Banks: Investments still a priority, spreads stable despite rate cut! Lending v/s investments continue to battle it out: With CY13’s seven months down, we, yet again, see banks’ focus more inclined towards investments than lending. The banking sector continues to expand its investment portfolio keeping advances growth subdued, though not as much as it was evident after successive policy rate cuts recently. The investment and deposits jumped 15% and 16% on YoY basis during 7MCY13 while advances increased by a very subdued 2% during the same period. Interestingly, if we compare the MoM percentage change in Jul’13, a sharp decline in investments (7%) is witnessed, followed by decreasing advances by only 2.1% MoM despite declining policy rate scenario that saw a massive 300bps cut by the central bank till FY13 to help strengthen the overall sector’s lending portfolio. On other hand, deposits too have decelerated (3%) on MoM basis. Banks still cautious for high credit risk due to inherent economic risks: The advances grew from PKR 3.70trn (Jul’12) to PKR 3.78trn in Jul’13, a mere 2% YoY rise. The obvious reason for this slight increase was a series of cut in policy rate bringing it down to single-digit (9.0%) during FY13. However, no significant growth has been seen in advances from the Dec’12 level to-date primarily to due lower credit demand from the private sector amid worsening law & order situation and low overall macros. At the same time, deposits grew 16% YoY taking sector’s Advances to Deposit ratio (ADR) to 53.6% in Jul’13, an improvement of 71bps MoM while a massive decline from 60.6% recorded in Jul’12. Investments only slightly dip MoM: The investments of the banking sector grew 14.6% YoY to PKR 3.8trn in Jul’13, from PKR 3.1trn in Jul’12, while on MoM basis, 7.1% decline was noted. Most of the banks remained inclined towards investments in gov’t securities, in order to reduce their credit risk and ensure lower but guaranteed returns. However, sector’s Investment to Deposit ratio (IDR) has seen a slump of 216bps MoM in Jul’13 to 54.3% while 49bps decline from 54.8% last year. We still expect banks to continue with their focus largely towards investments till macros improve, although banks have started making efforts to mobilize funds through advances recently. Spreads stabilize around 6.31% since May’13: Banking sector’s weighted average spreads, in Jul’13, declined by a mere 4bps MoM to 6.31%, compared to 6.35% in Jun’13 and 6.34% in May’13. This takes the average 7MCY13 spreads to 6.26%, a decline of ~95bps YoY. Spreads have gradually started to pick up from its lowest in Apr’13 of 6.19% this does present a sigh of relief for banks who have been facing double-edged sword in the form of increased deposit costs (minimum 6% deposit rates calculated at average monthly balance from minimum monthly balance), and decline in lending rates (over 300bps cut in the policy rate since Jun’12). Encouragingly, despite recent cut of 50bps in the policy rate, banks, on average, have been able to keep lending rates at 11.28% -only 8bps decline MoM, thereby keeping spreads at 6.31% (partial decline of 4bps contributed by a cut in the average deposit rates). We continue with our cautious stance on banks with only likeness towards NBP (Target Price: PKR 54/share) and BAFL (Target Price: PKR 21.2/share).
Posted on: Wed, 28 Aug 2013 07:39:48 +0000
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