The banking spread, which is the difference between lending and deposit rates, averaged 6.1% in May as opposed to 6% in the preceding month, data released by the State Bank of Pakistan (SBP) on Tuesday shows.
The average lending rate offered by all banks on outstanding loans clocked up at 11.1% in May, which is four basis points less than the rate offered in April. The deposit rate averaged 5% in May, which is almost flat on a month-on-month basis following a nominal increase of one basis point only.
However, the banking spread during May remained 23 basis points less than the average spread recorded in the same month of 2013. As opposed to the latest figure of 6.1%, the average banking spread in May 2013 was 6.3%.
The year-on-year decline in the banking spread appears to be driven by a reduction of 34 basis points in the average return on advances. On the contrary, the drop in the average deposit rate was rather small, as it decreased by 10 basis points over the last 12 months.
Similarly, the monthly banking spreads have averaged 6% during the first five months of 2014 versus 6.2% in the same period last year.
According to Topline Securities Research Analyst Zeeshan Afzal, the year-on-year decline in the average banking spreads is mainly on the back of the central bank’s requirement to pay an increased rate on profit-and-loss-sharing savings accounts.
Monthly banking spreads are increasing gradually now after they touched a nine-year low of 5.9% in January due to the falling cost of deposits despite a stable policy rate, which currently stands at 10%, he said.
“Banking spreads may remain in the same territory despite the expected fall in the policy rate. However, net interest margins of banks are likely to get support from higher yields on increasing PIB (Pakistan Investment Bonds) portfolio of banks and rising credit growth,” Afzal said, adding that he expects the profits of banks covered by his brokerage house to increase by 30% in 2014.
Afzal’s optimism is echoed by Shajar Capital’s Faizan Ahmed, who believes the outlook for the banking sector is positive because the economic recovery is going to spur the advances of the banking sector.
Fresh banking spreads in May clocked up at 4.8%, which is 14 basis points lower than the average fresh spreads in the preceding month. Going forward, increased lending to the private sector may potentially reduce the impact of constrained banking spreads, Ahmed added.
Published in The Express Tribune, June 25th, 2014.
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