Financial outlook: Banking spread stands at 5.82% in November

On a year-on-year basis, spread came down by 42 basis points.

KARACHI: The banking spread, which is the difference between lending and deposit rates, averaged 5.82% in November as opposed to 5.81% in the preceding month, according to the latest data released by the State Bank of Pakistan (SBP).

The average lending rate offered by all banks on outstanding loans clocked up at 10.93% in November, which is one basis point higher than the rate offered in October. The deposit rate averaged 5.11% in November, which remained flat on a month-on-month basis.

On a year-on year basis, however, the spread came down by 42 basis points. The lending rate declined 20 basis points on an annual basis while the increase in the deposit rate was 22 basis points.

The lending rate on fresh disbursements made in November decreased seven basis points on a month-on-month basis to 10.41%. The deposit rate offered on fresh deposits in November decreased 37 basis points on a monthly basis to 5.59%.

This resulted in the ‘fresh spread’ of 4.82% in November, which is up 30 basis points from October, SBP data shows.

In its latest monetary policy announcement, the SBP reduced the discount rate by 50 basis points to 9.5%. Following an SBP directive last year, the minimum deposit rate that commercial banks must pay to their savings accountholders has been linked to the prevailing discount rate.

“While the impact of the 50-basis-point discount rate cut is already reflected in the deposit rate, we believe the same will be seen in the lending rate with a lag of two months given the quarterly loan re-pricing formula,” research analysts associated with Foundation Securities wrote in a recent note to their clients.

As for the spread for the first 11 months of 2014, it clocked up at 5.98%, down 28 basis points from a year ago. The weighted average lending rate has been 11.06%, down 27 basis points, while the deposit rate clocked up at 5.08%, up by only one basis point.

“With the expected monetary easing, we do not see any significant uptick in banking spreads going forward,” Foundation Securities’ analysts said.

Shrinking spreads typically reduce banks’ profitability, as they pay a higher interest on deposits while earn a smaller return on advances. Banks generally respond to such a scenario by investing more in government securities.

Analysts at Foundation Securities believe the constrained spread scenario should not deter investors. “The normalisation of yield spread between Pakistan Investment Bonds and the discount rate should incentivise the banking sector to expand its loan book… The phenomenon will shield banks’ net interest margin from a reducing interest rate environment.”

Referring to the latest statistics on the banking sector, they said incremental deposits continue to be mobilised towards government papers. SBP data shows investments have grown 17.7% since the beginning of 2014 against a 10.1% increase in advances over the same period.

This trend has resulted in the investment-to-deposits ratio of 60% whereas advances-to-deposit ratio hovers around 48%.

“For now we maintain our liking for the banking sector,” Foundation Securities said, adding a higher-than-expected monetary easing by means of a discount rate cut can make the case for a revisit of the stance.

Published in The Express Tribune, December 27^th,  2014.

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