Govt’s Move to Create a Single Treasury Account Will be Credit Negative for Banks: Moody’s

Moody’s Investors Service says that the introduction of treasury single account would be credit negative for Pakistani banks’ funding and liquidity as well as profitability.

Moody’s, in its latest report, “Financial Institutions – Asia”, states that on April 17, the State Bank of Pakistan (SBP) confirmed reports that it is in consultation with the government of Pakistan (B3 negative), and considering the introduction of a treasury single account (TSA) as part of the government’s agenda to reform public financial management. Introduction of the TSA, which would reside at the SBP, would be credit negative for Pakistani banks’ funding and liquidity as well as profitability.

The TSA is a consolidated bank account through which the government transacts all receipts and payments. The TSA is an important tool for the efficient management and control of government liquidity because it provides a unified view of all available cash resources to the government and the demand on these resources, which in turn optimizes government borrowing and reduces debt-servicing costs. It also facilitates better fiscal and monetary policy coordination.

TSAs are currently in place in many developed and developing markets, including Latin American and African countries. From the banking sector’s perspective, the creation of a TSA would require the transfer of government deposits to the consolidated TSA at the SBP.

In Nigeria, TSA implementation prompted a foreign currency liquidity squeeze and increased funding costs, while in Tanzania, authorities allowed banks to retain some government deposits to alleviate liquidity pressures.

This would lead to the withdrawal of government deposits in commercial banks, which total Rs. 1.88 trillion ($13.3 billion), or 14% of total deposits as of 31 March and includes federal, provincial and local deposits, according to the SBP definition.

However, it is not yet clear which type of deposits fall within the scope of the TSA. Among the Moody’s rated banks, National Bank of Pakistan (B3 negative, caa1), the largest public sector bank, would be most affected by a TSA given that government deposits comprised 29% of its total deposits at year-end 2018.

Moody’s expect a TSA would reduce banks’ profitability. Banks would no longer be able to benefit from floats from payment inefficiencies and delays, for instance, by investing in government securities that generate interest income.

The negative effect is likely to be offset by fees generated from processing transactions, but only partially because these potentially will be subject to a competitive bidding process. Replenishing the withdrawn deposits through costlier private sector deposits or repo funding from the SBP will likely increase banks’ funding costs slightly, although the sale of income-generating securities would also affect the banks’ net interest income.

The proposal’s implementation remains uncertain and the SBP emphasized in its announcement that it will first consult all stakeholders and assess the effect on the banking sector before making a decision.

Although a TSA would be negative for Pakistani banks, it is expected that their strong funding and liquidity profile, a key credit strength, as well as their access to a stable and growing deposit base, will mitigate the risks.