Auto financing likely to improve as banks offer lower rates to meet ADR target

KARACHI: The demand for auto loans is expected to pick up as banks have started offering lower markup rates to consumers for purchasing cars, in an attempt to meet the 50 per cent advances-to-deposit ratio (ADR) threshold this year, a brokerage report said on Monday.

Sunny Kumar, an analyst at Topline Securities, said in a report that banks are aggressively lending, with some banks offering loans as low as 4.0 per cent, which is 12 per cent below the Karachi interbank offered rate (Kibor) to avoid additional taxes.

The yields on Treasury bills (T-bills) and Pakistan Investment Bonds (PIBs) are decreasing due to a cut in interest rates and easing inflation pressures. Similarly, the benchmark lending rate Kibor is also declining, having dropped by 140 basis points (bps) in the last seven days. On Monday, the six-month Kibor stood at 14.69 per cent.

“Auto financing, which declined to Rs227 billion in August 2024 from a peak of Rs368 billion in June 2022, will also start gaining momentum as many banks have already begun offering lower fixed rates of 14-15 per cent compared to 20-24 per cent a year ago,” Kumar said.

The demand for car loans was muted due to high interest rates, rising inflation and macro-prudential measures amidst an economic slowdown. However, economic indicators have improved, with falling interest rates, and it is expected that auto financing will improve in the coming months.

Consumer price index (CPI) inflation has slowed to 6.9 per cent in September, down from 9.6 per cent in the previous month.The prediction that inflation will remain in single digits in the upcoming months will support the case for further rate cuts by the SBP. The SBP is expected to reduce rates by an additional 200bps in both the November and December meetings. The SBP has cut rates by 450 bps since June.

If banks fail to reach the 50 per cent ADR mark by the end of December 2024, they will face an additional 10 per cent tax if the ADR is between 40-50 per cent, and a 16 per cent additional tax if the ADR falls below 40 per cent. As of June 2024, the average ADR for the banking sector stands at 38.6 per cent. Only three out of 19 listed banks which include Samba Bank, Faysal Bank, and Askari Bank have a gross ADR above 50 per cent.

According to a Topline report, any further deep discounted lending to corporates either of a short-term or long-term nature, may trigger the repricing of existing loan books, which may have an impact across the industry.

“We believe the major challenge for banks is finding secure, guaranteed lending opportunities. Nevertheless, the push to meet the ADR threshold is likely to encourage more competitive lending, potentially benefiting both borrowers and the broader economy,” it said.

“This aggressive lending by banks in the coming months bodes well for the local stock market and will also increase cash liquidity,” it added. Following a sensitivity analysis to ascertain the additional lending needed by listed banks to attain a 50 per cent gross ADR and its net impact, the report stated that the banks would need to disburse a total of about Rs3.6 trillion to reach the target.

According to the findings, most of the banks will experience a net positive impact if they choose to lend at 3.0 per cent (Kibor of 15 per cent minus 12 per cent) for a quarter compared to the provisioning of tax. Banks will be losing 12.5 per cent for three months assuming they lend at KIBOR minus 12 per cent.

“Given the low demand of funds (good quality) on the corporate side, we believe, it will be difficult for the banks to achieve the target and they may eventually end up provisioning higher tax,” it said.

“However, if all listed banks were able to lend the additional advances required to reach 50 per cent target, the government would lose around Rs157 billion, as per our estimate.“Based on our channel checks, banks are also looking into legal recourse of this, however, even if they get the stay order, still higher tax will be recorded based on prudent accounting principles.”