JS Securities Limited – Morning Briefing

Karachi, June 20, 2018 (PPI-OT): Banks: Yields on PIBs remain on upward trajectory

Yields for 3-YR, 5-YR and 10-YR Pakistan Investment Bonds (PIBs) increased by 45-95bps during 1Q2018, where JS Banking Universe witnessed attrition of Rs750mn-6,200mn on its unrealized gains on PIBs/Federal Government Securities.

Currently, an average of 35% of Investment book is parked in PIBs, which sums up to 20% of total Deposits.

In addition, more than 60% of the PIB investments have been categorized under ‘Available-for-Sale’ (AFS).

With only 15bps change in 3-YR yields during YTD 2Q2018, we expect limited erosion in Surplus on Revaluation of assets for 2Q2018, leading to partially netting of the positive impact of higher benchmark rate of the banking sector’s profitability.

Interest rate hike leads to higher yields
We believe investors will be watchful for banks with higher investments parked in longer tenor government papers, for the impact of ongoing rising yields on their respective book values. Yields for 3-YR, 5-YR and 10-YR Pakistan Investment Bonds (PIBs) increased by 45-95bps during 1Q2018, where the Policy Rate was increased by 25bps. During the same period, JS Banking Universe witnessed attrition of Rs750mn-6,200mn on its unrealized gains (including one-time realized capital gains during the quarter) on PIBs/Federal Government Securities, which account for 1-6% of their respective book values.

One-third of investments in PIBs

Currently, an average of 35% of Investment book is parked in PIBs, which sums up to 20% of total Deposits. In addition, more than 60% of the PIB investments have been categorized under ‘Available-for-Sale’ (AFS). Out of the data available for our sample coverage, United Bank Ltd (UBL), Habib Metropolitan Bank (HMB) and Askari Bank Ltd (AKBL) have witnessed a higher decline in unrealized gains than peers. As at 1Q2018, ~50% of the aforementioned banks’ investment books consisted of PIB Investments, which in the case of HMB and AKBL are mostly parked under AFS.

Impact likely to continue in 2Q

With only 15bps change in 3-YR yields during YTD 2Q2018, we expect limited erosion in Surplus on Revaluation of assets, leading to partially netting of the positive impact of higher benchmark rate of the banking sector’s profitability. To recall, Policy Rate during 2Q2018 was increased by 50bps. However, 2Q profitability will witness a higher increase in cost of funds (75bps, 1H2018) on account of immediate effect of interest rate change in MDR, while yield on earning assets will increase by 25bps (1Q2018) due to a lag in loan price adjustment.

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