KARACHI: The banking spread, the space between the lending and deposit rates, fell to 6 per cent in 2014 from 6.2pc in the previous year, according to the latest data released by the State Bank of Pakistan (SBP).

By contrast, the spread shot up by 21 basis points month-on-month to 6.02pc in December despite a 50bps cut in the policy rate in the preceding month.

Topline Research said in its report that the lending rates on outstanding loans remained stable at 10.9pc, whereas rate on deposits declined to 4.9pc compared to 5.1pc in the previous month. “We see narrowing spreads due to ongoing monetary easing cycle in the country, where the SBP is expected to cut policy rate by 100-150bps in the next six months,” said another research report of Taurus Securities.

The reports said the lending rates dropped by 26bps to 11pc from 11.3pc whereas cost on deposits remained stable at 5pc in 2014.

“In spite of some recovery in spreads during the first half, the entire 2014 turned out to be another subdued year for banking spreads due to downward movement in interest rates during the second half,” said a report of JS Research.

In addition, downward trend in secondary market yields of government papers continues, with three-year and five-year bond yields falling by 57bps and 60bps since the start of this year, said the report.

The Topline report said the banks are now less affected with a discount rate cut as minimum deposit rate (MDR) on saving rates are also linked with the policy rate. So, along with the reprising of loan book, deposit rates are also revised following a rate cut.

The spreads may come under pressure due to declining interest rates outlook, however, bank’s net margins will get cushion from heavy investments in higher yielding Pakistan Investment Bonds (PIBs) and an expected uptick in credit growth.

“We expect the banking sector to post earnings growth of 35pc and 11pc in 2014 and 2015, respectively,” said the report.

Published in Dawn January 24th , 2015

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