Banking spread shrinks to 4.9pc

KARACHI: Banking spread shrank 33 basis points (bps) to 4.90 percent year-on-year in March, biting profitability of banks amid soft lending and deposit rates, a brokerage said on Friday.

Analyst Fahad Irfan at Alfalah Securities said banking profitability continued to narrow owing to low interest rate environment and reduced quantum of investment in the government securities.

In March, deposit rate fell 30 bps to 2.99 percent over the same month a year ago, while lending rate declined 63 bps to 7.89 percent, according to the State Bank of Pakistan (SBP).

The central bank kept its policy rate for March-April on hold at 5.75 percent for the fifth straight meeting, opting to wait for more clarity on the trend for rising inflation that increased at the fastest pace in almost two years.

SBP left its main policy rate intact at 5.75 percent since May 2016, which is at the four-decade low level. “We believe the current pace of spreads (difference between lending and deposit rates) should prevail in the remaining course of 2017,” Irfan said. “However, with a reversal in policy rate expected in the second half of this year, impact on spreads should be seen from 2018, due to lagged asset re-pricing.”

He said falling interest rates made it difficult for banks to make profits through just parking deposits into Pakistan Investment Bonds (PIBs) and treasury bills as spreads earned on these investments have started to shrink.   

The government’s appetite for the central bank’s borrowing remained high. It borrowed Rs862 billion from SBP in March, up 62.3 percent over the same period of the last year. However, the government’s borrowing from banks rose 2.4 percent to Rs150 billion in March.

Loans to private businesses rose 14.1 percent year-on-year, whereas the government borrowing from the banking system depicted an increase of 13.3 percent.   

“The consistent easy monetary policy, ample availability of liquidity owing to high deposit growth and maturing PIBs, China-Pakistan Economic Corridor-related activities, and positive economic outlook are the major driving factors behind the impressive growth in advances,” Irfan said. “On advance side, current growth should continue in 2017 as banks would opt for riskier assets in search of improved yields.”