Average profit margin improves as interest rate increases

VIASalman Siddiqui
SOURCEThe Express Tribune

KARACHI: The average profit margin of banks has improved with lending yield on outstanding loans surging to an 18-month high of 8.08% in July, a development that comes after rates were adjusted in line with the benchmark interest rate.

“Lending yield on outstanding loans edged north of 8% for the first time in 18 months,” Taurus Securities analyst Mustafa Mustansir said in a note to clients.

The rate stood at 7.85% in the prior month of June, showing a 23-basis-point surge in July.
He said the surge was booked after banks incorporated a 50-basis-point hike in the benchmark interest rate to 6.5%, announced by the State Bank of Pakistan in May 2018.


Monetary policy: SBP raises key interest rate by 50 basis points to 6.5%

Mustansir told The Express Tribune that the impact of the latest hike of 100 basis points to 7.5% in the benchmark interest rate, made in July 2018, has yet to come.

“Banks revise lending rate after every three months. The impact of July’s rate hike (in the SBP-announced key interest rate) would be seen sometime in October-November (2018),” he added.

With this, the banks’ average profit margin – the difference between lending rate and the rate of profit on deposits – improved eight basis points to 4.93% on outstanding loans in July from 4.85% in June. The profit margin improved slightly, as the rate of profit on deposits also surged 15 basis points to 3.15% in the month from 3% in the prior month.

The analyst said the hike in lending rate was made to reduce demand for credit with the objective of taming aggregated demand in the local economy. The move, however, would slow down economic growth.

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State Bank of Pakistan Governor Tariq Bajwa has said the surge in the policy rate was to tame aggregated demand in an overheated economy that is taking toll on the country’s foreign currency reserves.

Pressure on fresh lending rate

SBP expected to hike interest rate, but analysts divided over how much

Mustansir said the lending rate on fresh loan disbursement, made during the single month of July, remained lower at 7.72% compared to the rate on outstanding loan at 8.08% in the month, as banks compromised on their profit margins on fresh loans due to shrinking demand for credit in the economy.

The situation would convince banks to cut the loan portfolio for all type of borrowers, including individuals and corporations and invest more in government securities like Pakistan Investment Bond (PIB) of three, five and 10 years, in order to maintain their profit margins on higher side.

Accordingly, the credit spread (difference between PIB yield and lending rate) for July 2018 touched at negative 90 basis points (compared to negative 71 basis points in the prior month of June), the lowest in almost four years, as the buildup in PIB yields continues with suppressed increase in lending yields due to growing competition for borrowers, he said in the report.

Resultantly, the lending spread also declined to 24 basis points (the lowest in over 2 years) as industry spread above the 3-month Kibor shrunk further, he added.

(This news/article originally appeared in The Express Tribune on August 26th, 2018)

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