The average banking spreads, a key determinant for banks core earnings, has dropped to 6.01% in the last month of the calendar year 2013 compared to 6.24% in previous month. With the availability of last month data, spreads for 2013 remained at 9-year low of 6.245, which is 78bps down compared to 7.02pc in 2012. With the expected rise in banking spreads in 2014 due to lagged impact of recent 100bps rise in discount rate, experts believe 2014 would be good for Pakistani Banks and their earnings may increase by 21pc in 2014 compared to estimated 7pc decline in 2013. Further impetus is likely to be provided by rising credit growth due to expected economic recovery. According to data, during Dec 2013 , banking spreads has dropped to 6.01pc in Dec 2013 vs. 6.24pc in Nov 2013 . Experts believe rising discount rates are priced in deposit cost earlier than return on advances, which may have caused the shrinking spreads. During Dec 2013 , cost of deposit increased by 16bps MoM to 5.05pc after 50bps rise in discount rate in Nov 2013 . However, return on advances slightly declined by 7bps to 11.07%. Similar trend was observed in the fresh deposit cost, which increases more aggressively to 6.54% vs. 5.19% in Nov 2013 while return on new advances increased by 54bps MoM to 10.54%. Average lending rate dropped in 2013 by 147bps to 11.31% on the back of 26 month long monetary easing till Jun 2013 and SBP tight regulations for return on PLS account. Zeeshan Afzal , a banking sector expert from Topline , believed that lagged impact of monetary easing in 2012 (250bps) and 1H2013 (50bps) caused return on advances to decline by 250bps to 50bps in 2013. On the other side, deposit cost remain less elastic to the changes in discount rate due to SBP’s frequent policy changes on return on saving accounts. As a result, average deposit cost declined by 69bps to 5.07% in 2013 much lower than fall in return on advances. In early 2013, SBP required banks to pay at least 6% minimum return on average monthly balances of PLS (Profit & Loss sharing) saving account effective from 2Q2013. The requirement got stricter when SBP linked this minimum rate with the discount rate in Sep 2013 . To recall, in Sep MPS, SBP made it compulsory for banks to pay minimum discount rate less 300bps (SBP repo rate minus 50bps).
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