Commercial banks increased their efforts to generate cheap deposits amidst declining interest rates in the first half of 2015.
On a year-on-year basis, deposits of the banking sector increased 10% in January-June to Rs9.1 trillion, which is notably higher than the 8% average growth recorded during the last five years.
However, the growth in the amount of loans that banks gave out in the first six months of 2015 remained relatively muted on a year-on-year basis. Advances increased 3% annually in January-June, which represents ‘slight improvement’ in view of the average growth of 2% over the last five years, according to Topline Securities senior research analyst Umair Naseer.
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“The advance-to-deposit ratio reached a multi-year low of 50%, as banks preferred to invest in risk-free government securities,” Naseer said.
The State Bank of Pakistan (SBP) has cut the benchmark interest rate by 3%, bringing it down to 7% since October 2014 on the back of low inflation. As a result, banking spreads shrank to 5.75% for the first five months of 2015, which shows almost 5% attrition over the spread of 6.05% reported for the same period of 2014.
This has prompted banks to mobilise low-cost deposits in the shape of current and saving accounts that now represent 70% of total deposits as opposed to 65% in 2010.
Banks’ financials up to June 30 have not been released yet. But a look at the industry-wide data for 2014 reveals that the largest market share of customer deposits belonged to Habib Bank (16.8%) followed by National Bank (12%), United Bank (10.5%), MCB (7.6%), ABL (7.5%) and Bank Alfalah (6.4%).
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In contrast, the largest market share of loans and advances at the end of 2014 belonged to NBP (14.9%) followed by HBL (13.5%), UBL (10.5%), ABL (6.7%), MCB (6.6%) and Bank Alfalah (6.2%).
Banks have been reluctant to extend loans to private-sector businesses in the presence of risk-free avenues for investments. However, Naseer says the trend is expected to change in the wake of interest rates that are at their lowest levels in decades.
As an example, he quotes the sharp rise in car financing on the back of multi-decade low interest rates. Part of high-yielding consumer lending constituting 6% of total credit, SBP data shows car financing surged 27.3% in the first 11 months of 2014-15 as opposed to the corresponding single-digit increase in loans to the private sector over the same period.
“We anticipate credit to grow 14% on average in 2015-17,” he said.
Published in The Express Tribune, July 8th, 2015.
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