News Column

Morning Shout released by KASB Securities Limited and Economics Research

August 26, 2014



Banks: Headline spread at a 9-yr low; but margins on the up!

Headline banking spreads clocked in at 5.95% for Jul-14; down 40bp MoM as deposit cost rose by 36bp MoM to 5.11%. The apparent increase in deposit cost is mainly a normalization effect, as temporarily higher CA during the last week of Jun-14 (due to Ramadan) had skewed the June number on the downside.

KASB Securities Limited highlights that banks (especially mid and small-tier names) are comfortable raising funds at high rates and parking them in PIBs (at 200-300bp yield differential from T-bills). Actual spreads thus earned are not reflected in the headline data.

By Jun-14, conventional banks have parked over 30% of their total deposits into long tenure (3-10yr) PIBs. Thus, liquidity considerations have now taken the front seat in 2H14. SBP has already conducted OMO injections of over PRs700bn since June.

Healthy 2Q14 results driven partly by higher margins (as reflected by 19% QoQ NII growth by top 4 private banks) reinforces KASB Securities Limited's positive outlook for Pak Banks.

KASB Securities Limited reiterates Buy on MCB (PO: PRs340) and UBL (PO: PRs225).

Jul-14 banking spreads at 5.95%, down 40bp MoM as deposit costs normalize

Recent decline in banking spreads in Jul-14 to 5.95% is the lowest number on record since April 2005. For Jul-14, spreads fell 40bp MoM as lending rate shaved off marginal 4bp to land at 11.06% whereas deposit cost rose by 36bp MoM to 5.11%.

KASB Securities Limited contends that the apparent increase in deposit cost is mainly a normalization effect; where temporarily higher CA during the last week of Jun-14 due to Ramadan had skewed the number on the downside (Jun-14 deposit cost of 4.75% was 30bp lower compared to 2014TD average).

Having said, average 2014TD spreads at 6.08% are just 18bp lower on a YoY basis, largely reflecting higher SA cost from linkage of Minimum Deposit Rate to Discount Rate in 2H13, although impressive changes in the deposit mix (consistently improving CA) curtailed much of the negative impact.

Lending rate persists flat despite impressive volume growth

Even though KASB Securities Limited does seen impressive volume growth in credit during 2014TD (as overall advances are up 12% YoY in Jul-14 compared to previous 5 years' CAGR of merely 6%); lending rates continue to remain stubbornly flat - averaging 11.12% in 2014TD (33bp lower on YoY basis) - with credit spreads exhibiting continuous weakness (see chart 2).

Amid heavy PIB exposure, liquidity needs take the front seat

Although the headline spread shrinkage (courtesy high deposit cost) apparently paints a dismal picture, KASB Securities Limited highlights that banks (especially mid and small tier names) are comfortable raising funds at high rates and parking them in PIBs (at 200-300bp yield differential from T-bills, and rising!). Actual spreads thus earned are not reflected in the headline data (PIBs are part of investment book). By Jun-14, conventional banks have parked over 30% of their total deposits into long tenure (3-10 yr) PIBs.

Thus, liquidity considerations have now taken the front seat in 2H14. Lack of liquidity and GoP's insatiable appetite for long term domestic bank borrowing has further taken PIB yields North by ~40bp in Jul/Aug. SBP has already conducted OMO injections of over PRs700bn since June, whereas Repos by SBP during the same period stand at PRs300bn.

2Q14 results reinforce positive view; Reiterate Buy on MCB/UBL

Healthy 2Q14 results driven by (1) higher margins, (2) loan growth, (3) favourable deposit mix, and (4) non fund income momentum (as reflected by 19% QoQ NII and 12% QoQ fee income growth in 2Q14 by top 4 private banks) reinforces KASB Securities Limited's positive outlook for Pak Banks. KASB Securities Limited reiterates Buy on MCB (PO: PRs340) and UBL (PO: PRs225).


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Source: Pakistan Press International


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