Banking spread narrows 33bps to 5.37 percent in February

KARACHI: Banking spread shrank 33 basis points to 5.37 percent month-on-month in February this year due to falling yields on government papers, an equity brokerage said on Thursday.

Analyst Rehman Siddiqui at Alfalah Securities Limited said decline in spreads was reflective of what was happening in the secondary market with Pakistan investment bonds and treasury bills as the market at large was expecting a rate cut in March.

“Furthermore, loan book growth is expected to remain tepid despite relaxation from SBP (State Bank of Pakistan) on CAR (capital adequacy ratio) given the weak economic sentiment,” Siddiqui said.

The State Bank of Pakistan (SBP) slashed policy rate by a cumulative 2.25 percentage points to 11 percent last month to shield the struggling economy from the fallout of preventive lockdown sparked by the novel coronavirus.

The improvements in the inflation expectations also allowed the SBP’s policy committee to soften the monetary stance.

Siddiqui said rates on outstanding deposits rose five basis points month-on-month to seven percent in February, while lending rates clocked in at 12.3 percent, 28 basis points down from the previous month.

A SBP’s report showed that private banks underwent a 29 basis points decline month-on-month in spreads as yields on outstanding loans decreased 27 basis points versus a two basis points rise in the outstanding deposit cost.

Profitability of banks is likely to narrow as falling interest rates would make it difficult for the banks to make profits by just parking deposits into the government papers. The spreads to be earned on these investments seem starting to shrink.

“SBP has come to the rescue by relaxing prudential regulations to curb the effects of the coronavirus outbreak,” Siddiqui said. “However, we believe these numbers [decline in spreads] will worsen further.”

Growth in loans to private sector businesses slowed down to three percent year-on-year to Rs5.2 trillion in February. However, credit to the government sector surged a sizable 13.8 percent to Rs12.5 trillion in the month under review.