Approximately Rs. 3.6 trillion will be required to be disbursed by listed banks to achieve the 50 percent Gross Advances to Deposit Ratio (ADR) target by December 2024, according to Topline Securities.
Many banks in Pakistan are now racing to meet the Gross Advances to Deposit Ratio (ADR) of 50 percent by December 2024 to avoid additional tax.
To recall, the government has imposed an additional tax on banks if they fail to meet a 50 percent ADR threshold by December 2024. As of June 2024, the banking sector’s average ADR stands at 38.6 percent.
Lend More or Pay Higher Tax
If banks are unable to reach the 50 percent ADR mark at the end of December 2024, they will incur an additional 10 percent tax if the ADR is between 40-50 percent, and a 16 percent additional tax if the ADR falls below 40 percent.
As of June 30, 2024, only 3 out of 19 listed banks, which include Samba Bank (SBL), Faysal Bank (FABL), and Askari Bank (AKBL), have a gross ADR above 50 percent.
To avoid this tax, a few banks have recently started lending at as low as 4 percent (KIBOR minus 12 percent), as per channel checks.
In a recent transaction, as per news reports, Trading Corporation of Pakistan (TCP) got Rs. 360 billion in financing from banks at KIBOR (benchmark lending rate) minus 1.9 percent. With KIBOR standing at around 16 percent on that day, TCP effectively raised financing at a 4 percent interest rate.
In a recent corporate briefing session, banks were confident in meeting the 50 percent target by December 2024. However, banks will strive to cross the 40 percent ADR mark to ensure lower additional taxation of 10 percent versus 16 percent.
Any further deep discounted lending to corporates, either of a short-term or long-term nature, may trigger the repricing of existing loan books, which may have an impact across the industry.
Auto financing, which declined to Rs. 227 billion in August 2024 from a peak of Rs. 368 billion in June 2022, will also start gaining momentum as many banks have already begun offering lower fixed rates of 14-15 percent compared to 20-24 percent a year ago.
A major challenge for banks is finding secure, guaranteed lending opportunities. Nevertheless, the push to meet the ADR threshold is likely to encourage more competitive lending, potentially benefiting both borrowers and the broader economy. This aggressive lending by banks in the coming months bodes well for the local stock market and will also increase cash liquidity.
Moreover, the interest expenses of leveraged listed companies will decrease due to the sharp fall in lending rates; KIBOR has come down by 140 basis points in the last 7 days. “Currently, the market is trading at a forward P/E of 3.9x, which we expect to rise to 4.6x, taking our index target for June 2025 to 106k, a potential upside of 27 percent,” Topline added.
What Banks Need to Do
Topline conducted a sensitivity analysis to determine the additional lending required by listed banks to achieve a 50 percent gross ADR by December 2024 and its net impact. Approximately Rs. 3.6 trillion would be required to be disbursed by the listed banks in total to reach the target.
According to Topline, most of the banks will experience a net positive impact if they choose to lend at 3 percent (KIBOR of 15 percent minus 12 percent) for a quarter compared to the provisioning of tax. Banks will be losing 12.5 percent for 3 months assuming they lend at KIBOR minus 12 percent.
Given the low demand for funds (good quality) on the corporate side, it will be difficult for the banks to achieve the target, and they may eventually end up provisioning higher taxes.
However, if all listed banks were able to lend the additional advances required to reach the 50 percent target, the government would lose around Rs. 157 billion.
Banks are also looking into legal recourse for this; however, even if they get the stay order, still higher tax will be recorded
