Pakistan Banks: Deposits growing faster than expected

KARACHIL: Overall deposits of Pakistani Banks have grown by 18 per cent YoY to Rs 16.5 trillion by end September 2020 (highest in 13-years). The same is up by 13 per cent YTD with deposits in September 2020 rising by 1.0 per cent on Month on Month bases.

Growth in deposits has been fueled by higher remittances (+15% YoY in US Dollar and 27% YoY in Pak rupee terms during eight months 2020), while lack of business activity due to COVID-19 (cash-based) may have also resulted in increase in bank deposits.

Investments have grown by 19 per cent YoY to Rs 11.04 trillion by end Sept-2020. The same is up 25 per cent YTD (vs. 21% YTD growth by end Jun-2020) with Investments in Sept-2020 rising by 1.6% MoM.

IDR has depicted an improvement to 67 per cent in Sept-2020 from 66% in June-2020 and 60% in December-2019. The higher IDR is largely due to high interest rates at the start of the year and low appetite for risk (Advances) due to COVID-19 lately.

On the other hand, Advances have grown by just 1% YoY to Rs 8.03 trillion by end Sept-2020, while down 2% YTD and 0.3% MoM in Sept-2020. This is despite the aggressive cuts in interest rates by the Pakistan Central Bank since Mar-2020 as the impact of COVID-19 pandemic has reduced the overall risk appetite of banks. As a result, ADR has dropped to 49% in Sep-2020 from 51% in Jun-2020 and 56% in Dec-2019.

Provisioning have also seen a substantial increase as banks have opted to increase General Provisioning in the wake of COVID-19.

The Currency in Circulation (CIC) has increased by 17 per cent YoY to Rs 6.14 trillion by end Sept-2020, with CIC as a % of M2 clocking in at 30%, above past 5-year avg. of 27%. Reasons for increasing CIC can be attributed to low interest rates, evasion from tax authorities and incidence of WHT on withdrawal of deposits.

Going forward, the Topline Broker’s analyst expects Deposit growth in the range of 12-14% during 2020E (vs. historical 3-year average growth of 11%), while Advances to grow by around 2% during the year.