CY14: Banking Sector Review & Outlook Written as on January 27, 2015 SBP has recently announced the MPS which holds certain implications for banking sector. In addition to this SBP has also updated the banking sector spread data for the month of Dec14. In todays Value Seeker we discuss the banking spreads and the possible impact of falling interest rates on banking sector. Banking spreads inched up by 21bps MoM in Dec14 Despite strong expectations of DR cut, banking spreads during Dec14 inched up by 21bps MoM to 6.02%; thanks to linkage of minimum deposit rate with repo rate. Deposit rates of banking sector inched down by 21bps during Dec14 while the yields on advances remain stagnant. However banking spreads remain stagnant on YoY basis in Dec14. Average spread during CY14 were settled at 5.98% whereas the same were 6.24% in CY13 depicting a fall of 26bps YoY. The average deposit cost remain stagnant on YoY at 5.06% while average yield on advances dipped by 26bps to 11.05%. Decrease in lending to private sector was the primary reason behind lower advances return. Possible implications of recent MPS for banking sector Banks are heavily invested in govt securities and DR cut of 100bps is likely to result in significant unrealized gain in 1QCY15 which will increase book value of equity as most part of banking sector investments are parked under Available for Sale category. In addition to this, chances of better private sector lending are also bright as financing at cheaper rate is likely to fascinate quality borrowers. However, energy crisis and poor law & order situation are still key hurdles in private sector lending. Furthermore banks have to put more efforts for deposits growth as depositors are likely to switch to the other options for better yields. Chances of flow of funds from banks to capital markets are very high as Pakistan s equity market is the best performing market of the world for the last 3 years. Outlook: Neutral By considering the downward trajectory of interest rates, we expect significant unrealized gains to banking industry going forward. However we foresee deposit shrinkage amid lower deposit rate. Furthermore private sector lending will also remain subdued on severe energy crisis. By keeping in view the above factors, we foresee a neutral stance on banking sector.
Posted on: Tue, 27 Jan 2015 09:20:05 +0000