LAHORE: Deposits of Pakistan banks have grown by 18% Year-on-Year (YoY) to Rs17.9trn in 1Q2021 which is the highest growth in March quarter in the last 14 years, said the latest State Bank of Pakistan (SBP) data.

Growth in deposits has been fuelled by higher remittances (+29% YoY in USD and 31% YoY in PKR terms during 1Q2021), while business activity (cash-based) hindered due to COVID-19 may have also resulted in the increase in banking deposits.

Investments have grown by 35% YoY to Rs12.6trn in 1Q2021. The excess liquidity is being placed in investments (primarily T-Bills) due to subdued growth in advances.

Advances grew by 4% YoY (vs 10-year average of 9%) in 1Q2021 as banks remained wary of overall economic conditions due to COVID-19. However, sequential growth of 3.5% Quarter-on-Quarter (QoQ) is an indication of better economic activity during the last few months.

Provisioning has seen an increase as banks have opted to increase General Provisioning (overall outstanding stock up 20% YoY as of Mar-2021) in the wake of COVID-19. Fresh provisioning during the quarter stands at Rs26bn, compared to Rs5bn in Dec-2020 and Rs32bn in Sept-2020 quarter.

Money supply (M2) growth clocked in at 15% in 1Q2021 primarily driven by higher government borrowing from scheduled banks (+12% YoY). The Currency in Circulation (CIC) has increased by 16% during the same period.

CIC increased to Rs6.6trn by the end of Mar-2021, with CIC as a percentage of M2 clocking in at 30%, above the past 5-year average of 27%. Reasons for increasing CIC can be attributed to low-interest rates and evasion from tax authorities.

Going forward, according to experts, deposit growth is expected in the range of 12-14% during 2021E, while advances are expected to grow by around 5-7%, where banks are expected to remain risk-averse given concerns over further waves of COVID-19.