Banks racing to boost gross ADR as tax threat looms

­KARACHI: Banks are rushing to reach the 50 per cent gross advance-to-deposit ratio (ADR) by year end to avoid paying more taxes, a brokerage house said on Saturday.

As of July 2024, the gross ADR of the banking industry had dropped to 39 per cent. This is below the 50 per cent barrier that is required to prevent an additional 16 per cent tax on investment income.

“Banks are racing to meet the gross advances to deposit ratio (ADR) of 50 per cent by December 2024 to avoid additional taxes,” said Topline Securities in a brief note.

“As of June 30, 2024, only three banks, which include Samba Bank (SBL), Faysal Bank (FABL), and Askari Bank (AKBL), have a gross ADR above 50 per cent, it said.

“In a recent corporate briefing session, most banks were confident in meeting the 50 per cent target by December 2024,” it added.

Last week, JS Global in a report said that banks may ramp up efforts to boost their gross ADR by year-end (the relevant reference point for the ADR level).

“Assuming deposits remain at current levels, the sector’s loan portfolio would need to increase by Rs3.4 trillion (29 per cent growth, versus historical average of 8 percent) from 1 August to 31 December,” it said.

“Since the loan expansion of this level may be less probable, this could also involve limiting deposit growth (as also witnessed in 2022) -- also briefed by several banks in the latest corporate briefings,” it added.

A 10 per cent deposit contraction from August to December would require 16 per cent loan growth to take gross ADR to 50 per cent, it noted.

Deposits at banks increased by 19.1 per cent year-on-year to Rs30.6 trillion as of July 2024. The advances of the banking sector stood at Rs11.9 trillion in July, down 4.5 per cent from a year ago. Banks’ investments increased significantly to Rs30.4 trillion, a 41.8 per cent year-on-year increase.