The effect of Pakistan’s central bank move to link the minimum deposit rate (MDR) to the prevailing repo rate has started to appear on the banking spreads. The weighted average spreads dropped to 6.01% in Dec’13 versus 6.24% in Nov’13, down 23bps MoM. Moreover, the spreads has dipped to almost 9‐ years low from when they contracted to 5.94% in Apr’05. Overall in 2013, average spreads stood at 6.24% vs. 7.02% last year (down 78bps), while are the lowest since 2005. Besides, a relatively lower interest rate scenario with effective interest rate declining by around 170bps YoY to 9.5% is also a factor behind these lower spreads. With reduced banking spreads, we believe the banking sector’s core earnings are likely to experience pressure in the upcoming announcement. Rolling forward to 2014, we believe the MDR linkage to repo rate may continue to cap the spreads expansion but respite to bottomline can come from i) reduced provisioning and, ii) improved credit expansion linked to envisioned economic recovery. Support to profitability may also come from banking sector’s focus on increase their non‐fund income and better cost controls.
Banking Spreads down by 23bps MoM to 6.01%
As per the monthly data released by the SBP, banking spreads dropped to 6.01% in Dec’13 versus 6.24% a month earlier, down 23bps. The decline in the spreads primarily stems from material rise in cost of funds that clock to 5.05%, up 16bps MoM. The cost of funds has continued to experience an uptrend since the linkage of MDR/repo rate. The residual decline in spreads was contributed by 7bps decline in the weightage average lending rates. The lending rates are the lowest since Dec’06. On the fresh spreads front, we observe the spreads decreased significantly by 81bps to 4.0% in Dec’ 13 as compared to previous month, while the same has been decreased by 106bps on YoY basis. Though the average fresh lending rate rose by 54bps but 135bps increase in the fresh cost of funds more than mitigated its impact. The trend in the fresh spreads indicates towards banking spread to remain under pressure in the coming months. Drilling deeper in the numbers, the fresh spreads of Public Sector Banks are down 83bps while spreads of Private Sector Banks down 77bps on sequential basis.
Year witnessed a 78bps reduction to average of 6.24%
Overall in 2013, the banking spreads average around 6.24% down 78bps from 7.02% in 2012. Lower effective interest rates stands down by an approx. 170bps YoY culminated into 147bps reduction in the lending rates. While insufficient relief was provided by 69bps reduction in the cost of funds.