Banking sector’s spread shrinks to 5.47% in July

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KARACHI: An increased cost of deposit and a lower lending rate resulted in a reduced average banking spread last month, according to latest data released by the State Bank of Pakistan (SBP).

The banking sector’s spread showed a decrease of 32 basis points on a month-on-month basis to reach 5.47% in July, SBP data showed. Defined as the difference between lending and deposit rates, the banking spread had averaged 5.79% in the preceding month.

According to Shajar Capital Investment Analyst Hamza Kamal, the month-on-month decline in the lending rate (21 basis points) was more pronounced as it reached 9.42% in July.

The lending rate hovered at a 10-year low due to the lagged impact of a discount rate cut.

In contrast, the yield on deposits increased 11 basis points to 3.95% in July as opposed to 3.84% reported in June, SBP data shows. It should be noted that interest rates on advances are reset on a quarterly basis whereas deposits are re-priced immediately.

Although the banking spread widened a little in June, it has mostly been shrinking since the end of 2014 in the wake of ‘accommodative’ monetary policy being pursued by the SBP.

The average spread for 2015 so far stands at 5.72% versus 6.08% recorded in the corresponding period of last year, Kamal said. Cumulatively, lending and deposit rates have shrunk by 150 and 96 basis points, respectively, since the start of 2015.

The lending yield on fresh disbursements continued its downward trend and stood at 7.88% in July, down 36 basis points month-on-month. The lending yield on fresh disbursements is below the yield offered on five-year Pakistan Investment Bonds (PIBs), he said.

The cost of fresh deposits followed the opposite trajectory, as it increased 40 basis points to 5% in July. This reduced the spread on fresh deposits to a multi-year low of 2.87%.

“Further compression in spreads is expected in the second half of 2015 with the discount rate cut expected in the wake of improving economic indicators,” Kamal noted.

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.

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