Banking spreads at 16-month high in July

KARACHI: Banking spreads reached a 16-month high in July, according to data released by the State Bank of Pakistan (SBP).

Average spreads enjoyed by banks in the country stood at 7.6 per cent last month. During the month, outstanding loans issued by banks were charged an average interest rate of 13.35 per cent (including zero mark-up) while outstanding deposits were compensated at an average rate of just 5.84 per cent (including zero mark-up).

“The latest increase in the discount rate by the central bank caused the Karachi Inter-bank Offered Rate (Kibor) and yields in secondary markets to rise as well,” explained InvestCap Securities Head of Research Khurram Shehzad.

He added “although lending rates have increased quickly to reflect the change in the cost of funds, rates offered on deposits have not risen as quickly.”

Experts contend that deposit rates offered by banks generally rise with a lag and are also dependent on other factors such as rates being offered to prospective lenders on other instruments as well as competition between banks.

Economists have criticised the central bank for not limiting the difference in rates charged and offered by banks. “Low rates of returns on deposits discourage savings and enhance the country’s reliance on domestic and external debt,” commented economist Shahid Hasan Siddiqui.

He added “high mark-up on loans and advances drive up cost of production, fueling inflation and discouraging exports.”

Former State Bank governor Shamshad Akhtar had cited that high banking spreads are indicative of “high inefficiency and corrupt banking practices”. However, the central bank has so far been unwilling to issue directives that could limit the spreads earned by banks.

“Spreads being earned by banks in Pakistan are the highest in the world,” asserted economist A B Shahid, citing that the highest spreads were previously reported in Argentina at 7.2 per cent.

Bank profits surge by 35%

Profitability of banks has surged by 35 per cent in the first half of the current calendar year. A report compiled by researchers at AKD Securities has highlighted that out of 25 banks in the country, financial results of 21 banks for H1 CY10 have been announced and they have amassed “profits of Rs36.1 billion, up 35 per cent year-on-year.”

The report also showed that profitability has been “heavily skewed towards the bigger banks with the Big-5 (National Bank, Habib Bank, United Bank, MCB Bank and Allied Bank) accounting for 90 per cent of total announced profits.”

Moreover, among the Big-5, Habib Bank (HBL) witnessed the biggest jump in profitability. HBL’s profits soared 29 per cent from Rs6.1 billion in H1 CY09 to Rs7.865 billion in H1 CY10.

National Bank stood second in terms of growth in profitability with a 25 per cent increase during the same period, rising to Rs7.879 billion. Meanwhile, Allied Bank’s profitability surged by 20 per cent to reach Rs3.647 billion in the first half of the current calendar year.

Experts have attributed the growth in banks’ profitability to a decrease in allowances for non-performing loans, higher earnings on assets and greater stability in the exchange rate of Pakistani rupee.

However, all may not be rosy as far as the performance of banks in coming months is concerned. Analysts expect fresh pressures on outstanding loans in the wake of massive floods in the country.

Published in The Express Tribune, August 28^th, 2010.