Bank deposits hit a record high at Rs17.87 trillion

KARACHI: Deposits of the banking system have reached a record high of Rs17.87 trillion owing to higher remittances and lack of cash-based business activities, analysts said on Thursday.

The deposits hit a record high to Rs17.87 trillion by end of December 2020 after posting an increase of 22.14 percent when compared with Rs14.63 trillion by the end of December 2019, according to data released by the State Bank of Pakistan (SBP).

According to the analysis of Topline Securities, the growth in deposits has been fueled by higher remittances (+17.5 percent YoY in USD and 27.5 percent YoY in PKR terms during 11M2020), while lack of business activity due to COVID-19 (cash-based) may have also increased bank deposits.

 Investments have grown by 31 percent to Rs11.5trn in 2020. At the start of the year, the high yield on offer had already lured banks to move towards investments, which was compounded further as COVID-19 hit strangling business activity and in turn loan growth.

 Advances grew by just 2 percent in 2020 as banks remained wary of overall economic conditions due to COVID-19. However, the last quarter of 2020 for Advances has been relatively better with 3.4 percent QoQ growth. The aggressive cuts in interest rates by the Pakistan Central Bank since Mar-2020 may be starting to reap fruits as the impact of the COVID-19 pandemic also lowers and economic activity picks up.

Investment to Deposit Ratio (IDR) had already depicted an improvement to 67 percent in Sep-2020, which has been maintained at year-end. To recall this was 66 percent in Jun-2020 and 60 percent in Dec-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. ADR has dropped to 48 percent from 49 percent in Sep-2020 (to recall, this was at 51 percent in Jun-2020 and 56 percent in Dec-2019).

 Provisioning has also seen a substantial increase as banks have opted to increase General Provisioning in the wake of COVID-19, however, the last quarter has seen provisions stabilizing as the banks feel that they have adequately provided for up until Sep-2020.

M2 growth clocked in at 16 percent in 2020 primarily driven by the stellar deposit growth this year and a 19 percent increase in Currency in Circulation (CIC). CIC increased to Rs6.30trn by the end of December 2020, with CIC as a percent of M2 clocking in at 29 percent, above the past 5-year average of 27 percent. Reasons for increasing CIC can be attributed to low-interest rates and evasion from tax authorities.

Going forward, we expect Deposit growth in the range of 12-14 percent during 2021E, while we expect Advances to grow by around 4-6 percent, where banks are expected to remain risk-averse given concerns over further waves of COVID-19.

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