Banking sector deposit growth slowed down to 14.2% YoY primarily on account of the 2.1% sequential decline recorded in Apr-22. Total deposits clocked in at PKR 20.1Trn while advances surged to PKR 10.6Trn (↑22.8/3.0% YoY/MoM). Resultantly ADR for the banking sector shot up to 53.0% with the impetus coming from export financing, LTFF/TERF & construction financing. Investments, on the other hand surged past PKR 15.2Trn in Apr-22 given the attractive yields on offer to pull IDR for the sector to 75.9%. Going forward, we expect advances growth to taper off as interest rates are further jacked up and domestic demand slows down while inflow in debt securities will continue in the near term given the government is looking to raise over PKR 4.0Trn in the form of short/long term paper in the ongoing quarter. As for deposits, we expect growth to sustain at around the 15% mark.

Advances growth pulls ADR to multi-year highs: Banking sector advances growth surged to 22.8% YoY in Apr-22 pulling ADR to 53.0% primarily on the back of concessionary finance schemes introduced by the previous government. Growth in total lending was fueled by 1) export finance schemes (↑21.9%/PKR 124Bn YoY), 2) LTFF/TERF (↑77.5%/PKR 259Bn YoY) and 3) construction financing (↑71.9%/PKR 97Bn). It is pertinent to note that overall lending has also been scaled up ever since the government imposed a higher tax on income from debt securities if gross lending declined below certain defined thresholds. Resultantly, there is greater focus seen in Consumer, SME, Agri and retail segments however, we opine this to be short-lived as interest rates are back in double digits and are only expected to rise further in the light of high CPI readings and weakening PKR/USD parity.

Investments surpass PKR 15.2Trn as multi-year high yields on offer attract hefty flows: Total investments of the banking sector surpassed PKR 15.2Trn in Apr-22 to pull IDR to ~76%. It is pertinent to note that investments flow into the banking system has surpassed overall deposit growth as investments shot up by ~PKR 2.8Trn over the past year compared to PKR 2.5Trn increase observed in deposits. To a large extent, these investments have been funded by borrowings that have surged by PKR 2.7Trn over the same period. Going forward, we expect this momentum to continue at least in the near term as the government will resort to private sector borrowings to bridge the yawning fiscal deficit.

Banking/fresh spreads increase 36/103bps YoY in Mar-22: Banking spreads were recorded at 4.67% in Mar-22,↑36bps YoY as rates on outstanding deposits rose to 9.61%, ↑176bps YoY, while lending rates climbed to 4.94%,↑141bps YoY. On the other hand, fresh spreads settled at 5.49%,↑103bps YoY as the disbursement rate increased 290bps YoY to 10.59% whereas the return on fresh deposits rose 187bps to 5.1%.

Courtesy- BMA Capital Management