KARACHI: The banking spread kept on shrinking last month, reaching the lowest level in over a decade, according to the latest set of weighted average lending and deposit rates released by the State Bank of Pakistan (SBP).

The banking spread is the difference between lending and deposit rates. The spread on outstanding loans and deposits in November was recorded at just 5.29%. The spread shrank by five basis points month-on-month (MoM), as it was 5.34% in October.

Shrinking spreads result in decreased banks’ earnings because customers receive higher interest on deposits but pay a smaller interest on their loans. Banks generally respond to such a scenario by investing more in riskless government securities that offer guaranteed returns.

The banking spread has mostly been shrinking for the past one year in the wake of accommodative monetary policy adopted by the SBP. The central bank has reduced the benchmark interest rate consistently since 2014, as it currently stands at a historic low of 6%.

The banking sector spread registered a decline of 53 basis points year-on-year in November. It had averaged 5.82% in the same month of 2014, SBP data shows.

The weighted average lending rate decreased 18 basis points to 8.78% MoM in November. According to Alfalah Securities analyst Fahad Irfan, the dip is because of successive discount rate cuts.

The weighted average deposit rate dropped 13 basis points to 3.49% in November, SBP data shows.

Interest rates on loans are reset on a quarterly basis whereas deposits are re-priced immediately after the change in the benchmark interest rate.

The banking spread on gross disbursements and fresh deposits during November – also called the ‘fresh spread’ – clocked up at 3.29%, up from 3.22% recorded in October.

Irfan said the expansion in fresh spread is mainly because of relatively larger decline in fresh deposit rate, which came down by 32 basis points month-on-month, compared to the fresh disbursement rate that declined 25 basis points over the same period.

Most analysts believe the monetary easing cycle has bottomed out and that the benchmark interest rate will be on an upward trajectory now. The view is also reinforced by the latest monetary policy announcement in which the central bank maintained the status quo while forecasting an uptick in inflation going forward.

Banks pursued a conservative policy for most part of 2015 when it came to lending to the private sector. However, Irfan said the latest set of private-sector credit off-take data shows a sudden spike in lending.

“The recent spike consolidates our view of the hike in advances, as big-ticket power projects gradually achieve financial close in the coming period,” he said.

 

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