LA­HORE

The Pak Banker - - FRONT PAGE -

De­cline in bank­ing spreads has raised se­ri­ous con­cerns for the bank­ing in­dus­try fol­low­ing the re­duced in­ter­est rate sce­nario cou­pled with changes in the MDR (Min­i­mum De­posit Rate) has taken its toll on bank­ing spreads that clocked in at 5.19% in De­cem­ber 2015 (down 9bps/83bps MoM/YoY), low­est since Jan­uary 2004. More pro­found im­pact was seen in fresh spreads that tum­bled to multi year low of 2.7% in De­cem­ber 2015 (down 59bps/161bps MoM/YoY) ow­ing to year end phe­nom­e­non.

"We be­lieve the de­layed pick-up in in­fla­tion is to keep the in­ter­est rate low and thus, sec­tor's earn­ings would re­main sub­ject to rein­vest­ment risk," ex­perts said.

As per the lat­est SBP's num­bers, bank­ing spreads fur­ther de­clined to 5.19% in De­cem­ber 2015 ow­ing to a drop in lend­ing rates by 10bps/225bps MoM/YoY to 8.67%. De­posit rates also fol­lowed suit (wit­ness­ing an at­tri­tion of 1bps/142bps MoM/YoY to 3.48%), how­ever, de­cline was not enough to com­pen­sate for the drop in lend­ing rates.

In CY15 av­er­age spread stood at 5.56% ver­sus 5.99% in CY14, down 43bps and is the low­est av­er­age in last 11-years. Dur­ing De­cem­ber 2015, fresh spreads were down by a hefty 59bps MoM (ver­sus 9bps de­cline in out­stand­ing spreads) to 2.7% on ac­count of a sharp surge in de­posit rates (up 55bps MoM) and a mea­ger de­cline of 4bps MoM in lend­ing rates. We be­lieve sharp in­crease in de­posit rates is a re­sult of ag­gres­sive mar­ket­ing by the banks in or­der to ac­cu­mu­late high de­posits for the year end. Hence, we ex­pect de­posit rates to nor­mal­ize in en­su­ing months.

On the bal­ance sheet side, the year saw growth in de­posit (11.5% YTD), which com­pares fa­vor­ably with 10.8% growth wit­nessed last year but a notch below 5-yr av­er­age growth of 14.1%. The in­cre­men­tal de­posit flow re­mained di­rected to­wards risk free govern­ment pa­pers (up 32% YTD) with sub­se­quently pushed the IDR up to 72%.

Ad­vances seemed to be a sec­ondary choice of banks which por­trayed a mea­ger growth of 7.3% YTD trans­lat­ing into an ADR of 51.4% in CY15 (ver­sus 53.4% in CY14). Lower growth in the ad­vance is also at­trib­uted to lower work­ing cap­i­tal re­quire­ments due to lower com­mod­ity prices. De­layed pick-up in the in­fla­tion (read our re­port MPS: Pru­dence ad­vo­cates a wait and see ap­proach dated 20th Jan­uary 2016) has con­sid­er­ably weak­ened the case for rate re­ver­sal be­fore June 2016. Hence, the rein­vest­ment risk can prove to be a drag on the sec­tor's prof­itabil­ity go­ing for­ward.

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