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Pakistan Banks: Deposits growing faster than expected; IDR rising, while ADR drops

• As per latest SBP data, overall Deposits of Pakistan Banks have grown by 18% YoY to Rs16.5trn by end Sep-2020 (highest in 13-years). The same is up by 13% YTD with Deposits in Sept-2020 rising by 1.0% MoM.
• Growth in Deposits has been fueled by higher Remittances (+15% YoY in USD and 27% YoY in PKR terms during  8M2020), while lack of business activity due to COVID-19 (cash-based) may have also resulted in increase in bank deposits.
• Investments have grown by 19% YoY to Rs11.04trn by end Sep-2020. The same is up 25% YTD (vs. 21% YTD growth by end Jun-2020) with Investments in Sept-2020 rising by 1.6% MoM.
• IDR has depicted an improvement to 67% in Sep-2020 from 66% in Jun-2020 and 60% in Dec-2019. The higher IDR is largely due to high interest rates at the start of the year and low appetite for risk (Advances) due to COVID-19 lately.
• On the other hand, Advances have grown by just 1% YoY to Rs8.03trn by end Sept-2020, while down 2% YTD and 0.3% MoM in Sept-2020. This is despite the aggressive cuts in interest rates by the Pakistan Central Bank since Mar-2020 as the impact of COVID-19 pandemic has reduced the overall risk appetite of banks. As a result, ADR has dropped to 49% in Sep-2020 from 51% in Jun-2020 and 56% in Dec-2019.
• Provisioning have also seen a substantial increase as banks have opted to increase General Provisioning in the wake of COVID-19.
• The Currency in Circulation (CIC) has increased by 17% YoY to Rs6.14trn by end Sept-2020, with CIC as a % of M2 clocking in at 30%, above past 5-year avg. of 27%. Reasons for increasing CIC can be attributed to low interest rates, evasion from tax authorities and incidence of WHT on withdrawal of deposits.
• Going forward, we expect Deposit growth in the range of 12-14% during 2020E (vs. historical 3-year average growth of 11%), while we expect Advances to grow by around 2% during the year.

We are presently Market-Weight on Pak Banks with Meezan Bank (MEBL) and Bank Al Habib (BAHL) our top picks.