New methodology in place: SBP links minimum deposit rate to repo rate
Move to hurt banking spreads, but decision is yet another effort to support falling rupee.
Analysts say the SBP’s move was not unexpected as it is yet another effort by the central bank to support the falling Pakistan rupee. PHOTO: FILE
KARACHI:
The State Bank of Pakistan (SBP) seems to have vowed not to let commercial banks heave a sigh of relief.
With the monetary policy rate finally starting to inch up, banks anticipated better spreads and profitability in the years to come. But the SBP instructed all commercial banks on Friday evening that the minimum profit rate to be paid on all Pakistan rupee saving deposits will now be 50 basis points less than the prevailing SBP repo rate.
As opposed to the monetary policy rate at which banks borrow from the SBP, the repo rate is the one at which banks deposit their end-of-day excess liquidity with the central bank on an overnight basis.
Previously, commercial banks were required to pay the minimum rate of profit of 6% per annum on all rupee saving deposits on average monthly balances. However, under the revised methodology that links the rate of profit with the prevailing repo rate, the former will now increase to 6.5% per annum, eventually hurting banks’ margins.
The difference between the monetary policy rate and the repo rate has been 250 basis points since February 8. With the latest monetary policy announcement on September 13, the repo rate increased 50 basis points to 7%. Thus, the revised methodology will effectively result in banks paying 0.5% higher profit on all rupee saving deposits on average monthly balances.
The new condition, which will also apply to term deposits of commercial banks, will be effective from October 1. However, Islamic banks remain exempted from the minimum rate of profit condition.
Speaking to The Express Tribune, Global Securities research analyst Umair Naseer said the apparent objective of the SBP’s move is to keep banking sector spreads at a ‘reasonable’ level.
Banking sector’s weighted average spreads in August remained 6.28% after declining by a mere three basis points month-on-month, as opposed to 6.31% in July and 6.35% in June.
While the average eight-month calendar year 2013 spread has been 6.26% – down 92 basis points year-on-year – banks were finally hoping for an improvement in spreads based on the upward trend in the discount rate.
However, now the minimum profit rate will automatically change as and when the revisions are announced in the SBP repo rate every two months.
Naseer said the new condition will hurt the margins of the banks with higher savings to deposit ratio. MCB Bank and Habib Bank are likely to be hit the hardest as per the April-June 2013 financials. Their respective savings to deposit ratio for the latest quarter were 50% and 44%, he said.
On the contrary, National Bank of Pakistan and Allied Bank are likely to remain comparatively unscathed, as their respective savings to deposit ratio was 26% and 24%, he added.
Talking to The Express Tribune, Topline Securities CEO Mohammed Sohail said the SBP’s move was not unexpected. “Bankers were already talking about the possibility of linking deposit rates with the Karachi inter-bank offer rate (Kibor),” he said, adding that the decision is yet another effort by the central bank to support the falling Pakistan rupee.
Indeed, Elixir Securities stated in a research note on Friday that the SBP move will bring down the earnings of banking companies by 6%-12%.
Published in The Express Tribune, September 28th, 2013.
The State Bank of Pakistan (SBP) seems to have vowed not to let commercial banks heave a sigh of relief.
With the monetary policy rate finally starting to inch up, banks anticipated better spreads and profitability in the years to come. But the SBP instructed all commercial banks on Friday evening that the minimum profit rate to be paid on all Pakistan rupee saving deposits will now be 50 basis points less than the prevailing SBP repo rate.
As opposed to the monetary policy rate at which banks borrow from the SBP, the repo rate is the one at which banks deposit their end-of-day excess liquidity with the central bank on an overnight basis.
Previously, commercial banks were required to pay the minimum rate of profit of 6% per annum on all rupee saving deposits on average monthly balances. However, under the revised methodology that links the rate of profit with the prevailing repo rate, the former will now increase to 6.5% per annum, eventually hurting banks’ margins.
The difference between the monetary policy rate and the repo rate has been 250 basis points since February 8. With the latest monetary policy announcement on September 13, the repo rate increased 50 basis points to 7%. Thus, the revised methodology will effectively result in banks paying 0.5% higher profit on all rupee saving deposits on average monthly balances.
The new condition, which will also apply to term deposits of commercial banks, will be effective from October 1. However, Islamic banks remain exempted from the minimum rate of profit condition.
Speaking to The Express Tribune, Global Securities research analyst Umair Naseer said the apparent objective of the SBP’s move is to keep banking sector spreads at a ‘reasonable’ level.
Banking sector’s weighted average spreads in August remained 6.28% after declining by a mere three basis points month-on-month, as opposed to 6.31% in July and 6.35% in June.
While the average eight-month calendar year 2013 spread has been 6.26% – down 92 basis points year-on-year – banks were finally hoping for an improvement in spreads based on the upward trend in the discount rate.
However, now the minimum profit rate will automatically change as and when the revisions are announced in the SBP repo rate every two months.
Naseer said the new condition will hurt the margins of the banks with higher savings to deposit ratio. MCB Bank and Habib Bank are likely to be hit the hardest as per the April-June 2013 financials. Their respective savings to deposit ratio for the latest quarter were 50% and 44%, he said.
On the contrary, National Bank of Pakistan and Allied Bank are likely to remain comparatively unscathed, as their respective savings to deposit ratio was 26% and 24%, he added.
Talking to The Express Tribune, Topline Securities CEO Mohammed Sohail said the SBP’s move was not unexpected. “Bankers were already talking about the possibility of linking deposit rates with the Karachi inter-bank offer rate (Kibor),” he said, adding that the decision is yet another effort by the central bank to support the falling Pakistan rupee.
Indeed, Elixir Securities stated in a research note on Friday that the SBP move will bring down the earnings of banking companies by 6%-12%.
Published in The Express Tribune, September 28th, 2013.