Pakistan: Banks’ balance sheet grow by 24% YoY in August

SBPLatest banking sector data for August’15 indicates that banks’ balance sheet grew at a colossal rate (24%YoY) to Rs10.8 trillion. While private sector credit growth has not been substantial on account of bank’s continued preference for risk-free GoP securities, posting an encouraging growth of 7.25%YoY during the month.

However, consumer financing grew by 9.3%YoY (8.5% of the private sector loans) as banks focused on high margin auto finance and personal loans in the current lower inflationary environment. Expecting spreads to bottom out this year, analysts retain their liking for banks due to: 1) the room to benefit from loan growth and having an adequate CAR buffer, 2) achieving economies of scale and 3) a robust non-interest income.

With 8MCY15 spreads registering at an average 5.68%, weighted average banking sector spreads were reported at 5.51% for August’15, lower by 24bps YoY while increasing 4bps QoQ. The sequential uptick in spreads is more on account of a 10bps drop in deposit costs to 3.85% against a nominal 4bps dip in lending yields to 9.36%. While analysts expect spreads to come off in the near term on account of the latest 50bps DR cut in September’15 by State Bank of Pakistan, analysts believe spreads should bottom out this year on expectations of possible monetary tightening in CY16.

Selected sectors such as Textiles, Foods and Power have been the key recipients of industry’s credit disbursements. Consumer financing grew by 9.3%YoY in August’15 (8.5% of the private sector loans) as banks look to re-focus on high margin auto finance and personal loans in the current lower inflationary environment. Going forward, analysts also expect business activity to pick up providing space for double digit growth in advances.

With spreads expected to remain on the lower side, analysts continue to prefer banks that have the room to benefit from any uptick in advances with a decent CAR buffer, lower administrative expenses and are hedged against interest movements through strong non-interest income streams (fee, commissions, dividends, capital gains).

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