Lahore - The banking spread has registered the record decline of last 11 year, lowering by 43bps to 5.56 percent against last calendar year of 5.99 percent, since lending rates dropped by 142bps annually to 9.63 percent.

As per the State Bank of Pakistan (SBP), the downtrend in interest rates has been primarily due to the monetary easing by SBP along with the introduction of Target Rate during 2015, in our view. Similarly, Dec-2015 spreads declined by 10bps MoM to 5.19 percent, as lending rates and deposit rates moved down by 11bps MoM (to 8.67 percent) and 1bp MoM (to 3.48 percent) respectively.

Moreover, 2015 fresh spreads also declined by 129bps YoY to 3.47 percent, where fresh lending rates dropped by 214bps YoY to 8.37 percent, whereas deposit rates averaged 85bps YoY lower at 4.90 percent. Meanwhile, average spread on fresh lending rates (fresh lending rates - 6M KIBOR) clocked in at 104bps during 2015 vs. 42bps during 2014.

With 4Q2015 spreads declining by 18bps QoQ to 5.27 percent, we expect banking sector’s profitability to decline by 15 percent QoQ on the back of weak Net Interest Income (-4 percent QoQ). Experts reiterate Under-Weight stance on the sector, where they expect sector’s recent underperformance (1.24 percent YTD) to continue over possible further cuts in policy rates amidst lower-than-expected inflation readings..