LNP – Deposit rates fall further in Sept. as banks re-price liabilities swiftly to maintain margins

• Deposits and lending rates during first nine months fall in lockstep in rare occurrence of harmony

Deposit rates offered to both corporate and individual customers are coming down faster as banks hasten to cut their funding cost in a bid to maintain margins, which are narrowing in line with the falling lending rates, exerting pressure on their bottom lines. 

The latest data showed the fall in deposit rates have continued in September as both the average weighted deposit rate and the average weighted fixed deposit rate have fallen by 30 basis points (bps) and 36 bps respectively. 

By the end-September, the two rates, which reflect the average rate of all deposits and the average rate of all the time deposits, reached 6.44 percent and 7.90 percent respectively, down from 6.74 percent and 8.26 percent in August. 

The September fall brought the cumulative fall in the average weighted deposit rate for the first nine months to 176 bps, corresponding with the fall in the average weighted lending rate, which fell by 175 bps during the first eight months, as data is available only up to August in the case of lending rates. 

This is the first time that both deposit and lending rates have fallen in lockstep, as in previous instances there was big gap between how the two rates behaved in response to monetary policy action.

Typically, deposit rates were the fastest to fall in a descending interest rate market while being the slowest to rise in an ascending interest rate market as banks exploit the time difference to make money. 

Last week, the average weighted prime lending rate (AWPLR), the benchmark rate for pricing loans to prime customers, rose by 13 bps to 6.32 percent after falling to 6.19 percent in the previous week— the lowest on record. 

Moody’s Investors Service in a special update on the banking sector in the Asia Pacific region estimated 5-10 percent decline in banks’ pre-provision income in 2020 due to contraction on margins caused by the fall in interest rates and the flattering of yield curves.  

Sri Lankan banks could see 0.5-0.25 percent contraction in the profitability as measured by ‘net income as a percentage of tangible assets’ from 2020 through 2022 due to margin contraction and higher credit costs resulting from pandemic related stresses on the borrowers, the rating agency showed. 

While the falling deposit rate could trim the nominal income of those who depend on their savings left in bank deposits, the government offers up to 15 percent per annum for senior citizens’ deposits and up to Rs.1.5 million to minimise the impact on their living standards. 

However, the real income depends on the rate of inaction in the economy. 

Sri Lankan banks gave Rs.78.3 billion in fresh private sector credit in August in a sign that they had ramped up new loans and any pressure on bottom line could be partly offset via higher loan volumes.