Lahore - Banking sector deposits have registered the growth of 10 per cent to Rs9.1 trillion in the first half of 2015 compared to last five years’ average annual growth of 8 percent, also showing growth of 10 percent annually in June 2015 against 8 percent growth of the same period last year.

However, the deposits of private businesses declined by over 5 percent on monthly basis in the very next month of July when the implementation of WHT on all banking transactions started.

The latest figures released by the State Bank of Pakistan (SBP) show that deposits of private businesses stood at around Rs2.3 trillion at the end of July, showing a drop of Rs132 billion in banking system in the first month of 2015-16 alone. The withholding tax is one of the major reasons for the sharp decline in deposits of private businesses in July,” said experts.

Aqeel Karim Dhedhi, chairman of the AKD Group, expects a steep decline in deposits at the beginning of the fiscal year when the withholding tax on banking transactions by non-filers worth more than Rs50,000 in a single day became effective. He said the imposition of 0.6 percent tax and then 0.3% withholding tax has deeply hurt deposit mobilisation at wholesale level, as informal payment mechanisms, like the Parchi system, reference system and local hundi system have been sprung up across the country to facilitate business activities.

Aqeel Dhedhi said that the businessmen are avoiding the banking channels altogether, he claimed and added that at least 10 to 15 percent banking transaction have been dropped due to diversion of money transfer to non-banking channels. Similarly, the use of prize bonds and dollars even in formal payment to carryout business deals has also surged in recent days, he added.

The financial experts said that the recent budgetary measures have been negative for banks but they believe that the underperformance of banking sector in the first half of 2015 have improved sector valuations, with bank index down at 16 percent.

Banking sector experts said that situation in June 2015 indicates that increased deposits were mobilised by banks, as deposits grew by 13 percent year-on-year as against 10pc last year.

Advances of the banking sector grew by 3 percent during the first half as against the average growth of 2 percent during the last five years (2010-14).

Meanwhile, profitability of Pakistan banking sector remained flat in 2Q2015 on YoY basis due to new taxation measures announced in Federal Budget FY16. Govt. had announced a one-time super tax of 4% on bank’s income for tax year 2015 and also imposed uniform tax rate of 35% on all sources of bank income including dividend income and capital gains. New taxation measures led to increase in effective tax rate from 34% in 2Q2014 to 52% in 2Q2015 which kept bottom-line of the banks in check.

The impact of increased taxation is also evident from Profit before tax (PBT) numbers which grew by 39% YoY to Rs88bn in 2Q2015. Despite a sharp increase in provisioning expense (up by 4.1x YoY to Rs10.1bn), strong growth in Net Interest Income (NII) and capital gains supported PBT of banks in 2Q2015. 

Banks continued to realize higher capital gains in 2Q2015 largely on PIBs taking benefit of declining interest rates. Capital gains during the quarter surged to Rs21.6bn as against Rs8.8bn in 2Q2014.  

On QoQ basis, profitability of the sector was down by 14% to Rs41.2bn largely due to higher effective tax rate in quarter. Pre-tax profits on quarterly basis increased by 19% led by 9% QoQ growth in NII and higher capital gains and fee income up 28% and 19%, respectively.