LAHORE  - Banking sector aggregate investments grew significantly by 11 per cent QoQ in 1Q2014 to Rs4.5trn. The government mopped up Rs530 billion during the last PIB auction of 1Q2014 which was reflected in the banking sectors’ balance sheet. Prior to this auction, investments of the banking sector had only grown by a single ppt during 1Q2014.

Statistics show that the banking sector’s gross advances grew by merely 1 per cent QoQ to Rs4.1trn in 1Q2014, reflecting the continued cautious approach by banks towards private sector lending. Note also that the Pak banking sector was unable to emulate the growth in investments on the deposit side, where the latter grew by a meager 1 per cent QoQ to Rs7.6trn in 1Q2014. Consequently, the banking sectors’ ADR remained flat at 54 per cent in 1Q2014. However, IDR rose by 5ppts to 59 per cent in March 2014 compared to 54 per cent in December 2012.

Banking spreads recovered somewhat in February 2014 to 6.05 per cent (+7bps MoM while down 13bps YoY) where the same had hit a low of 5.98 per cent (lowest since April 2005) in January 2014. Meanwhile 2M2014 weighted average spreads stand at 6.02 per cent compared to 6.21 per cent in 1Q2013. Going forward, on the back of our expectation that the DR will remain unchanged till June 2014 (JS view), we believe a sharp revival in banking spreads is an unlikely outcome. However, we do not rule out banks shifting their focus on tilting the deposit mix towards current accounts, which allow for lower cost compared to savings deposits where Minimum Profit Rate is linked to State Bank of Pakistan’s Repo rate. We also flag that the active participation of banks during the last PIB auction is likely to provide a boost to banking sector’s NIMs as banks are likely to earn higher yields on PIBs than T-Bills or advances.

Monetary tightening was eyed as an emerging theme for banks in 2H2013 but the linking of MDR on savings deposits to the DR has proved to be a game changer for the sector. More recently, low inflation numbers (3QFY14 / 9MFY14 at 8.1 per cent and 8.6 per cent) suggests any further monetary tightening is unlikely in the near term. Hence, we build in curtailed growth in banking spreads going forward while recent PIB focus points towards better NIMs in the near term. Eyeing a relatively balanced risk-reward outlook, we remain ‘Market-weight’ on Pak Banks and re-iterate ‘Sell’ on HBL (TP: Rs141) and a ‘Buy’ on BAFL (TP: Rs30).