LAHORE – Banking industry’s deposits growth clocked in at 8.25 per cent in first eleven moths of 2014, while industry’s IDR and Advances to Deposits Ratio (ADR) reached 59 per cent and 54 per cent by November 2014. 

According to statistics, ADR has been on a downtrend given that increase in absolute deposits is higher than the increase in absolute advances. On the other hand, IDR has shot up by 523bps since Dec 2013 on the back of further investment in government securities. Experts flag that since the start of the downtrend in interest rates (2Q2013), banks have preferred to park their investments in longer tenor government papers.

While banks’ preference for government papers is likely to remain intact, available liquidity to government from Sukuk, IMF tranche and privatization proceeds is likely to reduce government’s dependence on borrowing from commercial banks in the near future.

Average banking spreads hit a nine-year low in Oct-2014, while spreads clocked in at 5.81 per cent to average at 6 per cent during 10M2014. In the low spread scenario, experts expect investments stacked in PIBs to provide support to bank’s NIMs. Note that PIB yields in the secondary market have gone south by around 133bps in 4Q2014TD (owing to 50bp cut in policy rate by SBP), leading to possible revaluation gains for the banking sector.  However, some experts are of the view that profits of the banks will grow by as much as 35 per cent in 2014.

These are positive signs for sure. The banking sector has seen some tough time in the recent past. But they believe local banks will be the key beneficiaries of the impending economic recovery and uptick in business activities in coming years. Deposits of commercial banks increased at a compound annual growth rate (CAGR) of 14.6 per cent in the last five years (2009-13). Banks’ deposits increased 13 per cent on a year-on-year basis at the end of June.

This is slightly lower than the recent growth pattern, they said, noting that the decline is mainly because of slow growth in money supply and revaluation of foreign currency deposits after the appreciation of the rupee against the dollar.

Among large banks that have assets exceeding Rs500 billion, the largest expansion in deposits took place in Bank Alfalah (15.9 per cent) and Habib Bank (15.2 per cent) over the 12-month period ended June 30, 2014.

Other large banks also recorded significant growth in their deposits with Allied Bank, United Bank and MCB Bank posting an increase of 13.3 per cent, 13.1 per cent and 12.4 per cent, respectively. National Bank was the only large bank whose deposits declined (0.6 per cent) on a year-on-year basis. Investments of commercial banks increased at a CAGR of 31.8 per cent between 2009 and 2013 to Rs4.3 trillion. However, they have slowed down of late. Year-on-year growth in banks’ investment was only 5.4 per cent by the end of the 12-month period in June 2014 as opposed to the three-year average of 26.9 per cent during 2011-13.

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