LAHORE: The country’s banking spreads shrank by 35bps YoY in the month of August 015 at 5.69%, as lending rates dropped by 110bps YoY versus 75bps YoY fall in deposit rates.
According to the data released by State Bank of Pakistan, on a monthly basis, lending rates in Aug 2015 averaged 6bps MoM lower at 9.36%, falling for ten consecutive months, while deposit rates went down by 10bps MoM to 3.85%, taking weighted average banking spreads of Aug 2015 to 5.51%, up by 4bps MoM only while down by 24bps YoY.
Borrowings have supported the banking sector to take its Investments to Rs6.46trn, marking an increase of 11% during 3Q2015TD (26% in YTD 2015), with IDR improving by 8ppts from June 2015 to 72%.
The lending rates shrank by 6bps MoM to 9.36%, deposit rates compressed by a higher 10bps to 3.85%. On a YoY basis, spreads were down 24bps mainly due to monetary easing by SBP.
On the other side, fresh spreads hit their record low during Aug’15 and currently stand at 2.81%, down 6bps MoM. Such low spreads on fresh lending and borrowing raises concerns over the sustainability of banking profitability, which is temporarily safe from declining interest rates owing to PIBs accumulated by banks.
During 8MCY15 banking spreads averaged 5.68% primarily due to easing interest rates and other measures taken by SBP to limit banking spreads (introduction of target rate and reduction in corridor). However, banking profitability has remained impressive in 1HCY15 mainly due to high spreads the banks are enjoying on PIBs gathered during CY14.
Going forward, it is expected that spreads to further shrink due to re-pricing of the loan portfolio. However, in a short term, spreads during next two months might see some uptick due to immediate reduction in deposit rates post Sep’15 policy rate cut.
