Banking deposits grow 22 percent in FY2021

KARACHI: Pakistan’s banking sector recorded over a decade high growth rate of 22 percent in deposits during the last fiscal year of 2020/21 due to rise in remittances and growing use of online financial transactions, a brokerage reported on Tuesday.

According to Topline Research, banking deposits recorded the highest growth in 14 years to reach Rs19.8 trillion as of June-2021.

“Growth in deposits has been fueled by higher remittances, while business activity (cash-based) too was hindered due to COVID-19 resulting in an increase in banking deposits,” said analyst Umair Naseer at Topline Research. “Going forward, we expect average deposit growth of 15 percent over 2021-23 compared to last 10-year average growth of 13 percent.”

Remittances grew 27 percent to $29.4 billion and 30 percent in rupee terms. Investments of banks have grown by 29 percent to Rs13.7 trillion ($86 billion) as of June-end. The excess liquidity is placed in investments by banks due to muted growth in advances.

Advances grew by 10 percent as of June-end to reach at Rs9 trillion ($56 billion) as banks remained weary of overall economic conditions due to COVID-19. However, growth of 5 percent quarter-on-quarter in banks’ lending is an indication for improving outlook.

Investments to deposit ratio increased from 66 percent in June 2020 to 69 percent in June 2021, but was down from 70 percent in March 2021. Advances to deposit ratio (ADR) declined from 51 percent in June 2020 and 48 percent in March 2021 to 45 percent in June 2021.

“We expect ADR to improve going forward as the government has imposed tax on banks which fail to meet the minimum threshold of 50 percent ADR and as economic activity picks up,” said Naseer.

Total provisions against advances stood at Rs629 billion ($3.9 billion) and remained unchanged on y-on-y and q-on-q basis, despite overall concerns of sharp spike in non-performing loans due to COVID-19 linked deterioration in financial health of corporates.

M2 growth clocked in at 14 percent in FY21 primarily driven by higher government borrowing from scheduled banks (up 17 percent). Currency in circulation increased by 14 percent during the same period.

Currency in circulation as a percent of M2 clocked in at 29 percent, above past 5-year average of 27 percent, likely due to low interest rates and an effort to stay out of sight of tax authorities.