Lahore - Weighted average banking spreads clocked in 35bps YoY lower in 8M2015 at 5.69%, as lending rates dropped by 110bps YoY versus 75bps YoY fall in deposit rates.

On a monthly basis, lending rates in Aug 2015 averaged 6bps MoM lower at 9.36%, falling for ten consecutive months, while deposit rates went down by 10bps MoM to 3.85%, taking weighted average banking spreads of Aug 2015 to 5.51%, up by 4bps MoM only while down by 24bps YoY.

Borrowings have supported the banking sector to take its Investments to Rs6.46trn, marking an increase of 11% during 3Q2015TD (26% in YTD 2015), with IDR improving by 8ppts from June 2015 to 72%.

According to the data released by SBP lending rates shrank by 6bps MoM to 9.36%, deposit rates compressed by a higher 10bps to 3.85%. On a YoY basis, spreads were down 24bps mainly due to monetary easing by SBP.

On the other side, fresh spreads hit their record low during Aug’15 and currently stand at 2.81%, down 6bps MoM. Such low spreads on fresh lending and borrowing raises concerns over the sustainability of banking profitability, which is temporarily safe from declining interest rates owing to PIBs accumulated by banks.

During 8MCY15 banking spreads averaged 5.68% primarily due to easing interest rates and other measures taken by SBP to limit banking spreads (introduction of target rate and reduction in corridor).  However, banking profitability has remained impressive in 1HCY15 mainly due to high spreads the banks are enjoying on PIBs gathered during CY14.

Going forward, it is expected that spreads to further shrink due to re-pricing of the loan portfolio. However, in a short term, spreads during next two months might see some uptick due to immediate reduction in deposit rates post Sep’15 policy rate cut.

Experts said that Pakistan banks subscribed heavily to long term high yielding Govt. bonds (PIBs) in 2014 (27% of deposits vs. 9% in 2013) at a yield close to 12%. In last one year, yields on 3-year, 5-year and 10-year PIBs have fallen by 400-500bps.

They said that banking earnings clocked in 16% YoY, where Habib Bank Limited (HBL) and MCB Bank (MCB) continued to be key contributors towards the growth. Net Interest Income (NII) during the quarter increased by 26% YoY on the back of rising contribution of income from investments in higher yielding PIBs.