Banks remain sound

Banks in Pakistan seem to be ticking all the right boxes. Their profits are up, solvency improved; all profitability indicators are on the up - and all that in times of thin spreads and low interest rate scenario. The State Bank of Pakistan (SBP) in its Quarterly Performance Review of Banking Sector has narrated the obvious.
Mind you, the phenomenal growth in profits has come despite a slowdown in deposits and slight decline in gross advances - both seasonal in nature. The advance-to-deposit ratio at 47 percent has been hovering around the mark for nearly a year. It is the investment-to-deposit ratio that has skyrocketed to 69 percent.
It is now an open secret where most of banks excess funds are parked - government securities. The share of investments in total assets continues to grow as it inched up by almost 9 percent quarter-on-quarter. Mind you, the yields on government papers are nowhere near as lucrative as they were last year - but the risk adverse policies of the industry seem to be dictating the asset mix.
Needless to say the bulk of it is parked in government securities, which forms nearly 91 percent of total investments. One obvious shift has been witnessed within the investment mix as banks shift focus away from PIBs to shorter term treasury bills. The deposits have gone down slightly by 2.6 percent, which according to the SBP is very cyclical in nature and follows the drop in working capital requirements.
The interest expense on deposits reduced by a significant 11 percent - underlining the industry's focus on streamlining the deposit mix and improving CASA. The reduced cost of deposit more than made up for the loss incurred on asset yields at the top due to slowdown in interest rates. Banks have shown no signs of relenting the CASA drive, and little suggests that the ADR is going to go up anytime soon.
The SBP, in its short outlook for the sector believes the pickup in economic activity and accommodative monetary policy stance should result in an up tick in advances. It makes all the sense too, only those banks have till now refrained from lending aggressively and seem confined with whatever they make on government securities. From how it is, it will take nothing short of a CPEC to alter the bankers mood towards lending.