BY KAUSAR IKHLAQ
What is Bank Spread? Bank Spread is the amount that a bank generally receives for its assets and loans (in the form of receivables which it has provided for usage with terms and conditions in return for an interest income) and further pays this amount to depositors who have deposited in savings or long-terms deposit accounts. This particular ratio of money which the bank receives to its paying out is the banking spread.
The bank spread ratio at times can be the indicator of the institution’s ‘profit margin’. A higher spread relates to a higher profit margin as it shows that the interest earned is higher than it is paid out or vice versa. Furthermore, it is an average depiction of any institution’s lending & borrowing rate, mostly. It cannot ascertain the profitability of the bank.
If we look at the banking sector’s performance for the past one year, it was not very encouraging. There was consistent dip in the banking weighted average spread for twelve months. It dropped by 33 basis points to 5.37 percent as of February 2020. In last seven months, this has been the fifth time that such a dip has occurred followed by the last fours. This impacted the average lending rates which went down by 28 basis points to 12.37 percent as of February 2020, making the deposit rates to go higher by 5 basis points to 7 percent. The spread can be calculated by the following formula:
Lending rate – deposit rate = bank spread
12.37 – 7 = 5.37%
As per the research analyst, Amreen Soorani (JS Bank), the current unprecedented situation has put more pressure on the banks and financial institutions to pick above-average customers and this is one of the reasons for offering lower lending rates. This statement was published as of April 3, 2020. The KIBOR rate (Karachi Inter Bank Offer Rate) in February 2020 was unaffected at 13.49 percent (against the policy rate of that period which was 13.25 percent).
The lending spreads shrunk as a result. As per Soorani’s survey, the gross loans had a dip by 66 basis points to 13.10 percent in February 2020. Whereas, the new deposits decreased by 116 basis points to 6.67 percent. In March 2020, State Bank of Pakistan reduced the policy rate by 75 basis points (as of March 17, 2020) from 13.25 percent to 12.5 percent. And after seven days (as of March 24, 2020) further reduced the rate by 150 basis points to 11 percent. This was the first action taken by State Bank of Pakistan as the answer to COVID-19 Pandemic.
The second action was to modify the interest rate, narrowing the floor rate from 150 basis points down the policy rate to 100 basis points. It would be 10 percent in near future. This was done to enhance the deposit rate by 50 basis points.
As per Soorani’s prediction the banks will face tremendous pressure, as the spread would further be cropped because of State Bank’s decision. Year 2019 had an increase in interest rates which started with 10 percent and with an increase in policy rate by 325 basis points went up to 13.25 percent. This rate was unaffected until the policy cut announced on March 17, 2020. It is factual that Pakistani banks had increased net interest rates and as a result profitability rose, while loan growth was slow.
Moody’s Investor Service, after surveying five Pakistani Banks (The Five Giants), commented that the lower interest rates are a means to improve the borrowers repaying capability, the lower rates would minimize net interest rates and shrink bank’s earnings.
A research report by senior analyst Hamza Kamal (report from AKD research as of March 30, 2020) reveals that even though there has been a cut by the state bank in bank spreads, there could be some explanatory reactions in due time period. This action (by the State Bank of Pakistan) has been taken to facilitate the borrowers under COVID-19 crisis.
(The Writer is MS Marketing with rich experience in Marketing concepts and practicalities of industry. She also has experience of Sales trainings and social media campaigns at social media platforms. She can be reached at kausariqbal82@gmail.com)
