Credit off take of the banking sector remained essentially stagnant in 1HCY13, witnessing a minute increase of 0.3% MoM despite the State Bank’s recent discount rate-cut to 9 percent.
On an annual basis, however, the head showed some movement, though growth remained muted where advances of the scheduled banks increased by 3% YoY by Rs129bn in Jun-12 to Rs3.869 trillion.
“The torpid growth in advances can be explained by a lack of willingness on part of the banks to lend to the private sector given the hazy security situation along with the presence of alternate avenues available to banks to park their assets in the form of risk-free government securities,” viewed Muniba Saeed of InvestCap Research. The analyst believes that this risk-free investment alternative, government papers, provided the banks with an opportunity to avoid the growth-oriented private borrowers while parking their assets.
Deposits on the other hand depicted a lush trend where the head hiked by 9% CYTD13 to reach Rs7.316 trillion in Jun-13. On year-on-year basis, the trend was more thriving as deposits stepped up by 14%.
Whilst deposits showed a healthy growth and advances remained subdued, the banks relied increasingly on investments, the latter thus illustrated a healthy trend rising by a major 30% YoY to reach Rs 4.129 trillion.
Consequently, the ADR of scheduled banks declined to 53% in Jun-13 as compared to 58% in Jun-12.
The investment deposit ratio alternatively witnessed a sharp increase, rising to 56.43% in Jun-13 as compared to 49.53% in Jun-12. Muniba said banking spreads for outstanding lending and deposits leveled at 6.35%, down by 79bps YoY, in Jun-13 as deposit rates descended down to almost 5% (81bps YoY decline).
“However, such positivity was more than offset by the step down witnessed in lending rates during the same period, down by 160bps YoY to 11.35%,” said the analyst.
The average spreads for 6MCY13 consequently reached 6.25%, lower by 102bps as compared to 7.27% in 6MCY12. Spreads for fresh deposits and gross disbursements witnessed a massive 97bps decline on a monthly basis as deposit rates slid by a massive 106bps MoM to 5.11% in Jun-13.
To Muniba, excessive exposure to risk-free investments though might be a temporary relief for the banking sector, the same has, however, put the sector’s outlook in question.
In a report published recently, Moody’s Investor Service, announced the preservation of its negative outlook on Pakistani banks due to the increased exposure of the latter to government debt.
The outlook was backed by the rationale that the banks’ excessive exposure to the country’s Caa1-rated sovereign credit risk has put the asset quality of the banks in question.
Followed by the banks preference to decide against lending to the risk inherent consumer class, the recent slash in discount rate has further strained the banks margins as is also evident by the contracting spreads.
“Going forward we see the banking sectors outlook to be hinged upon the monetary stance unveiled by the SBP in the upcoming monetary policy,” the analyst said.
Also, she said, though a decline in savings rate was expected to offer scheduled banks, the much needed breather, such a step by the SBP can be flagged as a distant possibility. “We expect to see a reversal in SBP’s monetary easing stance going forward,” she said.
