Big five all set to face the music


The bigger banks are bracing for a financial impact the analysts estimate at 6 to 10 percent on their earning per share as the central bank scaled up the minimum deposit rate to six percent from the previous five percent.
“The minimum profit rate would be 6.0 percent p.a on all Pak Rupee saving deposits with effect from May 01, 2012,” SBP notified the commercial banks last Friday.
The notified rate of profit would be applicable on all existing and new saving deposits including term deposits, the regulator clarified.
According to economic observers, the upward revision of the deposit rate came as the State Bank moved against lofty banking spreads and rising banking sector profits, primarily being driven through investments in the risk-free government securities.
Given the prevailing recessionary climate and resultant increase in the banks’ bad debts which have soared beyond Rs 600 billion, the banks have adopted a risk-averse behavior towards private lending that create economic activity thus ensuring growth.
The analysts believe that SBP’s move was despite the fact that the regulator had already allowed individual depositors and investors to invest in the government papers through an IPS account which would shun banks’ intervention and therefore their incremental spreads.
Though against market economy and sector efficiency, the central bank, while increasing minimum rate of deposits, made it clear to banks to provide some level of respite to depositors while pinpointing concerns with respect to the banking in Pakistan as being limited to only funding fiscal deficit of the government instead of taking risk, finding investment avenues through building partnerships with the private sector etc.
“Looking at the secondary market rates, mainly KIBOR, treasury bills and Pakistan Investment Bonds (10-year), one can easily deduce the fact that high risk-free rates (T-bills yields parallel to risky KIBOR rates) themselves induce banks to go for investments in the government papers instead of lending to the private sector in first place,” said Khurram Schehzad, head of research at InvestCap.
The analyst said the EPS impact on the bigger banks ranges 6 to 10 percent since smaller banks had already been running with higher cost of deposits i.e. in 7-9 percent range in order to fetch higher deposits. The impact of mandatory increase in the deposit rates stood remote for them while big-5 banks, having average cost of funds around 5.2 percent, due to high CASA mix, would have an estimated impact on their annualized earnings with 1 percent increase in deposit rates, provided no pass-on through KIBOR or higher bids for T-bills/PIBs in the upcoming auctions.
As far as the numbers go, total deposits of the scheduled banks stood at Rs5.92 trillion as of Mar-12 (Rs5.87 trillion in CY11) while savings accounts hold a 38 percent share in the total deposit mix i.e. Rs 2.25 trillion as of March-12.
In the total savings account size, big-5 banks hold 56 percent share while the rest of the industry stands with 44 percent.
In this regard, since big-5 banks stand with the lowest cost of funds, a 1 percent mandatory increase in the deposit rates is expected to lead to a 6 percent to 10 percent impact on the big-5 banks’ CY12E earnings (annualized).
“As the secondary market yields have lately been on the rise on account of rising liquidity crunch in the money market with central bank funding the gap increasingly through OMOs with T-bills and PIBs auctions ahead, we believe spreads have already improved a bit while big-5 banks still have enough muscles to pass on the partial increase in deposit rates through re-rating of lending rates on a quarterly or semiannual basis,” said Khurram.


  1. The unique deposit structure in Pakistani banking sector is one of the prime reasons for the existence of high spreads. High spreads reflect inefficiency in the financial intermediation and lack of competition in the banking sector. Raising rates in my opinion will not work. Bank will simply pass it on. They raised it earlier in 2008. I guess it didn't work so they are going to give it another try. Savings rates, especially financial saving is very low in Pakistan. To start off only 25% of population has bank accounts. Banking products are limited. Alternative areas where people can park their savings (e.g. pensions funds, mutual funds, corporate bonds, etc) are limited or not trusted by savers. Financial literacy is also a big issue. Per capita income being low most deposit amounts are small and according to research that I have undertaken the saving and fixed deposits supply elasticity points to inelastic deposit supply function. SBP needs to realize that problem is structural in nature which cannot be fixed by resorting to era of "financial repression". Financial infrastructure, other than banks need to develop and mature in Pakistan with efforts undertaken impart financial literacy to general population. SBP I think is working on financial literacy angle, more need to be done. It will take time……

Comments are closed.