Caution Bankers: Gone are the times when banks could easily mint risk-free money by investing in Government paper; the regulator is now more on the watch.
With saving deposits accounting for over 38 percent of the sectors total deposits, the first glitch came when SBP introduced a floor rate of six percent on all PKR saving deposits with effect from May, 2012 up from the five percent-rate, introduced in 2008.
The decision took its toll on the cost of funds for the banking sector in CY12. The mark-up expense of the big five banks, climbed up by 22 percent in 2012, wolfing down six percent of their Net Interest Income (NII).
On the earnings front, with over 60 percent of the banking sectors deposits being parked in government securities, returns on which are highly correlated with the policy rate, top line growth was largely missing.
SBP gave another jolt to the banks by instructing them to pay at least the minimum rate on average monthly balance instead of minimum balance. Experts envisage this shift to eat up banks profits by over five percent.
In the face of banks drying appetite for private sector lending, this appears to be yet another move by the central bank to remind banks of their core business.
However, bankers believe that rate cuts and squeezing margins are not viable solutions to stimulate private sector lending, as issues limiting economic activity are exogenous.
A senior banker told BR Research that with the significant cut in the discount rate, the central bank should also have reduced its floor on return on deposits. By not taking any move on this front, SBP has exposed the smaller banks that face higher cost of deposits.
While lending to the private sector might shore up the sectors top line, consequently rising toxic assets would counterbalance the positive impact. The key to healthy profits is attracting low cost deposits. Recently, Summit bank introduced a current account with health insurance cover, matching the deposited amount in the account. The new offering helped the Bank half its average cost of deposits.
Another possible step could be to diversify the income sources which banks have been doing of late, as is evident from a 29 percent rise in the other income of Big 5 banks in CY12.
Banks also need to streamline their administrative costs. Branchless banking could be a viable way forward for cutting administrative costs in the long run, although the initial period would likely push up expenses further.
Comments
Comments are closed for this article.