Banking Sector – Investments grabbed major share of funds in CY10!

Deposits grew 19% YoY during CY10: The SBP’s data shows that banks remain ample liquid during CY10, as deposits witnessed a hefty 19% YoY jump as against our forecast of 11.5% YoY rise and compared to only 7% YoY increase in CY08 and 14% YoY rise in CY09. In December-10 alone, deposits jumped by 7% MoM compared to monthly average growth of 0.9% in 11MCY10.

Funds remained tilted towards investments: Both supply and demand factors influenced the lending activities of banks during CY10, with main focus remaining towards investments. Gradual uptick in the DR also hindered the lending activities during the year. Hence, total investments of the system grew by a healthy 28% YoY, while gross advances were up by a meager 7% YoY, with ADR settling at 68%.

CY11 Outlook: Further rise in GoP’s borrowing for budgetary needs, likely tight monetary stance maintained by the SBP in at least 1HCY11 and possible accretion in NPLs could hamper private sector credit growth. Therefore, banks will prefer parking their funds towards short term investments. Nevertheless, with interest rate likely to stabilize in later half in addition to seasonal credit demand in 4Q, we expect pick up in lending towards the end of CY11.

Deposits grew 19% YoY during CY10

Recent numbers released by the SBP reveal that the liquidity position of the banking system remained stable during CY10, with a decent growth of 19% YoY in deposits, outpacing our growth forecast of 11.5% YoY, and crossing PKR5.0tn mark. CY10 deposits growth also surpassed 7% YoY and 14% YoY respective rise in CY08 and CY09. In December-10 alone, deposits jumped by 7% MoM compared to monthly average growth of 0.9% in 11MCY10.

Funds remained tilted towards investments

Lending did not pick up much and advances posted a single digit growth of 7% YoY during CY10 (though was higher from 4% YoY increase witnessed in CY09) as both supply and demand factors influenced the lending activities. Gradual uptick in the DR in later half of CY10 (cumulative 150bps jump) also hindered credit growth. Main growth in advances was witnessed in 4QCY10, up 7% QoQ. Gross ADR of the system, hence, settled at 68% in Dec-10

compared to 76% in Dec-09. Investments remained in the limelight during CY10, with a healthy 28% YoY growth to stand at PKR2.1tn. Moreover, banks’ main concentration remained in short term T-bills investments, also driven by government’s unabated borrowing demand for fiscal support. IDR hence stood at 41% in Dec-10 as against 38% in Dec-09.

CY11 Outlook

Consolidation, started in CY09, continued in CY10 with number of banks reducing by 3 due to mergers. However, big banks managed to post healthy bottom-line growth during the year, on the back of better liability management and cautious lending besides improved returns from equity operations. Going forward, further rise in government’s borrowing for budgetary needs, likely tight monetary stance maintained by the SBP in at least 1HCY11 and possible accretion in NPLs could hamper private sector credit growth. Therefore, banks will prefer parking their funds in short-term investments. Nevertheless, with interest rate likely to stabilize in later half in addition to seasonal credit demand in 4Q, we expect pick up in lending towards the end of CY11 and strengthened profitability. Mergers and acquisitions will remain a key focus in CY11 as well, in order to meet SBP’s MCR on yearly basis.

Economic & Political News

Government reverses fuel price rise

Govt has succumb to the public / political pressure and has reversed the recent increase in oil prices. The prices of petroleum products have now revert to the level of October 31, 2010. US Secretary of State Hillary Clinton said on Thursday that Islamabad’s decision to reverse an unpopular fuel price increase was a “mistake”.

US to give USD190mn to Pakistan flood fund

US special envoy to Pakistan Frank Ruggiero, announced USD190mn aid for victims of last year’s floods, fulfilling a pledge by his predecessor Richard Holbrooke who died last month. American money for the fund is part of a USD500mn accelerated package diverted from a three-year USD7.5bn (Kerry Lugar) aid bill agreed in Washington.
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