End of June 2016: banks' investment in government securities soars to Rs 7.2 trillion

Banks' holding in government securities reached Rs 7.2 trillion as of end-June 2016, representing more than 90 percent share in total investments. According to State Bank of Pakistan (SBP), banks continued to heavily invest in government papers due to growing stock of government securities during the second quarter (April-June) of this calendar year (CY16). With a growth of 5 percent, banks' investment in government securities rose to Rs 7.2 trillion as of end-June 2016.
The SBP in its Quarterly Performance Review (QPR) revealed that during the second quarter, banks invested a net amount of Rs 239.6 billion, up by 6.6 percent, in Pakistan Investment Bonds (PIBs) followed by Rs 105.3 billion in Market Treasury Bills (MTBs), up 4 percent. Around 73 percent of the overall increase in investments is placed in Available for Sale (AFS) category followed by 26 percent in Held to Maturity (HTM). As per accounting standards, value of investments placed in HTM is not affected by market risk (change in interest rate) additional placement has been made in Held for Trading category, it added.
According to SBP, the banking system's fund-based liquidity remained comfortable mainly due to continued investment in government securities. In addition, significant rise in advances, led by growth in private sector advances and financing for commodity operations and coupled with the continuing investment in government papers also enhanced the asset base of the banking sector by 7.7 percent during the quarter. Quarter-on-Quarter basis, banks' investment in government securities in the second quarter is less than first quarter of CY16 as banks' holding in government papers grew by 5 percent in April-June 2016 over 8.6 percent in Jan-Mar 2016 due to continued fiscal reliance on commercial banks. As a result, against the required level of 24 percent, banks are able to maintain Statutory Liquidity Ratio (SLR) of 49.6 percent of eligible demand and time liabilities as of Jun-16.
During the quarter under review, banks also enhanced their investments in other avenues, ie, ordinary shares, Term Finance Certificates (TFCs), bonds, etc, by around 10 percent or Rs 48 billion primarily due to bullish trend in capital markets of Pakistan. During the quarter, the KSE-100 index increased by around 14 percent to reach 37,783 while KMI-30 index grew by 14 per to close at 66,162 on end-June 2016.
However, the SBP made it clear that these investments remain within the exposure limits prescribed by the SBP. As per R-6 (B.i) of SBP prescribed Prudential Regulations (PRs), aggregate equity investment limit for banks is 30 percent of their equity. On the funding side, deposit base grew by some 7 percent to reach Rs 11 trillion during Jun-16 quarter as compared to 8 percent during June 2015. The deceleration in deposit growth may be attributed to a number of factors including decline in return on deposits minimum rate on saving deposits is falling with the decline in the benchmark rate, shift in depositors' preference to alternative modes of savings (e.g. prize bonds capital market, etc) and imposition of withholding tax on cash withdrawals.
In order to fulfil the fiscal funding need and credit demand from private sector, banks have also used financial borrowings. The weekly data reveals that financial borrowings are primarily driven by Repo borrowing from the SBP which injected liquidity into the system to anchor overnight money market rate closer to the SBP target rate.