KARACHI: The weighted average banking spread clocked up at 5.16% in Jan-May after shrinking by 0.59% over the same five-month period in the preceding year, according to the latest data released by the State Bank of Pakistan (SBP).

The banking spread is the difference between average lending and deposit rates.

According to Alfalah Securities, the downwards spiral in the banking spreads will reverse from the second quarter of 2017 with an expected change in interest rates.

Spreads are currently hovering at the lowest level in the last 11 years. This means banks are paying a relatively high interest to their depositors while charging a comparatively low mark-up on their lending. The narrowing spread is a direct outcome of the record-low benchmark interest rate that the central bank is maintaining in view of weak inflationary pressures.

The banking spread clocked up at 5.23% in May, which is up 14 basis points from the average banking spread recorded in the preceding month. On a year-on-year basis, however, the banking spread for May was down 36 basis points.

The month-on-month uptick in the spread was driven by an eight-basis-point increase in the rate on outstanding loans and a simultaneous six-basis-point decline in the rate on outstanding deposits.

Analysts attribute the compressing spreads to unprecedented monetary easing and adjustment in the interest rate corridor by the SBP. The banking spread has mostly been shrinking for more than a 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 5.75%.

Shrinking spreads result in decreased earnings for banks, leading them to invest more in riskless government securities that offer guaranteed returns.

Banking spread clocks up at post pic

The banking spread on gross disbursements and fresh deposits – also called the ‘fresh spread’ – widened in May. It grew by 142 basis points to 3.81% in May on a month-on-month basis. The fresh spread widened during the month mainly because of an increase of 104 basis points in the average fresh lending rate to 7.07%. The average fresh deposit rate came down 39 basis points on a monthly basis to 3.26% in May.

Analysts believe the average spread is unlikely to shrink any further, as monetary easing by the central bank has already bottomed out.

Alfalah Securities said although spreads have expanded on a monthly basis, asset re-pricing at lower rates is expected to take place in the next three to six months. Interest rates on banking assets (read: loans) are reset on a quarterly basis whereas deposits are re-priced immediately after the change in the benchmark interest rate.

This means the increase in average banking spreads will remain in check in the short term at least. “More importantly, the impact of re-pricing will be more profound if advances growth accelerates going forward,” it said.

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