Impact of rise in minimum deposit rate: move to cost banks extra Rs 17 billion a year

The central bank''s decision to increase minimum profit rate to 6 percent on PKR saving/PLS products will cost an additional Rs 17 billion a year to banks as effectively around 30 percent of the total deposits are expected to be impacted by one percent increase in minimum deposit rate, analysts said.
In a major development, the SBP has asked all commercial banks to pay a minimum profit rate of 6 percent on PKR savings/PLS products effective May 1, 2012. According to SBP, a more balanced risk-reward incentive structure is warranted in the shape of appropriate deposit rate structure, as they believe that the savers, especially the smaller ones, need to be adequately compensated.
The SBP has been warning banks operating in Pakistan of high spreads that they are earning over last few years. Last time in May 2008, SBP introduced floor on the return on savings deposit at 5 percent which has now been further increased. "Out of the overall deposits in Pakistan of Rs 5.8 trillion ($64 billion) around 35-40 percent (that is Rs 2.2 trillion) are savings deposits," Farhan Mahmood, senior analyst at Topline Securities said.
And out of that approximately 80 percent (that is Rs 1.8 trillion) of the savings deposits are those having a return of 6 percent or below, he added. "Thus effectively around 30 percent of the total deposits are expected to be impacted by one percent increase in minimum deposit rate," Farhan said and added this will cost an additional Rs 17 billion a year to banks assuming the deposit structure to remain the same and banks will not pass on the impact.
"Assuming the same industry average, our preliminary working suggests that annualised earnings of Topline sample banks will be negatively affected by 6-10 percent in 2012 assuming the impact for 8 months of the current year he estimated. However going forward banks may be able to increase their lending rates thereby partially offsetting the additional cost, he said. "We have revised downward our 2012 earnings estimates for NBP, MCB, UBL, BAFL and HBL by 7 percent, 6 percent, 7 percent, 8 percent and 10 percent, respectively," Farhan said.