Bank deposits witness 8 percent growth in 2018

KARACHI: Growth in banks deposits slowed in 2018 to meager 8 percent to its lowest level in nearly a decade, a brokerage research showed on Tuesday, a sign of overall weakness in the economy and slowdown in GDP growth in the last calendar year.

Banks deposits witnessed an average 12 percent growth in the last five years.

Deposits of banks increased to Rs13.354 trillion in 2018 from Rs12.362 trillion in the previous year. Analysts attribute slowdown in bank deposits to lacklustre money supply growth.

“At the same time, M2 growth has been sluggish too, clocking in at 11 percent year-on-year,” analyst Syed Daniyal Adil at Topline Research said.

“The slower M2 growth can be attributed to decline in net foreign assets, where NFA has fallen to negative Rs863 billion, compared with Rs428 billion in the corresponding period last year,” he added.

The decline in net foreign assets is a consequence of yawning current account deficit, which was recorded at $19 billion for FY18 and less foreign disbursements.

The slowdown in the bank deposits’ growth is surprising in the backdrop of 4.25 percentage-point hike in the interest rates since January last year. It seems the banks have not been able to pass the interest rates hike in full to savers.

Profit rates currently being offered on savings accounts hovered at 8.5 percent. The central bank raised the policy rate by 150 basis points to 10 percent in November.

Banking loans grew 21 percent, which is the highest in 13 years, while the sector’s advance-to-deposit ratio stood at 59 percent, highest since 2012.

However, investments declined 11 percent on an yearly basis in a decade.

The investment-to-deposit ratio was 57 percent at the end of December 2018. The decline in investments was due to the shift of government borrowing to the State Bank of Pakistan.

“We expect deposits to grow 10 to 12 percent in 2019. However, we believe advances growth will feel the pinch because of higher interest rates and likely increased focus towards government paper in 2019,” Adil said.

The growth in deposits is also negatively impacted by higher deposit costs on fresh and outstanding deposits. The fresh deposit cost stood at 6.04 percent in October 2018, compared with 4.69 percent in the first month of this year.

The SBP, in its FY18 annual report, said that deposit-to-M2 ratio has continued to slide during FY17 and FY18, which indicates that the impact of withholding tax is still hindering the movement of cash back into the banking system.

“Measures should be taken to encourage savers to place their funds with banks. In this regard, while the SBP has repeatedly advised banks to increase their deposits by making efforts and has also put in place floors on deposit rates, it is extremely important to reconsider the taxation regime,” he added.

The removal of withholding tax on non-cash transactions will be particularly helpful, it recommended.

Deposit inflows will depend on banks business strategy and savers preferences that are driven by macroeconomic conditions (external account pressures, monetary policy stance, and return on alternative assets, according to the SBP’s half-yearly performance review of the banking sector.

The rising minimum saving rate (MSR) could potentially boost saving deposits, however, Adil added.