LAHORE – Banking spreads further narrowed in Sept 2012, coming in below the 7 per cent mark for the first time since June 2008 when the saving account rate floor was introduced.
Latest figures reveal that weighted average banking spreads came in at 6.95 per cent in August, down 10bps MoM and 64bps YoY. Consequently, in 3Q spreads have averaged at 7 per cent compared to 7.11 per cent in 2Q which is likely to lead to further contraction in Net Interest Margin (NIMs) for the banking sector.
According to experts, considering further likely monetary easing on the way, they expect spreads to continue their downward trajectory over the next few months, thus putting more pressure on banking sector profitability. However, any reversal in the saving accounts rate to 5 per cent can pose as an upside risk.
Financial market expert, Bilal Qamar observed that aggregate banking sector deposits and credit offtake so far in 3Q2012 have witnessed a decline of 2 per cent QoQ and 1 per cent QoQ, respectively. Likewise, adding to the sectors’ soft 3Q profitability outlook, banking spreads continued their declining trend. According to him, narrowing spreads can contribute to further contraction in NIMs where August 2012 spreads registered below the 7 per cent mark; the first time in since June 2008.
While banks have seen depressed offtake, experts believe some respite can materialize via higher investment in government borrowings as cumulative sector investments have grown by 14 per cent QoQ in 3Q.
According to data, banking sector 3Q2012-to-date aggregate deposits declined by 2 per cent QoQ to reach Rs6.3 trn. Credit offtake, too, came down by 1 per cent QoQ during the same period to Rs3.7trn reflecting prudent stance of the banking sector in the wake of depressed economic numbers.
While offtake has remained depressed in most parts of the year, banks have diverted their funds towards investing in government securities. This has seen cumulative banking investments climb to Rs3.6trn, up 14 per cent since June 30, 2012. As a result, IDR for the banking sector jumped 8ppt to 58 per cent during the same period.