Banking spreads peak in July: Report

Expected to fall in near future.

KARACHI: Banking sector spreads seem to have peaked as they improved marginally by two basis points to 7.88% in July on a monthly basis.

Spreads are expected to drop going forward as assets are re-priced to adjust for lower yields following the State Bank of Pakistan’s decision to cut discount rate by 50 basis points to 13.5% in July and a fresh rise in cost of deposits, according to a KASB Securities research report.

The lending rates corrected two basis points to 13.78% while returns on outstanding deposits depressed four basis points to 5.88%.

Banks stick to risk-aversion theme

Banks continue with the risk aversion theme where the bulk of 9.4% yearly deposit growth is parked in fixed income and government finances. Public-sector debt contributed 86% of system loan growth in fiscal 2011 and now accounts for only 42% of outstanding financing. Similarly banks’ IDR improved to all-time high of 48.5% on August 12 where banks now hold 67% of outstanding govt fixed-income securities.

Despite the token rate cut, the rate is expected to continue in the near-term owing to limited private sector long-term financing avenues and banks cutting down on consumer financing, adds the note.

Asset quality improves

Risk aversion has started to improve asset quality as gross non-performing loans (NPLs) corrected by 20 basis points to 14.8% of advances. It is worth noting that public sector banks were the biggest contributors to the drop, says the note. Since some fresh NPLs are either from public sector enterprises or guaranteed by government for the power sector and do not require provisioning, these could be depressing the stated coverage ratio. Meanwhile, the textile sector - the biggest borrower and chronic asset quality risk with 24% infection ratio - may show some slippages due to weak pricing power, inventory losses and prevailing energy shortages, adds the note.

Published in The Express Tribune, August 24^th,  2011.