April 25, 2019 (MLN): Moody’s Investor Service has forecasted that the introduction of Treasury Single Account (TSA) would be credit negative for banks in Pakistan, especially the National Bank of Pakistan, the largest public sector bank, given that government deposits comprised 29% of its total deposits at year-end 2018.

In its report on financial institutions within Asia, Moody’s take on TSA in Pakistan surfaced as it said that the introduction of TSA would be credit negative for Pakistani banks’ funding and liquidity as well as profitability.

From the banking sector’s perspective, creation of a TSA would require the transfer of government deposits to the consolidated TSA at the SBP. This would lead to the withdrawal of government deposits in commercial banks, which totaled PKR1.88 trillion ($13.3 billion), or 14% of total deposits as of 31 March and includes federal, provincial and local deposits, according to the SBP definition. However, it is not yet clear which type of deposits fall within the scope of the TSA, said the report.

“We also expect a TSA would reduce banks’ profitability. Banks would no longer be able to benefit from floats, from payment inefficiencies and delays, for instance, by investing in government securities that generate interest income.”

The negative effect is likely to be offset by fees generated from processing transactions, but only partially because these potentially will be subject to a competitive bidding process.

Replenishing the withdrawn deposits through costlier private sector deposits or repo funding from the SBP will likely increase banks’ funding costs slightly, although the sale of income-generating securities would also affect the banks’ net interest income.

“Although a TSA would be negative for Pakistani banks, we expect that their strong funding and liquidity profile, a key credit strength, as well as their access to a stable and growing deposit base, mitigate the risks,” concluded the report.

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