Banking spread, a key determinant of banks’ core earnings, fell to the lowest six-monthly average in the last four years and stood at 7.24% in the first six months of 2012.
The spread was 39 basis points (bps) lower when compared with 7.62% in the same period last year, according to figures released by the State Bank of Pakistan (SBP).
According to the data, average lending rate of banks remained at 13.06% while the deposit rate was 5.82%.
A 54bps reduction in banks’ average lending rate to 13.06% against lending rate of 13.6% last year was the major factor behind the lower banking spread in the first half of 2012.
The lending rate came down following a sharp reduction of 200 basis points in the State Bank’s benchmark policy rate in the second half of 2011, which brought down six-month Karachi Inter-bank Offered Rate (Kibor) by 184bps to 12.06% in the first half of 2012. Kibor stood at 13.9% in the first half of 2011.
However, the lower reduction in the lending rate compared to Kibor was due to risk-averse strategy adopted by banks in advancing loans.
On the other hand, the deposit rate remained almost firm at 5.82% in the first half of 2012 against average 6% in the first half of 2011.
Faisal Shaji, Head of Research at Standard Capital Securities, commented that despite the decline the banking spread is expected to remain above 7% in the next six months of 2012. However, he pointed out that if the country needs good economic growth, the spread should narrow down further.
“Seven per cent is an inflated rate and a big problem for economic growth,” Shaji said. “But this picture may change if the new government opts for growth-led economic policies.”
Economists say banks are mostly lending to the government, leaving very little for the private sector. This has resulted in slow growth of the private sector over the last few years.
June spread down 72bps
In June alone, average spread of banks stood at 7.14% versus 7.86% in June 2011, down 72bps primarily due to a reduction of 82bps in the lending rate. The lending rate has been standing below 13% for the last three months.
On the other hand, the deposit rate fell by 10bps to 5.82% in June, despite the fact that banks had been directed to increase minimum savings rate to 6% in May.
Spread to remain below 7.2%
During the last two months, banks’ average spread was one of the lowest in the last four years. Topline Securities, in a research note, said it believes the spread to remain below 7.2%, down 43bps compared to average 7.63% in 2011.
Though core earnings of banks will remain flat amid the decline in spread, overall earnings will grow by more than 15% in 2012 primarily due to lower provisioning for bad loans amid risk-averse strategy of banks, it said.
InvestCap Research expects average spread for 2012 to remain in the range of 7% to 7.2%. Citing the reason, the research house pointed to the upcoming monetary policy announcement, which is expected to keep policy rate unchanged given the macroeconomic imbalances, rising inflationary pressures owing to Ramazan, fiscal weakness and huge security-related expenditures.
Published in The Express Tribune, July 25th, 2012.