The banking sector spread for the month of December 2009, on the other hand, rose by 2bps to 7.35 percent up from 7.33 percent seen in November 2009. Lending rates of all banks operating in Pakistan declined by 9bps from 13.58 percent to 13.49 percent.
Analysts are expecting further decline in the lending rate in second quarter of 2010 onwards, as the SBP is likely to ease its monetary stance. Deposit rates for the month dropped by 11bps to 6.14 percent, and these are expected to consolidate, going forward.
Although the spreads rose by 19bps in 2009, they are expected to contract in 2010, as expectation of monetary easing will bring the KIBOR down. Deposit rates on the other hand are expected to consolidate in 2010, as most of the deposit mix readjustment has already taken place. However, any change in the minimum deposit floor requirement by the SBP could lead to a fall in rates. Spreads are, therefore, estimated to shrink by 40-50bps in 2010. Furthermore, monthly decline in loan to deposit yield is an outcome of softening interest rates and downward sticky nature of deposits.
"Post-February 2009, in line with easing monetary policy, decline in lending and deposit rates was visible. However, decline was more pronounced in loan pricing rates that had come down almost 117bps from their crest level of 14.7 percent in January 2009 to 13.5 percent in December 2009", said Kamran Rehmani, an analyst at First Capital.
Deposit rates have also dropped from 6.98 percent in February 2009 to 6.14 percent, depicting a decline of 82bps. That said downward movement in KIBOR along with lower banking appetite towards high yielding sector (consumer) is pushing down yield on advances, he added.
On the other hand, liquidity crunch and floor on saving accounts as well as competition from National Saving Scheme (NSS) is restricting a proportionate decline in the deposit rates. On monthly basis, in December 2009 average loan yield declined by 9 bps to 13.5 percent whereas rate on deposit softened by 11bps to 6.14 percent- primarily due to increase in KIBOR during the period August-November 2009.
Effective from 1st June 2008, the State Bank of Pakistan imposed a minimum requirement of 5 percent on profit rates of saving accounts in order to mobilise savings and ensure efficient price discovery. At that time, policy rate was at 12 percent, only 50bps lower than the current level. Recently, in its financial stability review of 2008-09, the SBP cited a possibility of revision in floor on saving accounts primarily due to easing phase of monetary scenario and prevailing stress on banking asset quality.
"In this regard, we are expecting a possible reduction of 100-150bps in discount rate by end of December 2010 and project an average KIBOR-6m in 2010 at 12 percent", Rehmani said. As per calculation, with no reduction in floor on saving account and assuming deposit structure of September 30, 2009, loan to deposit spreads would be at 7.0 percent. Whereas, for 100bps reduction in floor on saving account, average spread would increase by 35bps on average to 7.34 percent some 5bps higher than the level in 2008 and 14bps lower than in 2009, he added.