Govt banks’ borrowing surges 30pc till November-end

KARACHI: Investment of banks in government securities surged around 30 percent to Rs5.841 trillion till November-end over the last year as the risk-aversive financial institutions are seeking safe havens for parking their liquidity amid low private credit off-take. 

The central bank’s data showed that banks were holding 4.474 trillion worth of government papers by the end of November a year ago.

The banks invested Rs3.124 trillion in Pakistan Investments Bonds, Rs2.631 trillion in market treasury bills and Rs85.8 billion in Ijara Sukuk till November 2015, showed the State Bank of Pakistan’s data.

The banks have an increased amount of government papers on their books as the government has higher appetite for bank borrowing to meet its funding requirements.  

Facing a wide fiscal deficit over the last many years, the government relied on financing from the domestic banking system. 

The State Bank said commercial banks’ credit to the private sector plunged to 13 percent of GDP in the fiscal year of 2014/15 from 27 percent in 2007/08.

The government borrowing from the banking system as percent of GDP remained highest in Pakistan among the region. It was close to 28 percent of GDP in 2014. 

The government has been a dominant bank borrower in the market, depriving the private sector of credit for business activities. 

The government borrowed Rs534 billion from banks between Jul 1 and December 11, 2015 as against Rs443 billion during the same period of last fiscal year. 

Healthy deposit growth also aroused banks’ interest in government bonds.

The SBP was involved in short-term borrowing through open market operations (OMOs).

“This year we’ve seen Pakistan’s version of quantitative easing whereby the SBP issued new bonds and funded them by providing liquidity itself through OMOs,” said Faisal Mamsa an analyst at Landmark Capital. “We see this trend to continue next year too.” 

Some analysts foresee banks’ investments in government papers (fixed income market) to continue on the rise during the current fiscal year.

 “Given there is adequate, ever-ready demand for safe investments, it will be no surprise that we will see greater activity in the fixed income market next year,” said Eman Khan, an analyst at Tresmark Research. “There is also room for new issuance of Sukuk.”

Though government bonds’ holdings are one of the biggest sources of the strengthening of bank balance sheets, they are equally leading to the pileup of domestic debts.  

The outstanding stocks of domestic debt reached Rs12.7 trillion in the first quarter of FY16 as against Rs11 trillion in corresponding quarter of the last year. 

The share of permanent debt [mostly Pakistan Investment Bonds] in total domestic debt rose to Rs5.20 trillion by end October, 2015 compared with Rs4.30 trillion a year earlier.

Since inflation stayed lower and its expectations remain subdued and interest rates saw substantial cuts, the government’s financing structure has witnessed a major shift towards short-term debt-creating instruments.

That’s why since the last quarter of calendar year 2014, a shorter tenor three-year PIBs and T-bills became more attractive for banks to park money. 

 “There is ample liquidity in the market. Spread between Kibor (Karachi Interbank Offered Rate) and T-bills are at their lowest,” said a chief dealer at treasury management group of NBP. “Prevailing interest rates are at a historical low at six percent but looking forward, we expect that market participation in PIB auctions to be comparatively low and largely tilted towards the shorter tenor.”   The dealer said the market is not expecting any big slash from here onward due to higher inflationary expectation (based on higher expected readings of consumer price index in coming months). 

“Any change in the oil prices pattern or further increase in US Fed fund rate next year may also have an adverse impact in the interest rate outlook,” the dealer added.

“We foresee majority of the demand to come from non-banking sector and insurance sector.”

To a query of issuing fresh PIBs by the government this year, he said PIBs of approximately Rs1.5 trillion are due to mature in the second half of FY16. 

“Yield pickup on PIBs over T-bills is still there, but overall rates are not as attractive now,” he said.

The cut-off yield on benchmark six month T-bills, at the auction held on December 23, hovered at 6. 3 percent, while yield on five-year PIBs was 7.9 percent on December 17.

“There is no doubt that banks have to take a hit on their net interest margin in the year 2016 due to maturing PIB’s which are at higher yields and now they have to reinvest their maturing funds at the prevailing rates, far lower than maturing PIB rates,” said the dealer.

Khan also expected interest rates to hover around the six percent level in the next two monetary policies. “We may not see an uptick in the policy rate before June,” she said.