With their advances having registered a 9 per cent growth in 2014, the banks’ investment in the risk-free government securities broke all the previous records.
The industry analysts believe that while negatives like an uncertain law and order, a lingering energy crises and fear for bad debts kept the risk-averse banks from private sector lending, they invested “heavily” in the risk-free sovereign guarantees floated by the cash-strapped federal government to raise billions of rupees from its local funders.
During the just-concluded 2014, the scheduled banks’ total investments grew by a sharp 26 percent. The analysts attribute this surge to the banks’ heavy investment in long-term Pakistan Investment Bonds (PIBs).
“The law and order issues, energy crisis and risk of bad debts forced the banks to park their investments in risk-free government securities,” viewed Umair Naseer, an analyst at Shajar Research.
The banks’ tilt towards public sector lending increased their Investment to Deposit Ratio (IDR) to 61.2 percent during the year under review as compared to 54.1 percent of last year.
“The investment in government securities is at an all-time high as an IDR of 61 per cent has never been achieved previously,” said Umair.
Also, the credit penetration, advances as percent of GDP, also dropped to multi-year low of 18 per cent, lowest among regional economies.
Having shown a decent growth in 2014, the banks’ advances still have room for further improvement with clear signs of economic recovery.
The advances of the banking sector grew by 9 per cent compared to 6 per cent in the previous year increasing to Rs 4.4 trillion compared to Rs 4.0 trillion in 2013.
The advances growth during the last three years has averaged 5 per cent due to conservative lending strategy of the banks and low credit demand. The analysts anticipated credit growth to increase further in 2015 as lower borrowing by government would offer more liquidity to the banks.
Additionally, the lower interest rates on fixed income securities would force the banks to adopt a more aggressive lending approach. Total deposits of the commercial banks increased by 11 per cent in 2014 to reach Rs 8.3 trillion whereas, M2 growth during the period stood at 13 per cent.
The deposits growth has been slower when compared to average growth rate of 13 per cent during the last three years, “It is line with lower M2 growth,” said analyst Umair.
The M2 growth has also been witnessing a declining trend recently due to contained government borrowings and higher foreign inflows. Total outstanding stock of Net Foreign Assets (NFA) increased by Rs 562 billion in 2014 as against a contraction of Rs 436 billion during the same period last year.
On the other hand, Net Domestic Assets (NDA) increased by Rs 396 billion as compared to an increase of Rs 1.6 trillion in the corresponding period last year.
“We expect this trend to continue in near term as government is focusing on fiscal consolidation,” the analyst viewed. The banks’ Advance to Deposit Ratio (ADR) stood at 53 percent as compared to 54 percent in 2013.
ADR has been on declining trend during the last few years as it stood at 76 percent in 2009. The total provisioning expense of the scheduled banks, as of Dec 26, 2014, also remained largely stable at Rs 436 billion as against Rs 426 billion during the last year.
The analysts believe that the declining interest rate scenario and improving macroeconomic indicators would likely keep provisioning expense of the banks in check going forward contributing to bottom-line of the bank. As credit appetite has started to grow, the country’s banks are likely to be key beneficiaries in coming years.
“Demand for credit is likely to come from power, textile, telecom and consumer sectors,” said the analysts.
Moreover, they said, the declining Non-Performing Loans (NPLs) coupled with adequate Capital Adequacy Ratio (CAR) would further help the banks to grow overall. The evolution of branchless and Islamic banking is also expected to improve banking outreach and volumes which in turn would increase the overall banking sector’s profits.