Banking sector ADR rises to 47.8%

Jumps 944bps in 3 months; market concerned about steps banks are taking

KARACHI:

The banking sector's Advance-to-Deposit Ratio (ADR) improved to 47.8% as of November 29, 2024, up from 44.3% in October and recovering from a low of 38.4% in August. This marks a notable increase of 944 basis points (bps) in just three months, reflecting banks' efforts to meet the mandatory 50% ADR threshold by December 31, 2024. Failure to achieve this target will result in additional taxes, with a 10% tax on income from government securities for an ADR between 40% and 50% and a 16% tax for ratios below 40%.

To meet the deadline, banks have employed various strategies, including offering short-term loans to sister companies and trusted corporate clients. According to Tahir Abbas, head of research at Arif Habib Limited (AHL), the ADR's improvement indicates that banks are increasingly channelling deposits into loans, which could signify improved credit activity in the economy.

The ADR measures the percentage of a bank's deposits allocated as loans. Pakistan's businesses have long faced challenges in accessing financing, and the government raised the ADR requirement to 50% in 2022 to address this issue. However, the government's reliance on borrowing through instruments like Pakistan Investment Bonds (PIBs), treasury bills (T-bills), and Sukuk keeps the Investment-to-Deposit Ratio (IDR) consistently high, ranging between 93.3% and 99.6% from June to November 2024.

The banking sector's Gross ADR has surged to approximately 48%, reflecting a 10-percentage-point increase in loan portfolios since August, according to Waqas Ghani Kukaswadia of JS Global. He noted that while the ADR tax was introduced in 2022, it was temporarily exempted in 2023 to ensure liquidity for government borrowing. The reintroduction of the tax has spurred banks to expand lending rapidly to meet the December 31 deadline.

Market observers have expressed concerns about the measures some banks are taking to meet the target. These include short-term loans to affiliated companies and trusted clients, often with the expectation of reclaiming the funds after the deadline. Meanwhile, private sector borrowing has been constrained by high interest rates of around 15%, leading to rising defaults, particularly in the textile, cement, and steel sectors.

Non-performing loans (NPLs) have become a growing concern, further complicating the banking sector's efforts to expand credit. To address these challenges, the government plans to introduce a regulation requiring banks to maintain an average ADR throughout the year, rather than just on December 31.

Since September 2024, the banking sector's gross advances have increased by 23% to Rs14.9 trillion, while deposits have risen by just 1% to Rs31.1 trillion, according to Topline Securities.

Last month, Prime Minister Shehbaz Sharif formed a committee to resolve ADR-related issues, chaired by Deputy Prime Minister Ishaq Dar, to review the legal framework surrounding the ADR tax and propose alternative fiscal measures to ensure compliance without stifling lending activity. It will also consider non-fiscal regulatory changes to increase private sector credit and develop a consensus on solutions for maximising government revenue.

Yields on market treasury bills

Meanwhile, yields on treasury bills have continued to decline, with the 3-month cut-off yield falling by 100bps to 12%, the lowest since March 2022. Similarly, the 6-month yield dropped by 89bps to 12%, and the 12-month yield declined by 5bps to 12.3%.