Banking Sector: Deposits soar by 17% YoY in 2020, highest growth in 4 years

January 7, 2021 (MLN): The total deposits held by Commercial Banks have shown a robust growth of 17% YoY to Rs 17.1 trillion in CY20. This is the highest growth in 4-years and is better than the 10-year average of 13%.

According to the report by Topline Securities, the growth in deposits has been fueled by higher Remittances which marked a growth of 17.5% YoY in USD-term and 27.5%YoY in PKR-terms during 11MCY20, while lack of cash-based business activity due to COVID-19  may have also resulted in an increase in bank deposits.

Meanwhile, fresh deposits that were utilized in expanding the Investment portfolio have grown by 31% YoY to Rs.11.5 trillion in 2020. At the start of the year high yield on offer had already lured banks to move towards investments, which was compounded further as COVID-19 hit strangling business activity and in turn loan growth, the report said.  

Consequently, banks' investment to deposit ratio (IDR) which had already depicted an improvement to 67% in Sep’20, has been sustained at year-end. To recall this was 66% in Jun’20 and 60% in Dec’19. The higher IDR is largely attributable to high-interest rates at the start of the year and low appetite for risk (Advances) due to COVID-19.

On the other hand, the demand for fresh disbursements remained muted despite lower interest rates as it grew by just 2% in 2020 as banks remained wary of overall economic conditions due to COVID-19. This has resulted in a drop in advances to deposits ratio (ADR) to 48% from 56% in Dec-2019. According to the report, the aggressive cuts in interest rates by the SBP since Mar-2020 may be starting to reap fruits as the impact of the COVID-19 pandemic also lowers and economic activity picks up.

During the year, Provisioning has also seen a substantial increase as banks have opted to increase General Provisioning in the wake of COVID-19, however, the last quarter has seen provisions stabilizing as the banks feel that they have adequately provided for up until Sep-2020.

Going by the report, M2 growth clocked in at 16% in 2020 primarily driven by the stellar deposit growth this year and 19% increase in Currency in Circulation (CIC) to Rs 6.3 trillion by the end of Dec’20. This upsurge in CIC can be ascribed to low-interest rates and evasion from tax authorities.

Going forward, the deposits are expected to grow in the range of 12%-14% during CY21. While the advances are expected to grow by around 4% to 6% where the banks will remain risk averse given concerns over future waves of covid-19, the report cited.

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