LAHORE - As per the latest data published by State Bank of Pakistan (SBP), banking sector deposits are up 19 percent to Rs11.9 trillion in June 2017, which is a 6-year high. Experts attributed this to a 17 percent Broad Money (M2) growth in June 2017.

Deposit growth remained higher than expectation and could act as a catalyst in supporting profitability of the banks in times of tough Net Interest Margins (NIMs).

Advances also grew in tandem as they increased by 21 percent to Rs6.1tr. Such growth in advances was last seen in Jun 2006. This phenomenal growth is due to additional liquidity available with banks, unattractive yields prevailing on government securities and improving macros.

Despite this above average growth, advance to deposit ratio (ADR) of the sector stood at 52 percent which is still well below the levels seen in 2008 when ADR of the sector stood at 84 percent.

Investments on the other hand grew by 8 percent to Rs8.1tr as investment to deposit ratio (IDR) declined to 68 percent in Jun 2017 vs. 71 percent in May 2017.

Furthermore, breakdown of broad money numbers show that government has borrowed Rs1.4tr (Jun 30th to Jun 23rd 2017) from central bank as against net retirement of Rs382b in the same period last year. Borrowing from central bank is inflationary in nature and if it persists for long duration, it could lead to higher inflation and interest rates (positive for banks). It also reduces the crowding out affect of private sector credit.

Experts said that banks witnessed an uptick in fresh spreads for the eleventh consecutive month in May 2017, highest streak since 2009, to clock in at 3.87 percent (up 6bps YoY).

However, weighted average banking spreads remained on its declining trend, posting a 24bps YoY decline during the same period.

Similarly, banking spreads averaged at 4.94 percent (down 22bps) during 5M2017. Lending rates on loans are down by 60bps YoY to 7.92 percent, while deposit rates have declined by only 37bps to 2.99 percent.