Lahore - The average banking spreads have clocked in 38bps annually lower during 10M2015 at 5.62 percent as lending rates dropped by 126bps versus an 88bps fall in deposit rates. On a monthly basis, lending rates in Oct 2015 broke the 9 percent mark for the first time after Aug 2005, as it averaged 22bps monthly lower at 8.96 percent. Deposit rates also went down by 18bps monthly to 3.62 percent, taking Oct 2015 weighted average banking spreads to 5.34 percent, down 4bps monthly and 47bps annually.

According to experts, October 2015 witnessed second consecutive monthly uptick in fresh banking spreads, clocking in at 3.22 percent (+34bps MoM) as deposit rates slid more than lending rates during the month.

That said, downtrend on a YoY basis continued as lending rates on gross disbursements declined by 291bps YoY to 7.57 percent, a spread of 99bps over the 6M KIBOR. Note that spread over the 6M KIBOR on gross disbursements is averaging at 109bps (vs. 39bps during the same period last year).

Recent yield uptick in the T-bills auction and reversal in fresh spreads indicates the end of monetary easing by the Central Bank. In the case of potential uptick in interest rates from mid-2016, experts believe Faysal Bank (FABL) will gain the most in coverage as the bank maintains the highest exposure to variable interest bearing assets to total assets.

Allied Bank Limited (ABL) reported 9MCY15 earnings of PKR11.86 billion (EPS: PKR10.4), slightly higher than the consensus estimates on account of i) higher than expected NII after provisions (up 32 percent YoY) and ii) restrained growth in bank’s operating expenses (up 7 percent YoY). Bank’s profitability showed a limited growth of ~3 percent in 9MCY15 as against the profitability growth of 11 percent-26 percent witnessed in other members of Big-6 (ex-NBP) as the bank bucked the trend of realizing capital gains, foreseeing difficult CY16 and CY17.

With 53 percent of the bank’s total PIB portfolio classified as HTM, we expect the capital gains realized by the bank going forward will remain on the lower side. Conversely, the reinvestment risk of the bank will be considerably lower than the peers. Foreseeing a difficult CY16 with DR likely to remain low, the management also decided to exercise its call option on its outstanding TFC of PKR2.9 billion on which the bank had to pay KIBOR+1.3 percent.