In the wake of monetary easing, banking sector spreads have declined to their lowest point in the last 10 years, according to the latest data released by the State Bank of Pakistan (SBP).
Defined as the difference between lending and deposit rates, the banking spread averaged 5.57% in April as opposed to 5.91% in the preceding month, SBP data shows.
The decline of 34 basis points on a month-on-month basis is mainly because of a steep reduction in the average lending rate that came down by 51 basis points from 10.47% to 9.95% in April.
According to Taurus Securities research analyst Rohit Kumar, the hefty decline in the average lending rate in April was on the back of a major re-pricing of the loan portfolio.
In contrast, the average deposit rate offered by all banks on outstanding deposits clocked up at 4.38% in April, which is 17 basis points less than the rate offered in March (4.55%).
Kumar said the decline in the deposit rate is a result of a 50 basis points cut in the discount rate in March while the drop in the lending rate is a consequence of the quarterly re-pricing of outstanding loans.
On a year-on year basis, the banking spread came down by 48 basis points. The lending rate declined 1.14% on an annual basis while the decrease in the deposit rate was 0.66%, SBP data shows.
The lending rate on fresh disbursements made in April decreased 46 basis points on a month-on-month basis to 8.85%. The deposit rate offered on fresh deposits in April decreased seven basis points on a monthly basis to 5.15%. This resulted in the ‘fresh spread’ of 3.7% in April, which is down 39 basis points from the preceding month, SBP data shows.
Shrinking spreads typically reduce banks’ profitability, as they pay a higher interest on deposits while earn a smaller return on advances. Banks generally respond to such a scenario by investing more in government securities.
The SBP revised the key interest rate in the economy by 100 basis points in the latest round of monetary easing. With the discount rate standing at 7%, a 42-year low, banks’ lending rates will reduce further.
Despite a noted decrease in the interest rates, private-sector credit growth remained subdued in the first four months of 2015: credit to private businesses decreased 1% on a year-on-year basis.
“Banking sector spreads are likely to come down by 60-80 basis points in coming periods, which will hurt banking profits,” Kumar said.