SBP removes minimum deposit rate for corporate deposits

The State Bank of Pakistan (SBP) has announced the removal of the Minimum Deposit Rate (MDR) requirement for all conventional banks on deposits from financial institutions, public sector enterprises, and public limited companies.

According to a circular, the MDR will now only apply to deposits of individual account holders. This change will take effect on January 1, 2025.

Market rumors about this development had been circulating for the past few days. An analyst at Topline Securities commented that this move will benefit banks with a higher mix of corporate deposits, as they are no longer required to pay any MDR.

“Banks will now negotiate rates with corporate clients”.

As per the 2023 annual accounts of all listed banks, total deposits amount to PKR 27 trillion, with 53% (PKR 14 trillion) being corporate deposits.

The top conventional banks with the highest proportion of corporate deposits are Bank of Punjab (BOP), Bank of Khyber (BOK), Samba Bank (SBL), National Bank (NBP), and Askari Bank (AKBL), with ratios ranging from 65% to 88%.

Other major banks like MCB Bank (MCB), Bank Al Habib (BAHL), Habib Bank (HBL), and United Bank (UBL) have a corporate deposit exposure of 35% to 40%.

Sunny Kumar, an analyst at Topline Securities, noted that they expect a 50-100 basis points decline in deposit costs for corporates.

However, reducing rates further may be challenging due to competitive pressures and the risk of deposits shifting to alternatives like T-bills.

“This reduction is anticipated to positively impact banks' earnings by an average of 7% with a 50 basis points reduction in deposit cost.”

Additionally, the SBP has decided that Islamic Banking Institutions (IBIs) must pay profit on PKR saving deposits (excluding deposits of financial institutions, public sector enterprises, and public limited companies) equivalent to at least 75% of the weighted average gross yield of all pools of an IBI.

Pools created for Shariah-compliant standing ceiling facility and Shariah-compliant open market operations (OMOs) will be excluded from this calculation.

For example, Meezan Bank's existing annualized gross yield on assets (net of fixed assets) is 15.2%, meaning they need to pay at least 11.4% (75% of 15.2%) on saving deposits.

Assuming an average payout of 9-10% to retail accounts, the bank will need to pay an additional 1.5-2.5% to their retail deposit holders, totaling PKR 933 billion.