Banking sector’s spread shrinks to 4.97pc in July

KARACHI: Banking sector’s spread fell nine basis points (bps) to 4.97 percent year-on-year in July as competition increased in the wake of soft interest rates, analysts said on Friday. 

Spread also registered a decline of five basis points month-on-month in July. Analyst Mustafa Mustansir at Taurus Securities Limited attributed the decline in spread to intensifying competition for low-cost funds.

The spread – difference between lending and saving rates – continued to narrow due to soft monetary policy by the central bank. The State Bank of Pakistan’s (SBP) key policy rate stands at 42-decade low of 5.75 percent. 

Analysts said the prevailing low interest rate environment and build-up of low yielding stock of short-term government bonds are weighing on the sector’s earnings.

Alfalah Securities, in a report, said rates on outstanding deposits stood at 2.91 percent in July, down 26bps over the last year, whereas lending rates clocked in at 7.88 percent, showing a decrease of 35bps.  

SBP data showed that low-cost fund was leading to accumulation of debts in the private sector. Net loans of private sector rose 19 percent year-on-year to Rs4.683 trillion in July. The manufacturing sector held almost half of the chunk in total debt with Rs2.236 trillion on the back of four-year high growth in the sector. 

Borrowings surged across the board in different private sector areas including textile, power, petroleum chemical and construction.

Investment in government securities by banks showed a 12 percent growth to come at Rs7.4 trillion in July. It was R6.6 trillion a year earlier. Investment in government securities, however, posted a three percent month-on-month decline in July.      

“These securities provide an alternative to lending to support net interest margins (NIMs),” said Mustansir. “However, as scores of high-yielding Pakistan investment bonds mature (Rs773 expected to mature in 1QFY17), we may see further pressure on NIMs in coming months especially given the lesser likelihood of any upward revision in policy rate, on account of highly anticipated rupee devaluation and subdued consumer price index.”   

Government borrowing from the central bank also increased 19.6 percent to Rs2.631 trillion.  

Mustansir said the case for Pakistan investment bonds becomes less attractive with a credit spread hovering around 50bps, since over-commitment may back fire specially if there is a rate hike next year onwards.