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Emerging trends in financial market

January 13, 2013

With real estate and gold offering lacklustre returns, stocks, government papers and National Savings Schemes have attracted huge investments.

Investment by companies and wealthy individuals in zero-risk treasury bills has been on the rise over the last one year.

Corporate investment in the government-guaranteed Pakistan Investment Bonds (PIBs) and Ijara Sukuk also remains steady.

On the other hand, the trend to hold on hard currencies for exchange rate benefits, that had become out of fashion, now catches up off and on as speculators manage to make some quick bucks whenever the rupee falters under external sector pressures.

Being alive to emerging realities, some banks offer ‘reasonable’ rates of return to depositors even in the face of declining interest rates. That explains, at least in part, a big 20 per cent annual increase in deposits of banks up to November 2012 against a rise of 13 per cent recorded in one year to November 2011.

Karachi Stock Exchange (KSE) 100-share index shot up to an all-time high. Stockbrokers identify better-than-projected results of a few sectors including food, cement and oil and gas plus renewed interest of foreign buyers in our market as two key factors that drove our stocks up. They say that after the recent improvement in export earnings, textile is likely to join the sectors that are expected to keep bullish sentiments alive.

“What is important to note is that people and companies now invest more in those shares that have been performing steadily over a period of time though they also rush on any other scrip that becomes hot (on its individual performance) or because of better performance of the sector it belongs to,” pointed out a former KSE chairman. “Corporates are becoming gradually more dominant in steering the market sentiments,” he opined.

On a parallel note, large investment in NSS in the last year can be seen as an indicator that individuals and private funds and corporates (minus banks) are in constant search of high-return modes of investment preferably in safer areas than in volatility-prone avenues.

It has also established that launching of short-term saving certificates of three-month, six-month and one-year was a good idea to attract higher investment in NSS. “It was a difficult job to get this scheme approved by the government because banks were dead against them but somehow better sense prevailed and now you can see the results,” boasted a senior official of Central Directorate of National Savings (CDNS).

Even after the recent slashing from January 1, 2013 these short-term savings certificates offer 8.85 per cent, 8.90 per cent and 8.95 per cent return respectively. “These rates of return are attractive enough to help us retain fast-paced inflows because the most recent T-bills rates are only slightly higher,” said another senior official of CDNS.

In the January 9 auction of T-bills, weighted average yields on three-month, six-month and one-year were around 9.18pc, 9.19pc and 9.28pc respectively.

Bankers say investment keeps trickling in from wealthy individuals and corporates in T-bills as the returns on these bills is higher than the bank deposits of comparable maturities.

The share of individual/corporate investment in overall stock of T-bills rose to 21.3 per cent in November 2012 from 17.8 per cent in December 2011. Since the overall stock of T-bills itself expanded very fast to Rs2340 billion in November 2012 from Rs1264 billion in December 2011, the share of corporate/individual investment in them also skyrocketed to Rs632 billion from Rs274 billion.

Whereas the increase in total stocks of T-bills reflected the fact that banks continued to use the government papers for parking the bulk of employable funds, an unusually high growth in holding of T-bills by corporates and individuals is a proof of growing importance of zero-risk modes of investment among investors. Weighted average yields on three-month, six-month and one-year T-bills ranged between 11.67 and 11.90 per cent as of December 2012. By November 2012 the range of yields slipped gradually to 9.28-9.38 per cent.

“But what possibly continued to fuel corporate and individual investors’ interest in T-bills was that effective yields became rather more attractive,” said head of treasury of a large local bank in an apparent reference to declining rate of inflation. Average CPI inflation in December stood around 9.7 per cent. It continued moving upwards till May 2012 when it touched a high mark of 12.3 per cent but then began to fall again after easing of monetary policy and finally fell to 6.9 per cent in November 2012.

“So, weighted average yields on T-bills ranging between 9.28-9.38 per cent (as of November 2012) offered a real rate of return of 2.38-2.48 per cent if you discount inflation. That’s why we saw corporate and individual investment in T-bills growing. .

In the light of the foregoing discussion, banks seem to have been exposed to a big challenge in 2013 as far as deposit mobilisation is concerned.

If they make deep cuts in deposit rates to keep banking spread intact they will lose a large part of non-captive bank deposits (or the deposits that come to bank not under compulsion of official and business transactions but are offered to banks or retained with a certain bank with an obvious consideration of returns). And if they don’t do this in a declining interest rates environment their interest-income would be affected.

“Those banks that are ready to balance the two competing challenges would be the ones that have already been offering ‘reasonable rates of return’ to their depositors.

They would now have more space than other banks to cut deposit rates without taking a big hit on interest income,” said president of a mid-sized local bank.

“That quite a number of banks fall in such category can be recognised by the fact that quite contrary to public perception banks made deeper cuts in their lending rates in the last year as compared to their deposit rates,” said head of money market at a large local bank citing recent SBP data.

The data show that fresh average lending rate of all banks (excluding zero mark-up and interbank transactions) declined to 11.57 per cent in November 2012 from 14.12 per cent (reflecting impact of SBP’s monetary easing). But average deposit rate (excluding zero mark up and interbank transactions) slipped less swiftly to 7.82 per cent from 8.77 per cent in November 2011.