Banking spread remains flat in May

Shrinking continues since 2014-end in the wake of monetary easing by SBP

KARACHI:

The banking sector spread remained almost flat on a monthly basis in May, according to the latest data released by the State Bank of Pakistan (SBP).

Defined as the difference between lending and deposit rates, the banking spread averaged 5.59% in May as opposed to 5.57% in the preceding month, SBP data shows.

The lending rate dropped 10 basis points month-on-month to 9.85%. But its effect was largely offset by a simultaneous decrease of 12 basis points in the cost of deposits, which clocked up at 4.26% in May.

Banking spreads have been shrinking since the end of 2014 in the wake of monetary easing by the SBP.



According to KASB Securities research analyst Farid Aliani, the average banking spread for the first five months of 2015 has been 5.75%, which shows almost 5% attrition over the spread of 6.05% reported for the same period of 2014.

“We maintain substantial pressure on the banking spreads, as changes in the Interest Rate Corridor structure implemented in May are yet to reflect in reported headline spreads,” he said, adding the brokerage house anticipates sustained pressure on banks’ net interest margins (NIMs) in the July-September quarter.

Lending and deposit rates have shrunk by 88 basis points and 67 basis points, respectively, since the start of 2015, according to Shajar Capital research analyst Hamza Kamal.

The lending rate on fresh disbursements made in May decreased 24 basis points on a month-on-month basis to 8.61%. The deposit rate offered on fresh deposits in May decreased 32 basis points on a monthly basis to 4.83%. This resulted in the ‘fresh spread’ of 3.78% in April, which is up eight basis points from the preceding month, SBP data shows.

The reduction in the lending rate on fresh disbursements, according to Kamal, shows the banks’ eagerness to secure good corporate customers. Simultaneously, banks are trying to mobilise current and savings deposits, which has resulted in the decrease of 32 basis points in the fresh deposit rate. No wonder total deposits of the banking sector witnessed a notable rise of 2% on a monthly basis to Rs8.75 trillion, he added.

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.

The SBP revised the key interest rate in the economy by 100 basis points in the latest round of monetary easing. With the discount rate now standing at 7%, a 42-year low, banks’ NIMs have undergone a significant contraction in recent months.

Despite a noted decrease in the interest rates, private-sector credit growth remained largely subdued in the first five months of 2015: outstanding loans to private-sector businesses at the end of May have grown merely 6.9% on a year-on-year basis.

Published in The Express Tribune, June 25^th,  2015.

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