Bank deposits surge 21.7pc y/y in Feb on record-high interest rates, remittances

KARACHI: The banking sector deposits rose 21.7 percent year-on-year in February to Rs27.886 trillion, driven by higher returns amid record-high interest rates and branch network expansion, central bank data showed on Wednesday.

Remittances from overseas Pakistanis, which increased 26.2 percent year-on-year to $2.4 billion in January, also contributed to the deposit growth. Bank deposits increased 1.3 percent month-on-month in February, from Rs27.541 trillion in January, according to the State Bank of Pakistan (SBP).

The SBP has raised its benchmark interest rate by a cumulative 15 percentage points since September 2021 to curb skyhigh inflation. The policy rate has stayed at a record 22 percent since June 2023.

Bank investments rose 34 percent year-on-year to Rs25.449 trillion in February, from Rs18.993 trillion a year earlier, but fell 0.6 percet month-on-month, the data showed. Bank advances, however, increased only 2.9 percent year-on-year to Rs12.062 trillion in February, and declined 0.3 percent month-on-month, as high interest rates and slowing economic growth dampened credit demand from the private sector.

Bank credit to the private sector was decreasing as a result of consumers' and firms' hesitation to take out new loans. The private sector's access to bank credit is limited by high public-sector borrowing.

Since Pakistani banks have the option to invest in risk-free government assets, they are unable to utilise their enormous liquidity. Banks attribute a decline in lending to borrowers' lackluster demand brought on by rising interest rates and slowing economic growth.

The investment-to-deposit ratio surged to 91 percent in February from 83 percent a year earlier, while the advance-to-deposit ratio fell to 43 percent from 51 percent, the central bank data showed.

In 2023, the banking sector in the listed space witnessed significant profits driven mainly by policy rate hikes of 600 basis points coupled with volumetric growth in deposits, supported by lower provisioning and higher non-interest income during the year, said Arif Habib Limited in a report issued last week.

“However, with rates likely to have peaked, we foresee the onset of a monetary easing cycle in 1HCY24, leading to a decline in rates, down from the current 22 percent.” "Despite the projected decline in sector Net Interest Margins in the latter part of CY24 due to the reversal in monetary policy stance, our optimism regarding the overall profitability outlook remains unwavering," it said.

" We find several mitigating factors supporting this positive sentiment, including the lagged repricing of assets versus funding costs, potential expansion of the balance sheet, sustained support from non-interest income, reduced inflationary pressure mitigating operating expenses, and the opportunity to realize capital gains on the Fixed PIB portfolio. "