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Karachi: ADR standing at 8 years low
State Bank of Pakistan (SBP) recently released figures for aggregate advances, deposits and investments for the banking sector. Banking sector deposits by end of November 2011 have reached PKR 5,415bn, an increase by 5.7% since December 2010. During the same period Advances have witnessed a contraction of 3.9% as the banks continue their preference for government securities. This subsequently has resulted in banks’ investments to rise by 40.9% (since December 2011) by end of November 2011.
Advances to Deposit Ratio (ADR) has dropped to 62% in Nov-11
The Advances to Deposit Ratio (ADR) has drastically dropped to 62% by end of November 2011 compared 68% at end of CY10. The Advances currently stand at PKR 3,356bn compared to PKR 3,494bn last year. This declining trend in ADR is primarily due to banks’ reluctance to opt for private sector lending on fear of rising NPLs especially since economic situation is critical and energy crisis is likely to exacerbate.
Moreover, government’s increased dependence on the banking sector to finance its deficit, as it was required to maintain zero borrowing from SBP, is crowding out the private sector. This current ADR is the lowest since September 2003 when it was hovering around 60%. During the period, government borrowing from banking sector has risen by 92.7% to PKR 2,430bn compared to PKR 1,260 in the corresponding month last year.
Investments to Deposits (IDR) has jumped by 4% MoM
The Investment to Deposit Ratio has reached 54.7% by end of November 2011. Before CY11, such a high IDR situation was witnessed in 2003 when it peaked at 46% in September 2003. On MoM basis, the IDR has jumped by 4%. This is primarily attributed to conversion of Power Holding Company TFCs into TBill and PIBs to the tune of PKR 391bn.
SBP, since July 2011 has aggressively slashed discount rate as it was aiming to boost economic growth and private sector lending, however, trend has depicted no change. Bank’s investment in treasury bills has jumped by 39.5% since December 2010 from PKR 1,264bn to PKR 1,763bn by end of October 2011. Moreover, sector’s exposure to government PIBs and Sukuk has jumped by 34.5% and 63.9% since December 2011 to reach PKR 285bn and PKR 196bn respectively.
Outlook and Recommendation
The current trend of banks’ preference going for safer investment in government securities will likely to continue, even as SBP has cut the policy rate by 200bps to 12%. Moreover, with no further cut in policy rate is expected atleast till July 2011, contraction in spreads will be limited hence NIMs are unlikely to suffer a major decline.
Arif Habib Limited’s top pick in the sector is MCB, which is offering 66.7% upside to Dec -12 Target Price of PKR 233/share. The bank is expected to post net earnings of PKR 21.5bn (EPS: PKR 25.76) in CY11, a rise of 28% YoY. Arif Habib Limited expects the bank to pay cash dividend of PKR 3.0/share and bonus of 10% along with its full year results.