Macro Analysis /

Pakistan Banks: Central bank raises CRR for banks

  • SBP has increased the average CRR for scheduled banks from 5% to 6%

  • Assuming 5% spread we estimate a c. PKR8.5bn (or 3.0%) hit to pre-tax banking sector profits

  • Net impact is marginal. Primary aim is to reduce monetary aggregates, which improved post Covid-19

Yusra Beg
Yusra Beg

Senior Investment Analyst

Intermarket Securities
15 November 2021

The SBP has increased the average Cash Reserve Requirement (CRR), for scheduled banks (including Islamic), from 5% to 6%, while the daily minimum CRR has also been increased by 1ppt to 4%.

The CRR is applicable on demand liabilities and time liabilities with tenor of less than a year (PKR17.2tn of deposits as of June 2021 i.e. c. 90% of bank deposits). Previously, 5% of these deposits i.e. c.PKR860bn at June’21 were to be kept with the SBP at 0%. This will now rise to PKR1,030bn in the 6% CRR regime. As a result, banks will not be able to deploy about PKR170bn of deposits into interest-bearing assets. Assuming banks will forego a 5% spread on this incremental amount, we estimate a c. PKR8.5bn hit to pre-tax sector profits which is about 3% of sector profitability.

SBP has increased the CRR for the first time in over a decade, having increased it from 7% to 9% in 2008. Just prior to the global financial crisis, Pakistan’s GDP growth was at a cyclical peak and banking ADRs stood above 70%. The CRR was later reduced to 5% in 2012 in a bid to boost the economy. 

While the net impact on banking profits is marginal, authorities evidently want to cool down monetary aggregates, which have improved dramatically post Covid-19. M2 growth expanded to 16% yoy in June 2021 in tandem with robust deposit growth of 18% yoy in the same period. This event marks a shift from the liquidity measures undertaken by the SBP since last year to offset the impact of Covid-19. In this regard, we believe it is possible that the Capital Conservation Buffer is also taken back to previous levels (it was reduced by 1ppt last year). 

With the monetary tightening cycle having just started, we believe banking sector profitability is set to accelerate. Margins should widen over the next few years while provisioning coverage of c.100% for most universe banks gives comfort on asset quality. We have BUYs on all the banks in our coverage, with MCB, BAFL and BAHL offering the highest total returns.

Relief / liquidity measures given by the SBP during Covid-19

SBP lowered the policy rate by 625bps to 7.0%

The interest rate corridor was made symmetrical where Repo/Reverse Repo rates were kept +/- 100bps around the Policy rate. This served to squeeze margins by effectively shifting up the rate floor on savings deposits by 50bps. Additionally, banks were instructed to re-price floating rate loans immediately (applicable on Agriculture, Consumer, SME). 

Capital preservation measures

The SBP reduced the Capital Conservation Buffer (CCB) from 2.50% to 1.50%. This enabled banks to lend up to another PKR800bn, or c. 10% of outstanding loans. SBP also issued a two-quarter moratorium on dividend payouts by banks while also delaying IFRS-9 implementation to Jan 2022. 

Principal repayment on loans deferred by one year

Banks were instructed to defer principal repayment on advances by a year (expired March 2021).

Phased recognition of impairment loss on equities

Banks could book impairment on equity securities held as “AFS”, in a phased manner equally on quarterly basis in CY20. This would serve to reduce earnings volatility.

Reduction in CRR for FE-25 deposits

The Special Cash Reserve Requirement was reduced from 15% to 10% (to be maintained in US$ equivalent) of total FE-25 deposits effective from 20 April 2020. 

Promotion of digital banking

The SBP instructed banks to waive all charges on fund transfers through online banking channels (IBFT, RTGS) – this is still in place.

Concessionary financing

Schemes were introduced for companies to borrow at concessionary rates if they do not lay off employees. Companies wishing to borrow for Plant & Machinery could also avail concessionary financing.