Lending and borrowing: Banking spreads remain stable at 5.14%

Increase by just two basis points in February.

KARACHI:

The weighted average banking spread clocked up at 5.13% in the first two months of 2016, which is down 71 basis points from the same period of the last year, according to the State Bank of Pakistan (SBP).

The banking spread is the difference between average lending and deposit rates. It is currently hovering at the lowest level for the last 11-year period, thanks to a continuous decrease in interest rates on the back of declining inflation.

The spread remained stable last month, as it increased by just two basis points on a month-on-month basis to clock up at 5.14% in February.

The year-on-year fall in the average deposit rate during February was sharper than the corresponding drop in the average lending rate, SBP data shows. The average lending rate declined four basis points to 8.55% while the average deposit rate remained 3.41%, down six basis points from January.

“We attribute the compressing spreads to unprecedented monetary easing and adjustment in the interest rate corridor by the SBP to limit banking sector spreads,” said Taurus Securities analyst Rohit Kumar in a research note to his clients.

The banking spread has mostly been shrinking for more than a year in the wake of accommodative monetary policy by the SBP. The central bank has reduced the benchmark interest rate consistently since 2014, as it currently stands at a historic low of 6%.

Shrinking spreads result in decreased banks’ earnings because customers receive higher interest on deposits but pay a smaller interest on their loans. Banks generally respond to such a scenario by investing more in riskless government securities that offer guaranteed returns.

Interest rates on loans are reset on a quarterly basis whereas deposits are re-priced immediately after the change in the benchmark interest rate.

The banking spread on gross disbursements and fresh deposits - also called the ‘fresh spread’ - remained almost flat in February. It was down by only one basis point to 3.04%. While the average fresh lending rate went up 13 basis points to 7.28%, the average cost of fresh deposits increased 14 basis points to 4.25% on a monthly basis.

Kumar said he does not foresee any significant deterioration in the banking spread going forward, adding that the average lending rate has adequately incorporated the impact of monetary easing. “We do not expect any significant cut in policy rate,” he says while explaining why he believes the banking spread will not dip any further.

Published in The Express Tribune, March 27^th, 2016.

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