The banking sector result season just got over and little surprise that the profits jacked up considerably - yet again - even after all the super tax and other taxations measures. The sector profits have almost trebled compared to five years earlier - and the only other variable to have also trebled is banking sectors exposure to investments - primarily government securities.
As per the latest available numbers, the banking sectors overall advance-to-deposit ratio (ADR) as at September end 2015 stands at 51 percent - having touched the all time low just three months earlier. Incidentally, the investment-to-deposit ratio (IDR) stands at the highest ever 71 percent. And all this while the interest rate cycle was slowing down.
Last when the ADR was higher than the IDR was 18 months ago in May 2014. The gulf, ever since has only widened and the difference between the two now stands at 20 percent in favour of investments. Such massive difference was last seen more than four years ago - only that it was tilted towards advances.
The deposits have continued to grow at a modest pace of late, most of which finds a parking plot in government securities. Advances, on the other hand are only growing in single digits, contrary to the belief that improved macroeconomic situation and bottomed-out interest rates should lead to a spur in private sector lending.
There is definitely no good or bad ADR, but as long as the government's appetite is there - banks do not need a second invitation to join the party. The continuing increase in exposure in investments reaffirms that banks, by and large, appear more concerned about the risk factor, than asset yields at the moment. Much of CY14 was understandable, as yields on government securities were sky-high, but the undying love which continues, tells banks do not mind risk free return, however less lucrative.
Banks have of late focused more on rationalizing their deposit mix and that seems to be doing the trick pretty well for them. There is enough to be made on account of gain in sale of securities. So the lesson learnt so far is that banks have little reason to alter their asset strategy, as profits expand. As long as there is a willing sovereign borrower out there, the IDR will keep increasing. It will take nothing short of special to see the trend reverse anytime soon. Shareholders meanwhile are not complaining as the bottom line is all what they care for.