The Advances to Deposit Ratio (ADR) have drastically dropped to 62 per cent by end of November 2011 compared to 68 per cent at end of CY10. The Advances currently stand at Rs3,356 billion compared to Rs3,494 billion last year. This declining trend in ADR is primarily due to banks’ reluctance to opt for private sector lending on fear of rising NPLs especially since economic situation is critical and energy crisis is likely to exacerbate. Moreover, government’s increased dependence on the banking sector to finance its deficit is crowding out the private sector. This current ADR is the lowest since September 2003 when it was hovering around 60 per cent.
During the period, government borrowing from banking sector has risen by 92.7 percent to Rs2,430 billion compared to Rs1,260 billion in the corresponding month last year. The Investment to Deposit Ratio has reached 54.7 per cent by end of November 2011. Before CY11, such a high IDR situation was witnessed in 2003 when it peaked at 46 percent in September 2003. Banking sector deposits by end of November 2011 have reached Rs5,415 billion, showing an increase by 5.7 per cent since December 2010. During the same period Advances have witnessed a contraction of 3.9 per cent as the banks continue their preference for government securities. This subsequently has resulted in banks’ investments to rise by 40.9 per cent (since December 2011) by end of November 2011. Advances to Deposit Ratio (ADR) has dropped to 62 per cent in Nov-11.
On MoM basis, the IDR has jumped by 4 per cent. This is primarily attributed to conversion of Power Holding Company TFCs into TBill and PIBs to the tune of Rs391 billion. SBP, since July 2011 has aggressively slashed discount rate as it was aiming to boost economic growth and private sector lending, however, trend has depicted no change.
Analysts at the Arif Habib Limited (AH) Research say that bank’s investment in treasury bills has jumped by 39.5 per cent since December 2010 from Rs1,264 billion to Rs1,763 billion by end of October 2011. Moreover, sector’s exposure to government PIBs and Sukuk has jumped by 34.5 percent and 63.9 percent since December 2011 to reach Rs285 billion and Rs196 billion respectively.
The current trend of banks’ preference going for safer investment in government securities will in all likelihood continue, even as SBP has cut the policy rate by 200bps to 12 per cent. Moreover, with no further cut in policy rate is expected at least till July 2011, contraction in spreads will be limited hence NIMs are unlikely to suffer a major decline. Our top pick in the sector is MCB, which is offering 66.7 percent upside to Dec -12.
The bank is expected to post net earnings of Rs21.5 billion in CY11, a rise of 28 per cent YoY. We expect the bank to pay cash dividend of Rs3.0/share and bonus of 10 per cent along with its full year results.