Soft monetary policy continues to squeeze banking spreads
The central bank's stance of easing monetary policy continued to tight spread of banking industry which saw another contraction of 27 basis points in July to settle at 5.47 percent from 5.74 percent in June 2015. State Bank of Pakistan (SBP) statistics said that the lending rates declined by 21bps to 9.42 percent while deposit rates rose by 6bps to 3.95 percent.
The soft monetary stance of the central bank kept the target rate at 6.5 percent which also decreased the deposits rates of the banking industry subsequently.
The fresh spreads during July 2015 declined by massive 74bps to 2.87% mainly due to 37bps dip in lending rates and a contrary 38bps surge in deposit cost.
Cumulatively, in seven months of 2015, the weighted average spreads have compressed by 37bps to 5.71% compared to 6.08% in same period of last year.
The lending yields on fresh disbursement continue its downward trend to 36bpsMoM to 7.88%, below what has been offered on a5 years Pakistan Investment Bonds (PIBs). The cost of fresh deposits followed the opposite trajectory increased by 40bps to 5% reducing fresh spread to multi-year lows of 2.87%.
The total industry deposits have dropped to Rs 8.96 trillion in July 2015 as they faced post-June correction observed historically due to the recently introduce WHT where business community preferring informal channels over formal channels for transactions. The banking industry borrowings during the same period have surged by 42% as Reverse Repo levels remain above Rs1 trillion.
Moreover, banks adopting prudence in lending has kept industry's investments growth strong which increased by 9% to Rs 6.107 trillion with IDR improving by 7ppts from June 2015 to 71%. Advances have gone down by 1% during the same period, keeping ADR stable at 51% with overall deposits values stand at 4.579 trillion.