Banks’ exposure limit raised to 30pc: Share business
By Shahid Iqbal
KARACHI, Oct 14: The State Bank on Friday raised the limit of banks’ exposure to the equity market up to 30 per cent and asked them to invest 10 per cent in future market. Both bankers and stock market analysts said that the decision would bring fresh investment with high sentiment in the stock market and would earn more profits to the banks.
“It has been decided to broaden the exposure in shares from the existing limit of 20 per cent and 35 per cent to 30 per cent and 45 per cent of the banks and DFIs/Islamic banks’ equity respectively,” said a circular issued by the SBP.
The circular says the aggregate exposures, at any point of time, should not exceed the level of 20 per cent and 35 per cent (for DFIs and Islamic banks) of their equity in direct equity investment in ready cash market and 10 per cent of their equity in future contracts.
“The 10 per cent exposure limit for future contracts will include both positions taken in futures and buying and selling,” said the circular.
Equity market analysts said that the decision to allow banks for 10 per cent exposure in future contracts would minimize the speculative element from the future contracts. The speculation in future contracts resulted in disaster in March this year when the stock market fell from its all-time peak of 10,300 to stay above 5,000 points, wiping out billions of rupees from the market capital.
The Securities and Exchange Commission of Pakistan (SECP) in the recent past had introduced Continuous Funding System (CFS) by replacing Badla (COT) to eliminate speculation from the future trading, but still the speculative element was significant.
“Now with banks’ higher exposure in the future contracts would strengthen the future market as more liquidity would be available,” said a brokerage house analyst.
The higher exposure will bring fresh investment to the equity market and the overall impact would boost the market sentiment. Total equity of the scheduled banks, as of June 30, 2005, was Rs221 billion.
“This means that another investment of about Rs21 billion would come to the equity market and the immediate impact would push the KSE-100 index to cross 9,000 points,” said Mohammad Sohail, Director Broking and Research at Jehangir Siddiqui brokerage house. The KSE-100 index on Friday stood at 8,638-point level. It gained 4.5 per cent or 450 points in last 10 days reflecting the rapid growth in the share business.
Analysts said that leveraging through futures on the rise with official CFS investment capped at Rs25 billion, investors were being forced to avail funding in the derivatives market. The ready future spreads were recorded at 33.2 per cent on Friday, up by 10.80pc from 22.4 per cent compared to the previous weekend. The strong future spreads is due to the continuous bullish trend in the market that has encouraged investors to take long position in the futures. Open interest on future contract also increased by Rs2.7 billon or 22 per cent during the week to Rs14.8 billion.
Bankers said that the higher exposure to the equity market would bring more profits to the banking sector. During the last 10 years the average return of the equity market was about 20 per cent and the banks had been getting advantage of their 20 per cent exposures. They said that the banks would be able to generate more money though it remained a risky investment.
“With higher exposure to the equity investment banks should improve their risk management strategy to avoid any kind of possible negative impact,” said a local banker.
Banking industry was already doing booming business and expected to increase its average profits by 90 per cent by the end of the current year. Share prices of major banks witnessed multiple increases. Last year banks made record advances of over Rs.320 billion to the private sector and higher credit lending was still continue to race with the economic growth and particularly industrial growth.
“Banks earn 8 to 8.7 per cent on treasury bills, 12 to 13 per cent on lending to private sector while earning from stocks could be 20 per cent and above,” said the banker.
