Financial sector: Lazy banking, huge earnings

Banks earn Rs148b in Jan-Sept, up 28.7% year-on-year

KARACHI:

Investing deposits in risk-free government securities is lazy banking. The practice allows banks to grow profits while avoiding risks associated with the expansion of the private-sector loan book.

One obvious casualty of lazy banking is economic growth, which depends in large measure on the availability of affordable credit to private businesses.

CEOs of banks operating in Pakistan take offense when they are called lazy bankers.



While bank CEOs insist their conservative lending policy is not driven by the profit motive, latest banking data suggests otherwise.

Banks operating in Pakistan made a combined profit of Rs148 billion in Jan-Sept, up a whopping 28.7% from earnings recorded in the same nine-month period of 2014, according to the State Bank of Pakistan’s quarterly compendium on the banking system released last week.

Banks are commercial enterprises and their earnings growth - however quick and mind-boggling - should not be held against them. Nonetheless, it is perfectly legitimate to look into the source of the outlandish increase in banks’ profitability over such a short period.

DESIGN: NABEEL AHMED

Bank deposits increased 5.2% in the first nine months of 2015 as opposed to a corresponding rise of 2% in advances (another name for loans that banks extend to businesses and individuals). This means deposits mobilised by banks in Jan-Sept (Rs485 billion) far outweighed the advances generated (Rs89 billion) over the same period in both absolute and percentage terms.

No wonder the advances-to-deposits ratio stood at 46.7% at the end of September, slightly lower than 48.2% recorded at the end of December 2014.

So what did the banks do with the disproportionately high deposit mobilisation if they held back loans to businesses in the last nine months? Banking data suggests they simply invested that money in riskless government papers, like Pakistan Investment Bonds (PIBs) and treasury bills, and saw their bottom lines grow further.

Banks’ investments increased 26.4% to Rs6.7 trillion at the end of the first nine months of 2015. In a nutshell, the net increase in banks’ advances was Rs89 billion over the first nine months of 2015 while the corresponding rise in their investments clocked up at more than Rs1.4 trillion over the same period.

Resultantly, the investments-to-deposits ratio (IDR) at the end of September stood at 69.1% compared to 57.5% recorded at the end of 2014. Banks held 79.3% of all outstanding government securities at the end of October, according to a separate publication of the SBP.

Speaking to The Express Tribune, Invest & Finance Securities CEO Muzammil Aslam said banking investments in government securities is at an all-time high.



“The standard threshold for government treasuries was 20% while 75% of deposits were supposed to be reserved for credit off-take and 5% for meeting regulatory cash reserve requirements. That doesn’t seem to be the case anymore,” he said.

Published in The Express Tribune, November 24^th,  2015.

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