Government securities: banks' investment remains prime driving force

Over 91 percent investment of banks in government securities remained the prime driving force behind the investment growth. According to State Bank of Pakistan (SBP), the overall net investments of the banking sector rose by 1.8 percent during third (July-Sep) quarter of this calendar year (CY17) against a decline of 2.5 percent in the same period of last calendar year. Banks' net investment surged to Rs 8.6 trillion as on Sept 30, 2017 compared to Rs 7.642 billion on Sept 30, 2016.
However, banks' investment in government securities remained the prime driver behind investment growth as out of Rs 8.6 trillion net investment, banks invested some Rs 7.866 trillion in the government securities till the end of Sept 30, 2017.
The SBP in its recent report revealed that banks continue to invest in short-term Market Treasury Bills (MTBs) and have divested from Pakistan Investment Bonds (PIBs) and Sukuks during Q3CY17. During the third quarter of this calendar year, banks invested Rs 602 billion in MTBs, while divested Rs 420.2 billion from PIBs and Rs 11.7 billion from Sukuks.
Consequently, the share of MTBs in total net investments of banks increased to 52.6 percent in Q3CY17 compared to 42.0 percent in Q3CY16. The share of PIBs in total investments declined to 35.3 percent in Q3CY17 against 42.3 percent in Q3CY16. Banks' investment in PIBs and MTBs stood at Rs 3.004 trillion and Rs 4.387 trillion, respectively till the end of Sept 30, 2017.
The offer-to-target ratio for PIBs auctions has also declined to 0.36 in Q3CY17 from 3.32 in Q3CY16, which reflects reduced banking sector interest in long-term government securities. There is a change in government's maturity preferences for budgetary borrowings. The target amount for PIBs auction of Rs 300 billion in Q3CY17 was significantly lower than the PIBs maturity of Rs 772.6 billion: representing abated interest of government in long-term borrowings. The federal government has borrowed only Rs 50 billion against the target of Rs 300 billion in the July-Sept quarter.
Higher investments in MTBs can also be seen as a market risk management strategy by banks, owing to expectations of a possible change in the direction of interest rates in future. According to SBP, banks' investment in corporate securities (TFCs, bonds, debentures, fully paid up shares, etc) has decreased by 2.6 percent during Q3CY17. Particularly, banks' investment in corporate debt instruments declined by 1.3 percent or Rs 3.2 billion while investments in shares/listed equity fell by 0.9 percent or Rs 2.4 billion. This may be a manifestation of the ongoing volatility in the capital market.
The changing composition of banks' earning assets towards short-term investments and long-term loans points to repositioning by banks to remain profitable in the wake of evolving macroeconomic environment.