs. The half basis point trim in discount rate affected high maturity spread of PIBs. For example, spread of 10year PIB declined by 150bps to 200bps. It also resulted in banks booking huge revaluation gains amounting to Rs136bn, said the report.