Banks spreads down 39bps in 1H2012

RECORDER REPORT

KARACHI: The banking spreads, a key determinant for banks’ core earnings stood at average 7.23 percent, down 39bps during the first half of 2012, against 7.62 percent during the same period last year.

This is the lowest six monthly average banking spreads in last four years, analysts said.

“Major reason behind lower banking spread during the first half of 2012 is the 56bps reduction in banks’ average lending rate to 13.1 percent against average lending rate of 13.6 percent last year,” Farhan Mahmood, senior analyst at Topline Securities said.

This is primarily due to sharp reduction of 200bps in policy rate during the second half of 2011 which led to reduction in 6-months KIBOR by 184bps to 12.06 percent in first half of 2012 against 13.9 percent during the same period last year, he said. However, lower reduction in lending rate by banks is due to risk averse strategy in advancing loans amid provisioning and structural issues, he added.

On the other hand, deposit rate remained almost firm at 5.82 percent in the first half of 2012 against average 6 percent in the first half of 2011.

Alone in June 2012, banks’ average spread stood at 7.14 percent against 7.86 percent in June 2011, down 72bps primarily due to 82bps reduction in lending rate which is now below 13 percent since last three months, he said. While, deposit rate remained slightly lower by 10bps to 5.82 percent.

This is despite the fact that banks were directed to increase minimum savings rate to 6 percent in May 2012. There could be a reason that current deposits would have increased in June 2012 due to fresh budgetary allocations and reduction in expensive deposits by few big banks, he said.

During last two months, banks’ average spread is still one of the lowest in last 4 years.

“Going forward we believe spreads to remain below 7.2 percent, down 43bps versus average 7.63 percent in 2011,” Farhan said. Nonetheless, despite the fact that core earnings will remain flat amid fall in spreads, overall earnings will grow by more than 15 percent in 2012 primarily due to lower provisioning amid risk averse strategy opted by the banks in last few years, he added.