The deposit base of scheduled banks has snuggled up by 7 percent CY13TD (13 Sept, 2013).
However, unable to match such an increase, the banks’ gross advances declined by 1 percent during the same period. Investments on the other hand stepped down by 5 percent CY13TD, the decline in investments was even more drastic when assessed on a quarterly basis where the head declined by 10 percent 3QFY13TD.
“We attribute such happenings to the uncertainty witnessed in the policy stance earlier during the CY13, which initially kicked off as the country instigated efforts to enter the IMF programme stirring up investor concerns of spiralling inflation as subsidies were removed,” viewed Invest Cap analyst Muniba Saeed.
Coupled with expectations of an increasing rate of inflation was the need to keep real interest rates positive and thus an increase in discount rate, she added. Such uncertainty, the analyst said, deterred the scheduled banks to invest in the risk-free government securities awaiting clarity on the policy rate front.
The banking sector’s investment to deposit ratio (IDR) fell from 58 percent in Jan-13 to 50 percent on Sept 13. The ADR (advance to deposit ratio) also faced a similar situation, however, with lesser intensity sliding from 58 percent in Jan-13 to 53 percent in the same period.
Where average banking spreads in 8MCY12 rested at 7.2 percent, the same registered a massive decline of 94bps, coming down to 6.26 percent in 8MCY13. The massive decline can be explained by a low policy rate hovering at 9.5 percent and lower for most part of the year as well as the savings rate floor.
Banking spreads on outstanding deposits and advances, stood at 6.28 percent in Aug-13 (3bps decline MoM) led by a deposit rate of 4.83 percent (14bps down MoM) whereas the lending rate for the same period hovered around 11.11 percent (17bps MoM decline) following the 50bps cut in discount rate announced on 21, Jun, 2013.
About implications of monetary policy statement, Muniba said, the recent 50bps raise in the discount rate along with a forward view of monetary tightening led by higher inflation, the banking sector stood affected from such a transformation.
For starters it is expected to put an end to squeezed margins where the banking sector spreads were initially compressed due to a floor of 6 percent placed on deposit rates set on average balance for savings accounts and discount rate at 9.0 percent.
Also expectation of a future discount rate hike is expected to rejuvenate interest of banks for investment in risk-free government papers in the absence of shaky investor sentiment in the private sector (led by both heightened security concerns and escalated cost of doing business as subsidy on electricity is removed) along with fears of rising NPL’s that such advances fetch. However, with IMF signalling restrictions on the government borrowing from scheduled banks, the positivity from risk-free investments seems limited.
With the discount rate hiked by a mere 50bps, the upside at this point seemed narrow, she said. “However, we remain positive for the future foreseeing the rate to touch 10 percent by the end of CY13 and 11 percent during CY14,” she said. “We expect improvement in security situation and any development on alteration in minimum deposit rate to be major triggers for the sector,” said the analyst.
