After closing a profitable year in 2019, the banking industry continued to achieve major milestones in the outgoing month with its deposits, investments, and advances reaching an all-time high despite the prevailing economic slowdown.
This indicated that the first quarter of the banking industry is not likely to be bad but a profitable one though it will be different for the remaining three quarters going forward in terms of deposits, investments, advances, and profitability.
Banks’ Deposits Surge to Over Rs. 15 Trillion
The deposit of the banking industry continued to increase at a handsome pace reaching Rs. 15 trillion—an all-time high.
Commercial banks continued to attract inflows of deposits from customers and corporations through saving instruments despite reduced policy rates in the recent weeks which eventually cut down the profit rates on the savings and investments.
According to the State Bank of Pakistan (SBP), the banking industry’s deposits reached Rs. 15.13 trillion in March which grew by Rs. 311 billion from the previous month. Last year, the industry stood at Rs. 13.45 trillion by the end of the same month.
Besides banks and customers making profits on deposits, the government is also earning a handsome income from this avenue.
The withholding tax collection from profit on debt (banking deposits) increased to Rs. 47.26 billion during the first nine months of the current fiscal year as compared with Rs. 16.72 billion in the same months of the last fiscal year, showing a growth of 184 percent year-on-year growth.
Recently, the policy rate was reduced to 11 percent from 13.25 percent which will lower the average profit rates of the industry this may also decelerate the mobilization of deposits in the coming months.
Moreover, the prevailing economic slowdown is likely to cause an outflow of deposits by investors and deposit holders for meeting their expenses during the coronavirus crisis.
Banks’ Investments Grow to Over Rs. 9 Trillion
The banking industry has been consistently stabilizing its investments’ avenues that have also reached an all-time high of Rs. 9.29 trillion. With various options available, banks are channelizing their deposits in the form of investments in the government’s papers to book guaranteed profit.
The investments grew by Rs. 80 billion in March from February 2020, according to SBP. The investment to deposit ratio of the banking industry stands at 61.5 percent.
Last year in September, the investments of the industry stretched to Rs.9.26 trillion which reduced gradually in the subsequent months with the maturity of the investments.
Banks’ investment will further flourish in the coming months mainly in the government’s papers and Ijara Sukuk besides other non-interest avenues which will likely remain subdued in terms of returns due to the prevailing situation.
According to analysts, banks’ focus for deposit mobilization remained more towards investments compared to advances during the period given the high yields on government’s papers.
The investment returns of different banks in the government’s paper will generate healthy earnings and contribute to profitability.
Banks’ Advances Grow to Over Rs. 8 Trillion
Banks’ advances recorded a slow growth but it finally attained a historically high level of Rs. 8.25 trillion.
According to SBP, the banks’ advances grew by Rs. 38 billion in March from February 2020. As a result, the advanced to deposit ratio stands at 54.6% now.
High interest rates of various banks and the economic slowdown discouraged the borrowers to avail credit from banks to meet their running expenses or making a long-term investment for expansion of the business.
In the recent development, the situation turned into a challenging phase, as the economy is facing further jolts in the wake of the COVID-19 pandemic that turned the socio-economic situation of the world upside down.
The central bank has reduced the policy rate from 13.25 percent to 11 percent to attract the borrowers. It further introduced various financing schemes in line with the economic stimulus package including relief of debt payment of borrowers that will ultimately give direction to the industry.
The banking industry is facing a challenging situation now like various other industries but it can be an opportunity as well depending on the response of the market of its customers in the prevailing economic situation.
After touching a plateau, it is difficult for the banking industry to sustain the same level of growth in the business during 2020.