Listed Banks Must Lend Rs. 3.6 Trillion to Achieve 50% Gross ADR: Report
Listed banks in Pakistan need to disburse approximately Rs. 3.6 trillion by December 2024 to meet the 50 percent Gross Advances to Deposit Ratio (ADR) target, as reported by Topline Securities.
Tax Incentives and Penalties
The Pakistani government has implemented an additional tax on banks failing to reach the 50 percent ADR threshold by December 2024. As of June 2024, the average ADR in the banking sector stands at 38.6 percent. Banks falling short of the target will face a 10 percent additional tax if their ADR is between 40-50 percent, and a 16 percent additional tax if it falls below 40 percent.
Current ADR Status and Lending Rates
As of June 30, 2024, only three out of the 19 listed banks, namely Samba Bank (SBL), Faysal Bank (FABL), and Askari Bank (AKBL), have achieved a gross ADR above 50 percent. To avoid these taxes, some banks have started lending at significantly lower rates, with recent deals offering rates as low as 4 percent (KIBOR minus 12 percent).
For instance, the Trading Corporation of Pakistan (TCP) secured Rs. 360 billion in financing at KIBOR minus 1.9 percent, translating to a 4 percent interest rate with KIBOR around 16 percent on that day.
Banks’ Strategies and Challenges
Banks are confident they can meet the 50 percent ADR target by December 2024. They aim to surpass the 40 percent mark to minimize additional taxation to 10 percent instead of 16 percent. However, deep discounted lending to corporates could trigger the repricing of existing loans, impacting the industry.
Auto financing, which dropped to Rs. 227 billion in August 2024 from a peak of Rs. 368 billion in June 2022, is expected to gain momentum as banks offer lower fixed rates of 14-15 percent compared to last year’s 20-24 percent.
Economic Impact and Market Outlook
The push to meet the ADR threshold is anticipated to foster more competitive lending, benefiting borrowers and the broader economy. This increased lending activity is expected to positively influence the local stock market and enhance cash liquidity.
Leveraged listed companies will benefit from decreased interest expenses due to the recent 140 basis points drop in KIBOR. Topline Securities predicts that the market, currently trading at a forward P/E of 3.9x, will rise to 4.6x, with an index target of 106,000 by June 2025, representing a 27 percent potential upside.
Additional Lending Requirements
Topline conducted a sensitivity analysis, estimating that listed banks need to lend approximately Rs. 3.6 trillion to reach the 50 percent gross ADR target. Lending at 3 percent (KIBOR of 15 percent minus 12 percent) for a quarter is deemed more beneficial than provisioning for the additional tax. Banks would incur a 12.5 percent loss for three months under this lending scenario.
Challenges in Meeting Targets
Despite the incentives, the low demand for high-quality corporate loans presents a significant challenge for banks. Failure to meet the target could result in higher tax provisions. If all listed banks manage to meet the additional lending requirements, the government stands to lose about Rs. 157 billion in tax revenue.
Legal Considerations
Banks are exploring legal options to contest the additional tax. However, even with a stay order, the higher tax will still be recorded.
Conclusion
The requirement for banks to lend Rs. 3.6 trillion by December 2024 to achieve a 50 percent ADR is a significant challenge. While competitive lending may benefit the economy, banks face substantial hurdles in meeting these targets without incurring higher taxes.
