The banking sector spread has declined by 12bps in April 2009 over the previous month to 7.54 percent. On the other hand, on year-on-year basis, this is still 39bps higher in April 2009 than the level observed in April 2008. In the first four months of 2009, average spread was recorded at 7.65 percent - up by 56bps over the corresponding period of least year.
This also depicted improvement in Net Interest Income (NII) of the banking sector during the first quarter of 2009. "As domestic economy is passing through a declining interest rate scenario, after a tight monetary stance by the SBP, lending rates of the sector has also come down to the level of 14.14 percent in line with KIBOR after posting a peak level of 14.66 percent in the month of January 2009," Kamran Rehmani, an analyst at First Capital Equities, said. More than 80 percent of the advances carry floating rates and are mainly linked with KIBOR.
He was of the view that the lending rates track the reference rate (KIBOR) with the lag of 1-2 months and any changes in KIBOR is considered as a bellwether of lending rates. On the other hand, in April 2009, deposits rates of the banking industry recorded at 6.6 percent or 12bps lower as against 6.72 percent in the preceding month. Most of the banks have lowered their interest rates on the fresh deposits in anticipation of a monetary easing.
According to him, the deposit rates are expected to remain downward sticky in the shorter period. The banks would not be able to abridge the cost of funds substantially in months to come because of minimum 5 percent return requirement on saving accounts (~35 percent of the deposit mix). In addition to this, more than 25 percent of the term deposits (~30 percent of the deposits mix) have a maturity of more than 3 months.
Besides this, prevailing liquidity crunch and competitive pressure will restrict the banks to reduce the share of term deposits in the existing overall deposit mix. "We expect 5-6 percent growth in advances and stagnant growth in interest and non-interest income," he said. The sector is currently trading at PBV09E of 0.9x while PE09E is arrived at 5.8x.