Bank deposits reach 14-year high in March quarter

KARACHI: Banking sector deposits grew 18 percent to Rs17.9 trillion during the January-March period, having reached to the 14-year high level during the quarter due to robust inflows of remittances and muted cash-based activities, according to a brokerage report on Monday.

Topline Research, citing the latest central bank’s data, said growth in remittances fueled rise in deposits, while there was also hinderance in cash-based transactions due to slowdown in business activities. Pakistan’s workers remittances continued their record run of above $2 billion for the 10th consecutive month in March when remittances stood at $2.7 billion, up 20 percent compared to February and 43 percent compared to March last year. In July-March period, remittances climbed to $21.5 billion, up 26% over the same period last year.

Although the economic activities are gradually coming back to normal, they are yet to return to the pre-COVID level for the economy as a whole. Economic growth contracted 0.4 percent during the last fiscal year and is expected to struggle coming back to 3 percent this fiscal year with the International Monetary Fund projecting it at 1.5 percent.

“Going forward, we expect deposit growth in the range of 12-14 percent during 2021, while we expect advances to grow by around 5-7 percent and banks are expected to remain risk averse given concerns over further waves of COVID-19,” the Topline Research said in a report.

Investments grew by 35 year-on-year to Rs12.6 trillion in 1Q2021. The excess liquidity is being placed in investments (primarily treasury bills) due to subdued growth in advances.

Advances grew by 4 percent year-on-year (versus 10-year average of 9 percent) in 1Q2021 as banks remained weary of overall economic conditions due to COVID-19. However, sequential growth of 3.5 percent is an indication of better economic activity during the last few months.

Investment-to-deposit ratio increased to 70 percent by March after depicting an improvement to 67 percent in December 2020. This was 67 percent in September 2020 and 60 percent in December 2019. Advance-to-deposit ratio dropped to 48 percent as of March 2021 from 56 percent in March 2020 compared to 47 percent in September 2020 and 56 percent in December 2019.

Provisioning has seen an increase as banks have opted to increase general provisioning in the wake of COVID-19. Fresh provisioning during the quarter stood at Rs26 billion compared to Rs5 billion in December 2020 and Rs32 billion in September 2020 quarter.

M2 growth clocked in at 15 percent in 1Q2021 primarily driven by higher government borrowing from scheduled banks, 12 percent year-on-year. The currency in circulation (CIC) has increased 16 percent during the same period. CIC increased to Rs6.6 trillion by March-end with CIC as a percent of M2 clocking in at 30 percent, above past 5-year average of 27 percent. Reasons for increasing CIC can be attributed to low interest rates and evasion from tax authorities, said Topline Research.