KARACHI: The investments of the banking sector, amid weaker demand for advances and abundant liquidity, surged by Rs2 trillion during the first half (H1) of Calendar Year 2020, State Bank of Pakistan (SBP) reported.
According to Mid-Year Performance Review of the Banking Sector (January-June 2020), the investments in government securities showed more than 90 percent (Rs1.9 trillion) rise in investment flows during the reviewed period.
Banks invested in Term Finance Certificates (TFCs) and debentures to the tune of Rs130.9 billion during H1CY20. Further analysis of the investments in government securities revealed that the banks’ stock of market treasury bills (MTBs) and Pakistan Investment Bonds (PIBs) increased by Rs862.3 billion and Rs863.5 billion respectively.
In the backdrop of COVID-19 outbreak, the maturities between one to ten years in March 2020 showed a downward trend, indicating market expectations of decline in policy rate owing to the anticipated softening in economic activity.
PIB increased as they attempted to lock their funds at higher prevailing rate of return. However, the report emphasized that after April 2020, banks bidding in treasury bills significantly reduced.
The government reduced its auction target from Rs2.8 trillion in Q1CY20 to Rs2.2 trillion in second quarter of current year. On the contrary, the target for PIBs (including fixed rate and floaters) increased to Rs625 billion from Rs450 billion.
Moreover, the government introduced 3-year and 5-year tenure bonds in floater category during Q2 CY20, indicating its desire to improve its debt maturity profile.
It is pertinent to mention here that despite elevated economic stress driven by the COVID-19 pandemic, the assets of the banking sector witnessed a expansion of 7.8 percent during H1 CY20, according to the report.
The report attributed the growth to the robust increase in investments, funded by surge in deposits, adding that advances, on the contrary, observed mild downtick owing to the economic slackness caused by the disruption in the business activities after the outbreak.
The report said without SBP supportive measures, the contraction in advances could have been much higher. It highlighted that the policy measures rolled out by SBP facilitated the banking sector in conserving the capital enhancing the lending capacity and increasing the loss absorption ability.
As a result, despite some increase in credit risk, the banking sector demonstrated improved profitability and enhanced resilience. The Non-performing loans (NPLs) ratio increased from 8.6 percent as of end December 2019 to 9.7 percent as of end June 2020. However, net NPLs to loans ratio, which is a better measure of credit risk, increased only marginally from 1.7% to 1.9%.
