Spreads thin out

Given that the return objective for any bank is to earn a positive spread, a decline in the banking industrys spread would certainly not be good news for bankers. In the light of an increase in minimum profit rate on saving accounts, along with a lower KIBOR level, the banking industrys spread fell to the lowest level in nearly four years to the tune of 7.06 percent in May 2012. At this level, the industrys spread is around 58 bps lower compared to the same period of last year. A lower discount rate has to share most of the blame for bringing down the industrys lending rate during the past few months. The lending rate on outstanding loans stood at 12.95 percent in May 2012 as opposed to average of 13.63 percent in CY11. The monetary policy committee has kept the discount rate unchanged at around 12 percent, for the fifth time in a row, in its monetary policy announcement at the start of June. On top of that, a percentage point increase in the floor rate on saving accounts has further squeezed the industrys spread. In a move to prop up saving-investment ratio in the country and incentivise small savers, the central bank has raised the minimum profit rate on rupee saving accounts from 5 to 6 percent, effective from May 1, 2012. The industry also has another sob story to tell, as the government has increased tax rates on dividends received from hedge funds to 25 percent in FY13 and 35 percent in FY14 and onwards to wind down tax arbitrage enjoyed by banks through investment in funds. The move will likely compel the banks to opt for bonus units in lieu of cash dividends, resulting in record of lower dividend income on their financial statements. The banking industrys deposit base grew by around 4 percent since the start of the current year to Rs.6,108 billion as on June 15, 2012. At the same time, the industrys advances and investment base grew by 6 percent and 5 percent, respectively, to Rs.3,288 billion and Rs.3,123 billion, respectively. The BR Commercial Bank index, which tracks the price performance of banking scripts listed on KSE, stood at 3,079, marking a whopping growth of around 42 percent since the beginning of the year and down by around 7 percent from this years peak touched in May.