Karachi, August 10, 2023 (PPI-OT): OMO levels cross Rs9.5trn
The rising demand from government to finance fiscal deficit has led to the outstanding OMO (Open market operations) level to reach to Rs9.6trn as at Jul-2023, not including any mop ups executed by SBP (Rs1.3trn mom up on 27 July for 7 days).
As per data released by SBP yesterday, total borrowings of the sector are just shy of Rs10trn (+36% YoY). This comes to 25% of sector's total assets being financed by borrowings, which was 20% one year back and 15% two years ago.
With that, as these borrowings have fueled the sector's investment portfolio, Investment to Deposit ratio (IDR) has reached to 84% - one of the highest levels in history.
In terms of banks' profitability while OMO trades are profitable on the margin, they alter drivers of ROE. ROA is dragged incrementally lower with low margin OMO trades but increase in leverage (Assets over Equity: ~17x) preserves ROE expansion.
Higher borrowing demand from the government
The expanding fiscal deficit has led to the government’s borrowing from the banking sector to rise every year. Pakistan’s fiscal deficit has reached 3.7% of GDP in 9MFY23 (Rs3trn), out of which banks have lent the government a total of Rs2trn during the same time. Moving to 4QFY23, the total government paper auctions witnessed an additional borrowing of Rs4.4trn from the government, out of which a majority participation can safely be assumed by the banking sector.
Escalates OMO borrowings
With ongoing monetary tightening cycle, the window to keep lending to the government through government paper auctions seems lucrative to the banking sector as well. The sector earns higher yields on risk free investments, diverting allocation from lending to private and public sectors and reducing risk of Non-Performing Loan (NPL) accretion in times of record-high interest rates.
In order to avail the opportunity of participating in government paper auctions, the banking sector has been availing borrowings from the State Bank of Pakistan (SBP) through Open Market Operations (OMO - Reverse Repo Borrowings). To recall, SBP is prohibited to directly lend to the government under the State Bank of Pakistan Act.
The rising demand from government to finance the fiscal deficit has led to the outstanding OMO to reach to Rs9.6trn as at Jul-2023, not including any mop ups executed by SBP (Rs1.3trn mom up on 27 July for 7 days).
IDR back to record-high at 84%
As per data released by SBP yesterday, total borrowings of the sector are just shy of Rs10trn (+36% YoY). This comes to 25% of banking sector’s total assets being financed by repo borrowings, which was 20% one year back and 15% two years ago. With that, as these borrowings have fuelled the sector’s investment portfolio, Investment to Deposit ratio (IDR) has reached to 84% - one of the highest levels in history. At the same time, as Deposits increased by 16% YoY.
Moreover, with challenging macroeconomic times, Advances growth slowed to 10% YoY, sliding ADR down to 46%. The pace of growth and the Gross ADR, both, record a 2-year low.
Elevated leverage to boost banking sector’s ROE
The increase in borrowings reduce the average NIMs of the banking sector as the spread earned on Investments that are financed by these borrowings are relatively lower. Where the Investment yield is some basis point above the prevailing Policy Rate, the cost of borrowing is closer to the Policy Rate. This also results in drag in ROA.
The increase in use of leverage (Assets over Equity: ~17x), however, brings a positive impact to the sector’s absolute core income and preserves ROE expansion.