The advance-deposit ratio of banks remained stable at 73 percent in the first five months of the calendar year CY07, whereas the interest rate spreads rose by nine basis points to 7.40 percent in the period under review as compared to 7.31 percent in the corresponding period last year.
Banking sector has been in the limelight due to its tremendous performance witnessed in the past five years on the back of a better interest rates scenario and continuous rising demand of credit from the private sector.
However, the profitability momentum started cooling down since the 2006 calendar year, mainly due to decrease in the lending volumes as major sectors of the economy like textile and cements have already undergone their respective expansion activities in the recent past.
Interest rate spreads observed a rising trend in early 2005 when the State Bank of Pakistan raised the discount rate by 1.5pps in April 2005 to nine percent, which resulted in 48bps surge in the lending rates whereas the deposit rates rose by only 16bps, Hifza Zia, an analyst at Atlas Capital Markets said.
The central bank further raised the discount rate by 0.5pps in August 2006 to 9.5 percent, which prompted a further hike in the lending rates. However, banks deposit rates remained stable at the lower end.
The first five months of CY07 shows that the tight monetary policy has started yielding results as the interest rates spreads have started shrinking to just 9bps increase from 7.31 percent in 5M/CY06 to 7.40 percent in 5M/CY07.
The lending rates rose by 119bps to 11.28 percent in 5MCY07, whereas the deposit rates increased by 110bps to 3.88 percent in the period under review. On month-on-month basis, the banking spreads witnessed a decline of 8bps to 7.30 percent in May from 7.38 percent in April.
Over the last four years, the scheduled banks have shown decent growth in credit off-take from Rs 1.1 trillion in early 2004 to Rs 2.2 trillion in May 2007. Deposits also grew at a reasonable pace during the same period.
Net advances of the scheduled banks rose by 1.1 percent in 5M/CY07 to Rs 2.3 trillion from Rs 2.28 trillion by the end of December 2006, whereas the deposit base witnessed a hike of 11 percent to Rs 3.3 trillion by the end of May 2007 as against Rs 3.0 trillion by the end of 4Q/CY06. The advance-deposit ratio (ADR) eventually declined to 73 percent in May 2007 from 76 percent at the end of December 2006.
"Observing the low ADR of the banking sector and stable interest rate outlook for the banking sector, we maintain a positive stance in the banking sector", Hifza said, and added that the growth in net profits of the banks was expected to remain in the range of 10 percent to 15 percent for CY07.