SBP has recently updated the banking spreads for
the month of Apr'15. The banking spreads ticked at 5.57% for month of Apr'15.
In today's Value Seeker we discuss the banking spreads and the possible impact
of falling interest rates on banking sector.
Banking spreads
plunge by 35bps MoM
Banking spreads during Apr'15 declined by 35bps MoM
to 5.57% as compared to 5.92% in Mar'15 mainly on account of decline in
discount rates. The deposit rate of banking industry fell by 17bps to 4.38%
while the lending rates dropped by a higher percent to 9.95% and witnessed a
dive of 52bps thus squeezed spreads. Similarly, asset yields of private banks
descended by 46bps MoM while spreads also reduced by 24bps MoM during Apr'15.
Furthermore spreads on gross disbursements and fresh deposits depicted a drop
of 39bps MoM to 3.70% in Apr'15.
A YoY analysis revealed the similar picture during
Apr'15 and spreads observed a plunge of 49bps YoY as against 13bps YoY drop in
Mar'15. Likewise asset yields of banking also observed a notable decline of
114bps YoY in Apr'15 and 66bps YoY drop in deposit costs which led to a
decrease in spread YOY. Average spread for 10MFY15 of the sector stood at 5.84%
whereas the same was 6.15% in 10MFY14 revealing a decline of 31bps YoY.
Possible
implications of recent MPS for banking sector
Banks have heavily invested in govt instruments and
DR cut of 100bps is likely to result in significant unrealized gain in 2QCY15
which will raise the book value of equity as most part of banking sector
investments are parked under Available for
Sale category. In addition to this, there is
also positive outlook for growth in private sector lending by small and middle
sized banks as financing at cheaper rate is likely to fascinate quality borrowers.
ADR and IDR also plunged on MoM basis during Apr'15 with more decline in IDR
that could be continued in future.
Outlook
Funds already parked in government securities by banks are
yielding the adequate returns despite declining interest rate term structure.
Banks have to put more efforts to attract fresh deposits and maintain current
deposits as depositors are likely to shift to the other options for better
yields. Furthermore, Private sector credit off-take growth remained flat during
4MCY15 as banks are currently more inclined towards investments. So, keeping in
view of the current scenario it is likely that banks will tilt towards private
credit off-take and consumer financing.
Ahsan Arshad
+92-21-35205520-22 (Ext 8633)
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