The PIB bonanza continues

Banks’ treasury managers must be planning for expensive vacations, as the balance sheets of most banks have been occupied by government papers, especially the longer tenure PIBs. The change of heart in the past six months has been extraordinary, with the government fetching a mammoth Rs1.9 trillion in PIBs alone in 2H FY14.
The asset composition of banks is surely going to take a big swing as they have almost tripled their PIB portfolio over December 2013. Surely, the ADRs are going to take a sizeable dip-–it would be interesting to see how the private sector lending has fared when the numbers are out. But the banks would not mind whichever way the ratios go, as their profitability is all set to jack up-–on the back of more than decent returns on risk-free government papers, that too on 3-year papers, with maturity of just a little over two years.
The government accepted Rs217 billion in the auction last week, 86 percent of which was expectedly in 3-year papers. The cut-off yields largely remained similar to the previous auction, with the exception of slight increase in 10-year papers, which now clocks over 13 percent. The market participants BR research spoke to are all confident about economic conditions and opine that interest rates are expected to go south in the near term-–though they might reconsider their views after reading how Iraq’s civil war can inflate prices in Pakistan. And the banks may also feel the pressure should the rates instead go up as a result.
Anyway, the logic behind borrowing at such hefty rates with minimal rollover risk remains a mystery though. Perhaps the IMF’s directives to have a long-term maturity profile have propelled the government to continue borrowing at these rates. The banks would surely keep an eye on the interest rate cycle, and many expect capital gains to be booked, if and when the rates do come down.
The yield differential between T-bills and PIBs continue to widen as rates on PIBs are too lucrative to be ignored. The maturity profile has continued its shift. Banks are having a merry time. Just how smart is the government’s call to borrow at these rates is a question that begs an answer though.