KARACHI: If the banking spread was the sole determinant of your borrowing decision, now would the best time to take out a loan from a Pakistani bank.

Borrowing has become so cheap that the ‘fresh spread’ hit its record low last month. Defined as the difference between lending and deposit rates, the banking spread on gross disbursements and fresh deposits during August clocked up at just 2.81%.

According to the archives on the State Bank of Pakistan (SBP) website that date back to January 2011, last month’s fresh spread was at its lowest point in the past four and a half years.

Shrinking spreads typically reduce banks’ profitability, as they pay a higher interest on deposits but earn a smaller return on advances. Banks generally respond to such a scenario by investing more in government securities.

The overall banking sector spread registered a rise, albeit nominal, of four basis points on a monthly basis to reach 5.51% in August. The banking spread had averaged 5.47% in the preceding month, SBP data shows.

The average lending rate came down by six basis points on a month-on-month basis to 9.36% in August. But the decline in the average deposit rate was of 10 basis points to 3.85%.

On a year-on-year basis, the banking spread was down 24 basis points mainly due to monetary easing by the SBP, according to Taurus Securities analyst Rohit Kumar.

It should be noted that interest rates on advances are reset on a quarterly basis whereas deposits are re-priced immediately.

Notwithstanding the slight uptick in the overall banking spread last month, it has mostly been shrinking for the past one year in the wake of ‘accommodative’ monetary policy 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 average spread for 2015 so far stands at 5.68%, down 35 basis points from the same eight-month period last year when it hovered at 6.03%. Cumulatively, lending and deposit rates have shrunk by 156 and 105 basis points, respectively, since the start of 2015.

Kumar says the reduction in the banking spread over the last eight months is because of easing interest rates and other regulatory measures, such as the introduction of the target interest rate and a downward revision in the interest rate corridor by a cumulative 100 basis points since February 2013.

Banking profits should have taken a hit, at least theoretically, in the wake of shrinking spreads. However, earnings of the banking sector in the first half of 2015 recorded a surge of 52% on a year-on-year basis.

Kumar says banking earnings have remained impressive in Jan-Jun mainly because of high spreads the banks are enjoying on Pakistan Investment Bonds (PIBs) that they heavily invested in during 2014 when interest rates were relatively high.

Despite low interest rates, growth in advances remains slow. SBP data reflects banks have little interest in extending credit to private sector. Outstanding loans to private-sector businesses amounted to Rs2.8 trillion at the end of August, up by only 5.7% from a year ago.

AKD Securities analyst Zoya Ahmed believes private-sector credit growth has not been substantial so far because of banks’ continued preference for ‘risk-free’ government securities. “Going forward, we expect business activities to pick up, providing space for double-digit growth in advances,” she added.

 

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