Total deposits of scheduled banks grew by 12% to Rs9.3trn (33% of GDP) in 2015 as against increase of 11% in 2014 and average growth of 14% during last 5-years (2010-14). Experts attribute this to higher broad money (M2) growth in 2015, which clocked in at 11% versus 10% in 2014 and last 5-year average M2 growth of 13% in last 5-years. 

The slight improvement in deposits growth bodes well for banking sector as there were concerns of deposit withdrawals following imposition of withholding tax (WHT) on cash withdrawal from bank accounts in 2015.   

To recall, government imposed WHT of 0.6% on all banking transaction of over Rs50,000 in a day for non-filers. Later on, the Govt. reduced tax rate to 0.3% till Jan 2015 allowing traders to file tax return in the given time.

Investments registered strong growth of 32% to Rs6.7bn as banks continued to invest in risk-free government securities. Consequently, investment to deposit ratio (IDR) reached an all time high of 72% in 2015.     

Bank advances growth remained lackluster in 2015 increasing by 7% vs. 9% in 2014, increasing to Rs 4.7trn (17% of GDP). This is also significantly lower than our initial estimate of 12% during the start of year. We attribute this to lower working capital requirement by companies amid falling commodity prices, low aggregate demand and below average performance of textile sector (largest private sector borrower). 

Despite below expectation advances growth in 2015, experts remain bullish on advances growth owing to strong prospects from the initiation of China-Pakistan Economic Corridor (CPEC). According to Ministry of Water & Power, out of the total US$46bn, US$28bn projects are to be completed by 2018, which will involve financing of power and infrastructure projects by Chinese and local banks. This coupled with other planned power sector projects are likely to trigger higher advance growth going ahead. Our back of envelop calculation suggest that these projects will generate an additional credit demand of $2bn annually during the next 3-years, which is equivalent to 5% of the total advances of the industry. Bankers are also of the view that local component of the financing could be 10-20% of the total planned investment during the next 3-years. Experts now anticipate advances to grow by 10-12% in 2016 and 14% on average during the next three years in 2016-18.

Initially there were concerns that whether the planned Chinese investment would materialize.  However, financial close of few projects have already been achieved indicating strong potential for China-Pakistan Economic Corridor related funding. 

On the consumer side, banks are increasing their lending however their part of the total portfolio still remains low. As per SBP, consumer lending in 10M2015 increased by 10% in line with last year’s figure and its proportion as % of total loans stood at 6% (1% of GDP). Corporate portfolio still dominates the total loan book of banks with total proportion of 67%.

Spreads between the lending and deposit rate remained under pressure during 2015 following 300bps cut in interest rates and SBP initiative to curb spreads. Spreads as of Nov 2015 declined to 5.3% as against 6% in Dec 2014. These spreads do not include return from investments, which protected banks from falling interest rates in 2015. We believe that spread may remain flat in 2016 due to our anticipation of status quo in interest rates. However, banks margins could come under pressure in 2016 as major chunk of high-yielding Pakistan Investment Bonds (PIBs) mature in 2016.