Banking spreads hit record 8-year low level in February

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KARACHI: Banking spreads, based on outstanding lending and deposit rates hit 6.18 percent in February 2013, which is the lowest-ever level in last eight years. It witnessed a massive decline of 112 basis points as compared to February 2012 level of 7.30 percent, according to the data recently released by the State Bank of Pakistan (SBP).
Banking spreads struck lower level in February 2013 as compared to last eight years levels, causing a drop in deposit rates as they stepped down by 51 bps on yearly basis to 5.34 percent in the second month of this year.

Invest Cap analyst said that the last time such levels were witnessed was in April 2005 when spreads on outstanding loans and deposits stood at 5.94 percent in April 2005 consequential to a 7.49 percent average lending rate, whereas average deposit rates stood at a meagre 1.55 percent in the aforesaid month.
Considering a yearly change, the analyst said that the positivity induced by such was more than reversed by a downtrend in average lending rates, which fell by 163 bps to a level of 11.52 percent.

In view of monthly basis, he found that the trend was however the same but with much less intensity as the spreads on outstanding lending and deposit rates fell by a slender 3.0 bps. Such was the outcome of a sizeable decline in average lending rates, down 8.0 bps, however 5.0 bps decline in deposit rates balanced the latter translating into a 3.0 bps decline in spreads.

The analyst was on the view that the SBP directives on profit and loss sharing (PLS) accounts rates will exert further pressure on outstanding banking spreads.
Fresh spreads depict a similar trend, falling by 4.0 bps on a monthly basis whereas the same declined by 166 bps on yearly basis to 4.45 percent in February 2013.
He further elaborated that deposit rates on fresh deposits prevailing at an altitude of 6.08 percent in February 2013 whereas lending rates sputtering at 10.53 percent, direct the future path for banking spread.

The analyst further said that the current political and law and order situation in the country has been failing to promote investment and thus fresh disbursements by banks. In this situation he expected lending rates to experience further descend. He anticipated an increase in deposit rates to realise from April 2013 onwards, adding that banks start paying interest on average balance of saving accounts instead of minimum on the instructions of a recent circular issued by SBP. Regarding the circular issued by SBP to the banks on minimum PLS, the analyst said that this would pave the way to lower spreads going forward.

Courtesy: Daily Times

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