Bank sector advances hit Rs15.6tr amid tax policy shift

KARACHI: The banking sector’s advances reached Rs15.6 trillion as of December 27, resulting in an advance-to-deposit ratio (ADR) of 51.8 per cent, according to the latest figures from the State Bank of Pakistan.

The advances stood at Rs14.9 trillion in November, with an ADR of 47.8 percent.

“Banks achieved the 50 per cent ADR mark before December’s end, but the achievement holds no value as the government, in the last week, abolished ADR-based taxation and imposed an additional 5 percent tax rate,” Saad Hanif, head of research at Ismail Iqbal Securities.

“So the final tax would be around 54 per cent which was previously 49 per cent in case of ADR above 50 per cent,” he added.

The government removed a proposed additional income tax of 10-15 per cent on banks with low ADR. However, the standard income tax rate for banks has risen from 39 per cent to 44 per cent for 2024. This rate is set to decrease to 43 per cent in 2025 and 42 per cent in 2026. Meanwhile, the current super tax of 10 per cent remains unchanged.

“Banks increase advances in a bid to avoid incremental tax on government securities due to non-compliance of ADR-related tax,” said Awais Ashraf, director research at AKD Securities Limited.

“Because of the same, banks shy from taking deposits that resulted in the decline of deposits,” Ashraf added.

Deposits decreased to Rs30.1 trillion from Rs31.1 trillion last month. Investments rose slightly to Rs29.3 trillion, up from Rs29 trillion. The investment-to-deposit ratio improved to 97.5 per cent, up from 93.2 per cent in November.

A recent report from brokerage firm AKD Securities indicates that removing the ADR-related taxation will enable banks to concentrate on increasing deposit growth rather than avoiding deposits to evade additional taxation on government securities.

“We believe SBP efforts for digitalisation, coupled with stagnant cash in circulation (CiC), would drive deposit growth,” it said.

“Moreover, the addition of 2,400 branches, 8 million internet banking users, and the installation of approximately 77,000 POS machines over the last four years, along with the FBR’s drive towards the documentation of the economy, strengthen our conviction regarding deposit growth,” it added.

The report has revised its deposit growth estimates upward by 200 basis points (bps) for 2025, 2026 and 2027 to 13.3 per cent, 17 per cent and 13.5 per cent, respectively, compared with an average deposit growth of 17.1 per cent over the past five years.

The report has increased its assumption for the advances spread by 60bps for 2025, reflecting reduced volumes due to the removal of compliance risks for banks aimed at avoiding extra taxation.

“Subsequently, we have lowered our ADR ratio assumption to approximately 41 per cent for 2025, with expectations of a gradual rise to 50 per cent over the long term.”