Karachi: Despite the last 150bps cut in DR coming into effect from Oct 1’11, weighted average banking spread has registered at 7.67% in Oct’11, up 18bpsYoY and 4bpsMoM.
According to AKD Securities, at the same time, spread on fresh lending and deposit taking was at 5.94% in Oct’11, down 61bpsYoY but up 6bpsMoM. Going forward, while a secular decline in spreads is likely, Oct’11 data suggests that banks could close out the ongoing quarter and full-year CY11F with strong profitability. Considering the AKD Banking Universe has shed 20%CYTD, AKD Securities believes latest spread data could spur positive sentiment in Banks, particularly MCB. In this regard, while AKD Securities expects the SBP to cut the DR by 50bps in tomorrow’s MPS – which will add to banks’ margin compression in 1HCY12F – AKD Securities believes asset quality metrics will also improve next year. At the same time, banks are also likely to record higher capital gains on disposal of government securities. All in all, while earnings momentum next year will likely decelerate, banks growth should still clock in at -10%YoY on average in CY12F which, coupled with attractive valuations, may revive price performance going forward.
Spread compression delayed: Oct’11 weighted average spreads at 7.67% (up 18bpsYoY; 4bpsMoM) have surprised on the upside, with deposit cost falling quicker than lending yields. This is strong data which should enable banks to close out the ongoing quarter, and full-year CY11F, with strong profitability. That said, lower KIBOR and leading fresh spreads for Oct’11, while up 6bpsMoM to 5.94%, suggests banks are in for sharp spread/NIM compression in 1HCY12F.