THE banking sector, which has been facing tough regulations in a declining interest rate environment, has found a new avenue to bolster its profitability in the form of hefty investment in Pakistan Investment Bonds.

Similar to the huge participation in the last PIB auction, banks maintained their attitude to lock in higher yields on these bonds — significantly above T-bill yields and average lending rates — in the latest auction last week.

Against the revised target of Rs100bn, the government managed to raise Rs425bn. Three-year PIBs witnessed the greatest participation, mopping up Rs245bn at a cut-off yield of 12.09pc. The five-year and 10-year PIBs also managed to outperform their targets, raising Rs80bn and Rs99bn, respectively, with cut-off yields of 12.55pc and 12.90pc.

At the end of the third quarter of this fiscal, total investment in PIBs and Treasury bills stood at Rs2.4 trillion and Rs2.8 trillion, respectively. Of this, the banking sector held Rs1.5 trillion and Rs2.3 trillion respectively.

Potential for earnings growth: The weighted average yield on PIBs has not changed much since the last auction, and stands at 12.37pc. Nonetheless, it is much higher than the average lending rate, which stood at 11.18pc for January and February this calendar year, and the rate offered on T-bills, which often replicates the deposit rate.

We believe that the positive impact of this on the sector’s annualised earnings in CY14 would be to the tune of 6pc. This is in addition to the impact of the previous auction, at around 7-8pc.

And the extent of banks’ participation in PIBs will not only determine their profitability. Banks with high investment-to-deposit ratios (IDR) and lower PIB composition indicate higher room for investment re-profiling.

Our analysis suggests that in the listed conventional banking sector, Samba Bank, Faysal Bank and Bank Al Habib stand to benefit the most in terms of percentage change in earnings-per-share, provided they switch to PIBs after meeting their statutory liquidity ratios (SLR) by holding at least 15pc T-bills.

Other banks such as Standard Chartered, UBL and NIB, which have lower IDRs or already have higher proportion of PIBs, offer much lower earnings growth potential in this scenario.

Slowdown in SBP credit to govt and private sector credit: According to the latest numbers released by the SBP, the government continues to tilt towards the banking system for credit. During January-March 2014, net SBP lending to the government witnessed a decline of Rs388bn to Rs2.26 trillion.

On the other hand, credit from the banking sector went up by Rs303bn during the period to Rs3.8 trillion. This jump is primarily due to an increased appetite for government securities, i.e. PIBs. With the government undergoing another successful PIB auction, this tilt in government funding is expected to continue.

Meanwhile, private sector borrowing, which was once rising over optimism of the newly elected government, has lately witnessed a slowdown. After rising by Rs299bn in the first half of this fiscal year, the second half has so far seen a reversal of Rs32m in credit to private sector.

But it is important to note that this reversal is only cyclical, as the private sector typically draws down funds from banks in the September-December period, while retirement of loans initiates as the new calendar year begins.

During March, lending to the private sector rose by Rs17bn, mainly contributed by food and beverage sector, despite a sizeable retirement of loans of Rs19bn by the textile industry.

—Ameet Daulat & Hassan Raza, Taurus Securities



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