Banking spreads decline in 10 months

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KARACHI: The spread between bank deposits and loans fell by 54 basis points (bps) to 7.11 percent during the first 10 months (January to October) of the current calendar year from 7.65 percent in the same period last year, according to the latest data from the State Bank.

Analysts have said that this is the lowest 10-monthly average banking spread in the last seven years.

“The dip in the banking spread rate during January-October 2012 period was abided by a sharp 75 bps reduction in banks’ average lending rate, which stood at 12.91 percent against an average lending rate of 13.7 percent last year,” said Farhan Mahmood, senior analyst at Topline Securities.

Moreover, the spread started to decrease following the 400 bps cut in policy rates since October 2011 led to an average decline of 200 bps in six-month Karachi Interbank Offer Rate (KIBOR).

KIBOR stood at 11.3 percent in Jan-Oct 2012 against 13.6 percent during the correspondin period of the preceding year, he said.

Deposit rate was lower by 20 bps to 5.8 percent from average six last year, despite increase in minimum deposit rate on saving accounts in May 2012, he added. During October 2012, banks’ average spread was at 6.77 percent compared with 7.67 percent in October 2011, down 90 bps primarily due to 127 bps reduction in lending rate, which is now below 12.5 percent after a gap of more than four years.

“Deposit rate remained lower by 37 bps to 5.64 percent, primarily due to increase in low cost current deposits and reduction in deposit rates on expensive deposits. Similarly, on a month-on-month basis, banking spread declined by 13 bps following the quarterly adjustment of lending rate by most of the banks (lending rate down 24 bps month-on-month) after reduction in policy rate by 150 bps in the third quarter of 2012,” said Mahmood.

“Average spread is expected to remain around seven percent in 2012. Nonetheless, despite the fact that core earnings are expected to remain flat amid fall in spreads, overall bank earnings are expected to grow by more than 14 percent mainly due to lower provisioning,” he said. The banking sector has underperformed because of a shrinking margin following a series of policy rate cuts, he said.


Courtesy: The News


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