Bank deposits increase 18% in August 2021
News Report
Deposits with banks increased 18 percent in a year to Rs19.21 trillion in August 2021, up from Rs16.33 trillion in the same month the previous year, according to an SBP report.
Banks have mostly invested available cash in government debt instruments such as Pakistan Investment Bonds (PIBs) and T-bills, which is a safe way for the government to lend.
As a result, bank investment (loan to the government) increased by 28% year on year to Rs13.90 trillion in August 2021, up from Rs10.87 trillion in August 2020.
Bank advances (credit) to the private sector, on the other hand, increased over the year, but not at the same rate as government lending.
According to the State Bank of Pakistan, credit offtake (advances) grew 11% in the month under review to Rs8.94 trillion, up from Rs8.05 trillion in the previous month (SBP).
Arif Habib Limited (AHL Research) predicted that the ADR (advance to deposit) ratio fell 280 basis points to 47 percent in August 2021 compared to August 2020 and 60 basis points compared to July 2021.
It stated that the IDR (investment to deposit) ratio grew 581 basis points to 72 percent in August 2021 compared to the same month last year, but fell 248 basis points compared to July 2021.
The faster growth in the investment to deposit ratio compared to the advance to deposit ratio implies that banks in Pakistan have stuck to their traditional business strategy of primarily lending to the government and lending to the private sector in small amounts.
The banks’ business model runs counter to the government’s pro-business and pro-growth initiatives.
Banks, on the other hand, may no longer be able to operate under the current business model since the government would levy a 5% surcharge on institutions with an advance-to-deposit ratio of less than 40%, and a 2.5 percent surcharge on banks with a ratio of 40% to 50%, beginning July 1.
To avoid further taxation, banks would develop their working relationships with businesses in order to maintain an advance-to-deposit ratio of more than 50% in the future.
The advance to deposit ratio will also rise during FY22, with firms borrowing between Rs250-275 billion under the temporary economic refinance plan for the establishment of new factories and the expansion of existing ones (TERF).
Bank Deposit of Pakistan has grown by 22% YoY to Rs19.8trn (US$124bn) during deals as of June-2021 (i.e. FY21).
The bank deposits have recorded the highest growth in 14 years.
Growth in bank deposits has been fueled by higher Remittances (+27% YoY to US$29.4bn and +30% YoY in PKR terms), while business activity (cash-based) too was hindered due to COVID-19 resulting in an increase in banking deposits.
Investments of Banks have grown by 29% YoY to Rs13.7trn (US$86bn) as of Jun-2021. The excess liquidity is being placed in investments by Banks due to muted growth in Advances.
Advances grew by 10% YoY as of Jun-2021 to reach Rs9.0trn (US$56bn) as banks remained wary of overall economic conditions due to COVID-19. However, growth of 5% QoQ in banks lending, is an indication for improving outlook.
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The investments to Deposit Ratio (IDR) has increased from 66% in Jun-2020 to 69% in June-2021 but is down from 70% in Mar-2021. Advances to Deposit Ratio (ADR) has declined from 51% in Jun-2020 and 48% in Mar-2021 to 45% in Jun-2021. We expect ADR to improve going forward as the government has imposed a tax on banks which fail to meet the minimum threshold of 50% ADR and as economic activity picks up.
Total provisions against advances stood at Rs629bn (US$3.9bn) and remained unchanged on a YoY and QoQ basis, despite overall concerns of a sharp spike in Non Performing Loans (NPLs) due to COVID-19 linked deterioration in the financial health of corporates.
M2 growth clocked in at 14% YoY in FY21 primarily driven by higher government borrowing from scheduled banks (+17% YoY). Currency in Circulation (CIC) has increased by 14% YoY during the same period. CIC as a % of M2 clocked in at 29%, above the past 5-year average of 27%, likely due to low-interest rates and an effort to stay out of sight of tax authorities.
Going forward, we expect average deposit growth of 15% over 2021-23 compared to the last 10-Year average growth of 13%. We are presently Over-Weight on Pakistan Banks with MCB Bank (MCB), Habib Bank (HBL), and Meezan Bank (MEBL) our top picks, Topline Research said in a report.
