Contraction of bank spreads anticipated

The average spread of banks for the first 2 months (Jan-Feb) of 2009 has increased by 63bps to 7.7 percent from 7.07 percent recorded in the corresponding period in 2008. In the first two months of 2009, average lending rates of banks operating in Pakistan have risen sharply by 338bps to 14.62 percent while deposits rates have increased by 274bps to 6.92 percent from 4.18 percent in the same period last year.
In contrast, banking sector spread for the month of February 2009, fell by 16bps to 7.62 percent down from 7.78 percent seen in January 2009. Lending rates of all banks operating in Pakistan declined by 8bps from 14.66 percent to 14.58 percent as impact of falling KIBOR (6-month KIBOR down 126bps in February 2009) contracted lending rates. Moreover, in a double whammy, deposit rates rose by 8bps to 6.96 percent.
"Given the sharp fall in KIBOR (6-month KIBOR down 167bps in March 2009) amid very low credit off-take, spreads are likely to contract further", Farhan Rizvi, an analyst at JS Global Capital said. "We expect average spreads to fall below 7 percent during 2009", he added.