After a gap of six years, the advances of the scheduled banks grew by 10.8 per cent in FY14 to reach Rs 4.3 trillion compared to 3.4 per cent in FY13.
According to market observers, this growth is highest since 2008 economic crisis and is broad-based in the sense that it financed external trade activities, working capital, fixed investment and consumer financing.
On the other side, private sector credit showed a healthy growth of 11.3 per cent after six years. In 1H2014, the advances grew by 5.3 per cent compared to a growth of 0.3 per cent in 1H2013. During FY09-13, advances grew at CAGR of 5.6 per cent despite 13.8 per cent deposit growth. This, Topline analyst Zeeshan Afzal said, was because the banks refrained from lending due to risk aversion and unattractive business outlook.
Consequently, he said, the Advances to Deposits Ratio (ADR) declined from 77 per cent in FY09 to 53 per cent in 2013, while credit penetration (advances as a percent of GDP) dropped to multi-year low of 19 per cent; lowest among regional and comparable economies.
The same ratio in India is 54 per cent, Bangladesh 48 per cent, Sri Lanka 42 per cent, Nigeria 29 per cent and Vietnam 105 per cent.
However, Afzal said, reduction in government borrowing, better country outlook after the new government took charge and rising industry credit appetite shifted the banks’ focus towards private lending in FY14 and resulted in stable ADR of 53 per cent. The growth in Broad Money or M2, during July (2013) to June 27 (2014) remained at 12.2 per cent versus 15.9 per cent in FY13.
“Slower monetary expansion is mainly linked to limits on SBP’s NDA (Net Domestic Assets) and limits on Govt borrowing from the SBP,” said the analyst.
Within M2, strong foreign inflows improved Net Foreign Assets by Rs327bn in FY14 to total Rs 596 billion by June 27, 2014, compared to contraction of 263 billion in FY13.
This expansionary impact, however, was offset by slow NDA expansion by Rs 753 billion versus Rs 1.5 trillion in FY13. In line with M2, deposits of the schedule banks grew at 10.5 per cent in FY14 against 14.3 per cent in FY13. “This growth rate is lowest in last 5 years,” said the analyst.
Apart from slow M2 growth, recent Pak-Rupee rebound has also reduced the rupee’s value of foreign currency denominated deposits. The scheduled banks investments growth also remained low in FY14 as overall growth remained at meagre 5.6 per cent versus 30.2 per cent in FY13.
“Both the lower fiscal deficit and availability of non-bank funding helped reduce the government’s reliance on the banking system,” he viewed. As a result, Afzal said, the scheduled banks Investments to Deposits Ratio (IDR) reduced to 54 per cent from 56 per cent in FY13. As credit appetite has started to grow, the banks are likely to be key beneficiaries in coming years, the analyst said.
Demand for credit is likely to come from power, textile, telecom and consumer sectors, he added. The Net Interest Margins (NIM) of banks are also likely to grow on rising high-yielding government papers (PIBs) while reducing Non-Performing Loans (NPLs) coupled with adequate Capital Adequacy Ratio (CAR) would further help banks overall growth, he said. Evolution of branchless and Islamic banking would improve the banks’ outreach and volumes which in turn would increase overall banking sector profits.
“We expect profit growth and price re-rating across banking sector,” he said. A more-than-expected fall in interest rates, SBP-government adverse regulations and economic slowdown are factors posing risk to these valuations, however.
