JS Securities Limited – JS Research (03-04-2020)

Karachi, April 03, 2020 (PPI-OT): Banks: Spreads begin to narrow before monetary easing

Weighted average banking spreads registered a MoM decline of 33bps in Feb-2020, clocking in at 5.37%, as lending rates averaged 28bps MoM lower and deposit rates increased by 5bps this month.

Moreover, lending rates on gross disbursements (loan disbursed during the month) declined by 66bps MoM.

The brunt on banking spreads due to monetary easing is yet to come and may begin from 2HCY20 as sector’s loan book (ADR: 55%), and shorter tenor bonds (~50% of Investment book) would be re-priced in 3 to 6 months with the moving interest rates.

Weighted average banking spreads registered a MoM decline of 33bps in Feb- 2020, clocking in at 5.37%. Banking spreads continue to witness a sequential decline (fifth decline in the last seven months) as lending rates averaged 28bps MoM lower and deposit rates increased by 5bps this month, compared to Jan- 2020. We believe ongoing slowdown in credit offtake (Feb-2020: +4% YoY) has further pushed banks to work with selective higher asset quality clients, hence offering lower lending rates. During Feb-2020, the 6M KIBOR remained unchanged at 13.49%, which reflects a squeeze in lending spreads offered over KIBOR. Fresh spreads continued an upward trend, marking an uptick of 50bps MoM (6.43%). However, we highlight lending rates on gross disbursements (loan disbursed during the month) declined by 66bps MoM.

The brunt on banking spreads due to monetary easing is yet to come and may begin from 2HCY20. After Feb-2020, the State Bank of Pakistan has (1) announced a cumulative 225bps cut in the Policy rate, and (2) modified the interest rate corridor, leading to increasing the deposit rate by 50bps. These developments will act as a twofold blow to the banks, further trimming spreads in the coming quarters. While banks continue to increase PIB Investments to protect potential NIMs erosion, sector’s loan book (ADR: 55%), and shorter tenor bonds (~50% of Investment book) would be re-priced in 3 to 6 months with the moving interest rates.

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