Until the beginning of the previous week, Pakistan’s banking sector appeared more blue-eyed for investors than all the non-banking blue-chip stocks on local bourses, combined.
Domestic equity markets have been performing well since the run up to General Elections 2013. But the shooting prices of banking sector shares had been leaving even those impressive gains in their dust; more so since the expectations of discount rate hike settled in.
Between July and September 23, BR-Banking Index grew by 29 percent versus gains of 11 percent in the KSE benchmark. Industry source say that banking scrips (particularly blue-chip banks such as MCB, NBP, UBL and HBL) not only enticed the local punters but also became the favourite pick of foreign investors.
The same is also evident by the rally of 31 percent, 26 percent and 24 percent in the share prices of HBL, NBP and UBL respectively during the period. While MCB made relatively small gains of 9 percent between July 01 and September 23, its share price touched Rs 310.55 on September 23, approximately 20 percent above its average fair value-a matchless position in the banking sector at that particular date.
But the tide began to turn early last week, when heavy foreign selling ensued at local exchanges. Weakening of the rupee was always on the cards, especially in light of the new deal with the IMF. When the realisation of the details of that deal set in, and Pak rupee fell like nine pins last week. That signalled to the foreign investors that the gains they expect on investments will likely be largely clipped by losses due to exchange rate.
Since foreign investors had bet heavily on the banking sector, the selling which came from their end battered this sector more than others. According to AKD Securities, foreign investors sold stocks worth $ 11 million on September 24 which is the highest single day sell-off in 2.5 years, and according to industry sources, most of the selling was concentrated in banking stocks. This could be substantiated by the fact that BR-Banking index dropped off by 3.3 percent on that single day.
It is said that bad news comes in twos; but for the banking sector it apparently comes in threes. In this case, the second troublesome issue arose from the rupee’s plunge against the US dollar. On Thursday, the local currency fell to as low as Rs 110.6 in inter-bank trade during the day, before the SBP stepped in to salvage it back to under Rs 106 to the dollar.
That night, the representatives of the treasuries of all banks were called in by the regulator. Participants at the meeting who had gone in expecting a low down on the central bank’s plan for propping up the local currency instead received a verbal lashing before being informed that their audits will commence from the following day. So if you were wondering why your friends in treasury departments have been getting out of work late for the past three days, now you know.
The third dose, which was delivered by the SBP soon after, has ensured that banking sector analysts will also be at work till late in coming days as they tweak their models for the banks. The SBP circular issued on Friday informed the banks that they must now pay at least 6.5 percent return on all savings accounts, instead of the previous rate of six percent. That communiqué also informed that this rate will be changed as and when changes are announced for the SBP repo rate.
This brings us to BR Research’s take on SBP’s decision to raise the floor on returns on savings deposits. Getting a higher return on a savings account is all hunky-dory, but a primary consideration here should be the fact that savings accounts in Pakistan function more like current accounts. In most other banking systems, withdrawals from such accounts are limited, mandate prior notice or both.
Also consider that deposits in savings accounts constituted a hefty 40 percent of total banking deposits as of December 31, 2012. That means any hike in the cost of these funds causes a significant jump in the total cost of doing business for the banks. In this case, the SBP circular was a bill for another Rs 13.3 billion for the banks.
Ali Taufiq, head of equity strategy at Elixir Securities believe that this move by SBP will more than offset the positive impact of the rate hike on banks’ margins. According to initial estimates by various brokerage houses, this would shave off banking earnings by 6–12 percent. The government too, stands to lose from this situation, since the revenues it collects from the banks in the form of taxes will be thinner by a proportional amount.
Among the big five banks, MCB and HBL, having a saving deposit-to-total deposit ratio of 50 percent and 44 percent respectively as on June 2013, are expected to be the major victims. But the casualties among the mid-tier and small banks will be many and more serious; especially those already facing profitability issues and capital adequacy concerns. For a more detailed analysis of the impact on all banks, be sure to check these columns tomorrow.
Comments
Comments are closed.