LAHORE - Despite successive policy rate reduction, the banking sector has been continuing expanding its investment portfolio keeping advances growth subdued, as investment and deposits have jumped by 27 per cent and 13 per cent respectively on annual basis while advances were increased by a relatively subdued 7 per cent during 4MCY13.
Banking circles were of the view that with calendar year five months down, yet again, banks’ focus still tilted towards investments than lending, which is still quite understandable.
If compared the month wise percentage change in April 2013, a sharp decline in investments of 3.3 per cent is witnessed, followed by decreasing advances by merely 0.4 per cent MoM despite unchanged policy rate scenario that saw a massive 250bps cut last year with an intention to help strengthen the overall sector’s lending portfolio.
As per latest statistics, the advances grew from Rs3.6trn (April 2012) to Rs 3.9trn in April 2013, a 7 per cent rise. The obvious reason for this increase was a series of cut in policy rate bringing it down to single-digit (9.5 per cent) during CY12. However, no growth is seen in advances from the Dec’12 level to-date. At the same time, deposits grew 13 per cent taking Advances to Deposit Ratio (ADR) to 57.5 per cent in April 2013 from 60.7 per cent.
However, the main concern for banks has been mounting credit risk due to persistently low overall macros, observed analysts at Arif Habib Securities Research. Also, with GDP growth expected to remain sluggish in near term, naturally, credit and deposit growth will slow. This is expected to continue till key risks i.e. circular debt and triggered energy issues subside, they added.
They were of the view that investments of banks grew by 27 per cent to Rs 3.9trn, from Rs 3.1trn, during the year. Most of the banks remained inclined towards investment in government securities in order to minimize their credit risk and ensure lower but guaranteed returns.
Also, the undying borrowing needs of the govt made banks’ exposure to massively increase in the govt papers. This made the Investment to Deposit ratio (IDR) incline up to 58 per cent from last year’s 51.5 per cent. A further push to investments came from a 100bps rise in PLS rate taking it up to 6 per cent effective from Jun’12. With PLS returns to be charged on average monthly balance from April 2013 onwards, it is expected that banks will continue with their focus more towards investment than advances.
Banking sector’s weighted average spreads, in Apr 2013, declined by a mere 5bps MoM hovering around 6.19 per cent compared to 6.24 per cent in March 2013. This takes the average of 4MCY13 to 6.21 per cent, a decline of 110bps YoY. The double-digit decline in spreads during 2HCY13 has now come down to single-digit, with latest slash of a mere 5bps, representing a sigh of relief for banks who have been facing double-edged sword in the form of increased deposit costs and decline in lending rates.