Low Risk Appetite to keep advances growth muted

11MFY11 deposit expansion decreased to 6%: Banks’ deposit base grew by 5.7% to reach PKR5.4trn during 11MCY11, lower than the growth of 10.8% in the same period last year.

Credit contraction of 3.9% during 11MCY11: Advances declined by 3.9% against a growth of 3.1% during the same period last year. Traditional demand for commodity financing (for cotton procurement in particular) will help pick up advances in Dec11, increasing CY11 advances by to 1-2% YoY compared to 7% last year.

Outlook: Low risk appetite will likely keep banks’ preference for the government securities intact for the time being given the non-conducive macro environment the sector’s aim to contain credit cost which will lead to a cautious lending attitude.

11MCY11 deposit expansion decreased to 6%

On the liability side, banks’ deposit base, the biggest source of funding for banks in Pakistan and inextricably linked to their liquidity position, grew by 5.7% to reach PKR5.4trn during 11MCY11, lower than the growth of 10.8% in the same period last year. Lower growth in deposits in 2011 is largely attributed to decline in monetary expansion on the back of 1) Net Foreign Assets (NFA) rising by only 6% during the period compared to 16% during 11MCY10 and 2) Net Domestic Assets (NDA) increasing by 8% during 11MCY11 against 10% in the same period last year. Slower M2 growth (7% during 11MCY11 against 10% last year) is

expected to lead to deposit growth of 10% for CY11 compared to 18% last year.

In general, deposits of banks face stiff competition posed by instruments of the National Savings Schemes (NSS). As a result, low returns on deposits continue to hurt deposit growth.

Credit contraction of 3.9% during 11MCY11

Advances declined by 3.9% YoY against a growth of 3.1% during the same period last year. Traditional demand for commodity financing (for cotton procurement in particular) will help pick up advances in Dec-11. In addition, sequential increase in working capital requirement from the corporate sector is also expected to add value to loan book. These factors lead us to assume a 1-2% growth outlook in advances for the current year against 7% last year.

Investments, on the other hand, continued to consume major part of the generated liquidity. Banks’ investment during the period under review increased by a massive 40.9% against 14.9% growth posted in 11MCY10 primarily on the back of conversion of PKR391bn of PSE debt into treasury bills and PIBs.

Outlook

Low risk appetite will likely keep banks’ preference for the government securities intact for the time being. Furthermore, non-conducive macro environment does not warrant a strong credit offtake growth in the near-term; while banks aim to contain credit cost which will lead to a cautious lending attitude.

Economic & Political News

Pakistan forex reserves rise to USD16.69bn

Pakistan’s foreign exchange reserves inched up to USD16.7bn in the week ending December 9 compared with USD16.7bn in the previous week because of an increase in the reserves of commercial banks. Reserves held by the State Bank of Pakistan (SBP) fell to USD12.8bn, compared with USD12.9bn the previous week. Reserves held by commercial banks rose to USD3.9bn, compared with USD3.8bn from the previous week.

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