JS Securities Limited – Morning Briefing

Karachi, January 08, 2019 (PPI-OT): Banks: 2018 closes with divergent records for Deposits, Advances and Investments

Pak Banks deposit growth clocked in at 8% YoY in 2018 as deposits reached Rs13,354bn, lowest since 2008.

Funds were broadly deployed towards lending as Advances increased by 21% YoY to Rs7,888bn in 2018, reporting the highest growth since 2005.

Investments, however, declined by 11% YoY to Rs7,583bn with lower investment in government securities during 2018.

As a result, ADR and IDR switched places during 2018 to close at 59% (+6ppts YoY) and 57% (-12ppt YoY), respectively.

Going forward, we believe slowdown in economic growth will impact deposits for 2019E, keeping its growth in single digits.

Upside to our base case may stream from (1) government’s target to increase deposits to GDP ratio to 55% (~32% at present) and (2) removal or cut in WHT on banking transactions.

We believe, every 3% additional growth to the sector’s total Deposits (1% to GDP) would further increase the bigger bank’s earnings by 3%-5% and mid-tier bank’s earnings by 4%-6%.

2018 closes at 8% YoY higher Deposits, lowest since 2008

Pak Banks deposit growth clocked in at 8% YoY in 2018 as deposits reached Rs13,354bn. This has been the lowest growth the sector has witnessed since 2008 as the 2H2018 curtailed the momentum of double-digit growth witnessed during the 1H2018. During the same period, M2 growth clocked in at 11% YoY, driven by 20% YoY higher Net Domestic Assets (NDA). Repo-Borrowings, much utilized during 2017, became less popular during 2018 as it declined by ~39% YoY. We believe this was on account of banks opting to mature investments that were parked against the Repo Borrowings. With single-digit deposit growth and low Repo- Borrowings, sector’s asset base growth limited to 5% YoY.

Advances growth records more than a decade high growth

Funds were broadly deployed towards lending as Advances increased by 21% YoY to Rs7,888bn in 2018, reporting the highest growth since 2005. Private sector credit growth increased by 18% YoY, led by 15% YoY growth witnessed by conventional lending contributing 80% to the private sector credit growth; however, Islamic Banks and Branches also witnessed a robust growth of 25% YoY. On the other hand, Investments, declined by 11% YoY to Rs7,583bn. The last the banking sector closed calendar year in negative growth in investments was in 2008. During 2018, outstanding Net Government Budgetary Borrowings from banks declined by 16% YoY, as the government turned to the State Bank of Pakistan for the same (+2x YoY). As a result, ADR and IDR switched places during 2018 to close at 59% (+6ppts YoY) and 57% (-12ppt YoY), respectively.

2019E: Deposit growth likely to remain sluggish

Going forward, we believe slowdown in economic growth and attractive rates offered by other savings avenues such as National Savings Scheme (NSS) will impact deposit growth for 2019E, keeping its growth in single digits even after the low base set during 2018. However, we expect banks such as Bank Al Habib (BAHL), Meezan Bank (MEBL) and Bank of Punjab (BOP) to continue to increase their respective market shares. Upside to our base case may stream from (1) government’s National Financial Inclusion Strategy (NFIS) target of increasing deposits to GDP ratio to 55% (~32% at present) and (2) removal or cut in WHT on banking transactions.

While the former is likely to emerge in the longer term, we believe recent hints from government circles regarding removal of or cut in WHT on banking transactions can be a trigger for the sector’s deposit growth in the near future. To present a perspective of high deposit growth on the sector, every 1% increase in Deposit to GDP ratio would add 3% to the sector’s total Deposits. Keeping current market share and deposit mix unchanged, 3% increase to current Deposit growth would further increase the bigger bank’s earnings by 3%-5% and mid-tier bank’s earnings by 4%-6%. Moreover, we do not expect robust growth in Advances, similar to 2018, to continue as we believe ADR will remain sticky during 2019E.