Banking spread sharply falls to 4.85pc in June

KARACHI: Banking spread – difference between costs of lending and deposit – sharply decreased 17 basis points year-on-year to 4.85 percent in June as cost of funds reached over two-year high after policy rate hikes, a brokerage reported on Friday, indicating low profit margins for banks.

Banking sector’s spread on outstanding loans for June marginally edged up two basis points over the previous month.

“Aggressive rate hikes have raised cost of funds on outstanding deposits to its highest in 16 months,” analyst Mustafa Mustansir at Taurus Securities said. “In addition, cost of funds on fresh deposits is also at its highest in more than two years.”

The central bank has raised its key interest rate to 7.5 percent from 5.75 percent in the last six months.

Meanwhile, final issue of market treasury bills (MTBs) for July attracted the highest interest noted so far in the current calendar year, as the industry prepares for another round of hikes.

Mustansir said spread on fresh disbursements plunged to 3.47 percent for June compared to 3.69 percent for May, down 22 basis points, as fund cost soared 51 basis points month-on-month owing to earlier re-pricing of deposits following the 50 basis points rate hike in May.

Average banking spread, in the past six months, on outstanding loans arrived at 4.80 percent versus 4.94 percent a year earlier, while average spread on fresh disbursements clocked in at 3.62 basis points, same as the one a year earlier.

“We expect spreads to worsen in the coming months due to the mismatch in re-pricing of advances and deposits,” Mustansir added.

“Deposit cost may surge even further for the month of July, given the 100bps rate hike on July 14.”

He said deposits are likely to be re-priced twice (cumulative 150bps) and advances by 25 basis points when industry’s July spreads will arrive.

Mustansir expected another 100 to 150 basis points in rate hikes during the remaining period of the current calendar year due to “soaring aggregate demand pressures, rising inflation and non-optimum levels of twin deficits”.

“Policy direction may also be influenced by the course of actions taken by the upcoming government,” he said. “Consequently, aggressive sentiment towards rate hikes may push the industry to focus on building hefty MTBs books, increasing allocation yet again.”

The federal government has already budgeted one trillion rupees in borrowings from the banking sector for the current fiscal year — an estimate which may be revised upward due to the ongoing economic scenario and liquidity within the banking sector, increasing potential for banks to make easy money from investing in government securities amidst a negative credit spread.