Growth in advances of scheduled banks has outpaced deposit mobilization growth by 16per cent in 2004. The Statement of Weekly Affairs of State Bank for the last week of December 2004 shows total advances of Rs1,590 billion
compared to total deposits of Rs2,14 billion.
Advances were up 36 per cent compared to deposit growth of 20per cent. Quarterly break-up of these figures indicates average growth of 4.75 per cent per quarter in customer deposits compared to average growth of eight per cent in advances.
The outgoing quarter, i.e. October to December 2004 saw even stronger growth, with advances growing by 14 per cent, highest in any quarter of this year. This growth may be supply driven, as larger credit disbursements are witnessed in the last quarter when banks scurry to jack up loan utilization of their portfolio. However, credit disbursements in this quarter were still higher by 300 bps compared to 11 per cent advances growth in the corresponding quarter of last year.
The banking sector has lent out far more funds this year than the speed available with which to mobilize deposits, and total advances in proportion to total deposits saw an improvement of 900bps.
According to the Statement of Weekly Position, advances as a percentage of deposits as at last week of December 2004 were 74 per cent compared to 66 per cent as at last week of December 2003.
Since the market is flush with liquidity, no real threat is assumed yet to banking system's solvency. However, persistent advances growth in future years may change this situation of contentment. Also, with the closing of this year, the banking sector has increased its market share of advances and deposits to 80 per cent.
The banking sector is witnessing a transition to a new system of risk management and mitigation known as the Basle Accord II. As a first step, State Bank had issued directives to scheduled banks to increase the required equity base free of loan losses to Rs1.50 billion by December 2004 and Rs2.0 billion by December 2005.
Apart from the big five, namely NBP, HBL, MCB, UBL, and Allied, mid-tier banks and foreign banks that did not meet the minimum capital requirement have increased their equity base to become compliant.
Already halfway into the first quarter of 2005, the State Bank has yet to penalize any scheduled bank for non-compliance to this new risk management framework. Thus, it is evident that the banking sector is sounder on international grounds today than ever before, and banks are gradually down trotting into SME lending and agriculture finance, sectors that were once considered too risky.
According to the Statement of Weekly Affairs, total investments as at last week of December 2004 fell by 16 per cent compared to 19 percent growth in 2003. Banks found renewed interest in investments in 2003 at a time when interest rates were on the downward slide.
In a period of falling interest rates, banks made heavy gains on revaluation of fixed income securities held, as returns on these investments were much higher than the prevailing market rates.
As was the case with advances growth, the last quarter of 2004 also witnessed the highest decline in investments in any quarter of the year and investments were down 18.8per cent over the preceding quarter.
According to Quarterly Performance Review of the Banking System for September 2004, Market Treasury Bills accounted for 47.2 per cent of total investments. However, in the last quarter of 2004, it is estimated that the share of MTBs in the banking sector's portfolio of investments has substantially declined.
This is also evident from total investments as a percentage of advances as at fiscal year end falling by 2400 bps at 39 per cent compared to 64 per cent in 2003. Due to unavailability of data, the impact on T-bill holdings of the banking sector cannot be ascertained at the moment, but this time around, it was not higher T-bill yields, three month yields up 189 bps and six month yields up 121bps from July to December 2004, that attracted investments.
The T-bill auction profile from the State Bank reveals 79 per cent decline in amount realized through auction of T-Bills falling in maturities of three, six and twelve month tenors.
State Bank had rejected bids worth Rs17.332 billion for twelve month T-bills in the last auction of September 2004, followed by Rs15.114 billion for twelve month T-bills in the last auction of December 2004.
In aggregate, State Bank rejected bids worth Rs32.446 billion in the last four months of this fiscal year. State Bank had rejected these bids to counter any possible over-zealous hike in interest rates beyond the prevailing trend of 40-50bps per auction.
Substitution of banks' investment portfolio with advances led- growth is a promising initiative, making the banking sector earnings this year more core-income driven.
This has faired well for the banking sector as a whole which is expected to outperform this year, due to volumetric growth in advances, mainly to private sector credit up 34.27 per cent in 2004, and increasing spreads on KIBOR based lending due to higher weighted average yields on T-Bills this year.
The benchmark six month KIBOR rate is pegged to the weighted average yield on six month T-bills. Since mark-up on conventional loan products to corporate and commercial sectors is payable quarterly, banks revise the overall pricing to these sectors on a quarterly basis, where the lending rate is usually a factor of KIBOR based pricing plus banks' spread.
According to the SBP Monetary Policy Statement for the period from January to June 2005, State Bank will continue with hastened tightening of the money supply by raising cut-off yield on T-bills to reach the full year inflation target of seven cent.
With relatively nominal growth in profit rates on customer deposits, the gap between lending and deposit rates is set to widen further, which will invariably prove higher returns on banking sector advances and greater profitability in 2005.
