Banks’ net profits are growing thanks to their disproportionally huge investment in high-yield government debt papers and the growing share of savings and current accounts in their deposit mix.
In the first nine months of 2014 (9MCY14), the after-tax profits of banks rose to Rs115bn, up 40pc from Rs82bn in the same period last year. During this period, their net investment grew 17pc year-on-year, whereas their net advances increased just 12.2pc; deposits were up 13.5pc.
A slightly slower growth in advances vis-à-vis deposits is not a problem. . But if advances grow slower than investment, and then this becomes a trend, then all is not well, particularly if the share of low-cost current and saving accounts (Casa) dominate banks’ deposit mix.
By June, 75pc of banks’ deposits were in current and saving accounts, and term deposits constituted less than 25pc of the total, according to State Bank statistics.
For the past several years, banks’ profitability has originated chiefly from their investments — the bulk of which are in high-yield, risk-free government debt papers. And as they keep mobilising more Casa and less term deposits, the low cost of deposits helps in maintaining the growth in profits.
Declining inflation will surely further boost these trends, as it will increase banks’ real returns on investment and advances. The 50bps cut in the SBP policy rate in mid-November will automatically lead to a lowering of banks’ minimum deposit rate (MDR) — which is tied to the central bank’s repo rate — effectively reducing the cost of the bulk of deposits.
