KARACHI: In a thrilling revelation by JS Global Research, weighted average banking spreads soar to their highest levels since 2004. Amreen Soorani, Head of Research at JS Global Capital Ltd said, “So far, the sector’s weighted average spreads have reached to 7.73%, the highest witnessed in any quarter since 2004 (data not available prior to 2004). Moreover, fresh spreads, which are an indication of current spreads earned, have reached a high of 9.73%, suggesting weighted average spreads would continue their upward trajectory.”
What is the weighted average banking spread?
In simple terms, the term “weighted average banking spread” refers to a financial metric used in the banking industry to measure the profitability of a bank’s lending activities. It reflects the weighted average difference between the interest income earned from loans and the interest expense paid on deposits.
How have banks been able to improve their spreads?
Soorani explains, “In the ongoing high-interest rate scenario, banks have been able to limit the increase in their deposit cost by consistently expanding the mix of zero-cost deposits over time. On the other hand, repricing on the sector’s loan book continues as interest rates continue to increase every quarter”
Interest rates in Pakistan have been consistently increasing in the backdrop of economic uncertainties and rising inflation. In late June, the State Bank of Pakistan suddenly increased the policy rate to an all-time high of 22% in a last-minute attempt to secure a deal with the International Monetary Fund (IMF).
According to the PwC’s Banking Publication 2023 report, almost 80% of the deposits in the banking ecosystem are low to zero-cost deposits. This means that most of the deposit accounts are either current accounts or saving accounts. No interest is paid on current account deposits which accounts for major chunk of the deposits, more than 40%. These are zero-cost deposits. In the ongoing high-interest rate environment, zero-cost deposits hold significant value for banks. These deposits serve as the holy grail for banks as they can utilize them for lending purposes or invest them in government securities. Both of these options generate interest income for the banks. Banks have been trying to attract current account deposits.
Saving accounts account for more than 30% of the total deposits in the banking ecosystem. Interest is paid on these deposits. According to an investment banker, the rate of interest paid on the savings account is subjective to the amount itself. If an individual has deposited a very large amount, then the individual can negotiate a higher interest rate. In the current environment where the SBP policy rate is 22%, the interest rate can range between 13% -14% and can go up to 21% depending on the amount.
As stated earlier, banks use these funds from deposits for lending purposes, which helps them earn an interest-based income. Banks adjust the interest rates they charge on their existing loans to keep up with the changing policy rate. This has resulted in an increase in the average banking spread.
