Pakistan's banking sector deposits grew at a 4-year high of 10 percent to Rs 9.1 trillion ($90 billion) in 1H2015 compared to last five years average growth of 8 percent indicating increased deposit mobilisation by banks in the wake of shrinking margin outlook. According to Topline research on banking sector in June 2015, deposits grew by 13 percent YoY as against 10 percent last year in the same period. Advances of the banking sector grew by 3 percent in 1H2015 vs. last 5-year (2010-14) average growth of 2 percent signalling slight improvement.
Advances growth during June 2015 remained on lower side increasing by 7 percent vs. 11 percent last year due to retirement of power sector debt and aggressive deleveraging by companies. Consequently, Advance to Deposit Ratio (ADR) reached multi year low of 50 percent as banks preferred to invest in risk-free Government Securities.
"We anticipate this trend to reverse due to multi decade low levels of interest rate, China-Pakistan Economic Corridor (CPEC) projects, gradual improvement in energy situation and improving macros that will lead to gradual improvement in credit growth. We anticipate credit to grow by 14 percent on average in 2015-17," said Umair Naseer, an analysts at Topline.
High yielding consumer lending (6 percent of total credit) specifically car financing is anticipated to pick up due to multi-decade low interest rates. As against single digit growth in overall advances, car financing increased by 11 percent in 4M2015 which is the highest during last 8 years, as per the latest data of State Bank of Pakistan (SBP), he informed. Total Investments, on the other hand, rose by 14 percent in 1H2015 as Investment to Deposit Ratio (IDR) surged to 64 percent as against 54 percent in June 2014.
The recent budgetary measures have been negative for banks but we believe that the underperformance of banking sectors in 1H2015 (bank index down 16%) have improved sector valuations and offers potential upside. "We maintain our liking for the sector due to compelling valuations, improving macros to increase credit growth to 14 percent, investment mix in favour of high yielding PIBs (32 percent of deposits) and strong Capital Adequacy Ratio (CAR)," Umair said.