Rising confidence: Shift in investment portfolio to boost banks’ earnings

Improving macro-economic indicators boost confidence in sector.

KARACHI:

It seems that the banking sector of Pakistan has just received yet another lease on life in the shape of the latest monetary policy announcement that kept the key interest rate unchanged at 10%.

Banking stocks soared in the first trading session of the week, contrary to the selling spree that analysts expected in the case of the State Bank of Pakistan (SBP) deciding to lower the key interest rate.

But other than attracting buying interest on the bourse for the next two months at least, the banking sector now appears to be getting stronger due to multiple factors.

For example, private sector credit off-take is significantly higher now with deposits piling up fairly quickly in recent times. Similarly, investments are going up, non-performing loans (NPLs) are coming down, and spreads are expected to widen in view of recent trends in the money market.

Total advances of scheduled banks at the end of February stood at Rs4.1 trillion, up 6.2% on an annual basis. As for deposits, the year-on-year rise has been 14.3% by the end of February.

According to Global Securities research analyst Umair Naseer, the increase in sector advances is encouraging, but still not significant compared with the growth in deposits recorded over the same period.

The advances-to-deposits ratio (ADR) of the sector is now 54.1% compared to 58.2% in February last year. Investments increased 13% year-on-year, taking the investments-to-deposits ratio to 58.5% from 58.8% last year.

“Banks will now be willing to invest in longer terms Pakistan Investment Bonds (PIBs), as further hike in interest rates are not expected. This will help banks improve their spreads because higher term PIBs offer more attractive rates than short-term treasury bills,” he said.

The SBP acknowledged in the recent monetary policy announcement that declining inflation and rising confidence in the market have helped fiscal authorities meet their incremental borrowing needs from long-term PIBs rather than short-term T-bills.

The current spread between the yields on long-term fixed income instrument (PIBs) and short-term government securities (T-bills) is more than 200 basis points, according to Rajesh Kumar Maheshwari, research analyst at Standard Capital Securities.

Speaking to The Express Tribune on Monday, Maheshwari said a strategic shift in the investment portfolio of banks is expected to take place, as they shift their investments form the low-yield, fixed-income instrument (T-bill) to high-yield, fixed-income instrument (PIBs) in coming days.

“It will boost overall earnings of commercial banks by 10% to 15%,” Maheshwari said, adding that deposits will continue to grow in 2014 based on good business environment, growing rural economy and foreigners’ interest in investing in Pakistan.

Published in The Express Tribune, March 18^th, 2014.

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