Banking spread going down below 7 per cent

LAHORE – The banking spread, a key determinant for Pakistan banks’ core earnings, stood at average 7.11 per cent, during first 10 months of 2012, down by 54bps versus 7.65 per cent of the same period last year. This is the lowest 10-month average banking spreads in last 7 years, experts said.

Major reason behind lower banking spread during 10M2012 is the 75bps reduction in banks’ average lending rate to 12.91 per cent versus average lending rate of 13.7 per cent last year, noted expert Farhan Mehmood said.

He stated in a note that it is primarily due to sharp reduction of 400bps in policy rate since mid of 2011 which led to reduction in 6-months KIBOR by an average 200bps to 11.3 per cent in 10M2012 versus 13.6 per cent during the same period last year. However, lower reduction in lending rate by banks is due to the fact that banks could have increased their spread over Kibor rate.

On the other hand, deposit rate stood lower by 20bps to 5.8 per cent in 10M2012 versus average 6 per cent in 10M2011, despite increase in minimum deposit rate on saving accounts in May 2012.

Experts said that alone in Oct 2012, banks’ average spread stood at 6.77 per cent versus 7.67 per cent in Oct 2011, down 90bps primarily due to 127bps reduction in lending rate which is now below 12.5 per cent after a gap of 4.5 years. While, deposit rate remained lower by 37bps to 5.64 per cent. This is primarily due to increase in low cost current deposits and reduction in deposit rates on expensive deposits.

Similarly, on MoM basis, the banks’ spread decline by 13bps following the quarterly adjustment of lending rate by most of the banks (lending rate down 24bpsMoM) after reduction in policy rate by 150bps in 3Q2012.

Farhan believes that average spread to remain around 7 per cent, down 63bps versus average of 7.63 per cent in 2011. Nonetheless, despite the fact that core earnings to remain flat amid fall in spreads, overall banks earnings to grow by more than 14 per cent in 2012 primarily due to lower provisioning. The sector has underperformed the broader index by 5 per cent primarily due to shrinking margin scenario following the series of policy rate cuts.