Karachi: Based on leading SPI, AKD projects that Nov’11 CPI will clock in at 10.6%YoY/O.7%MoM.
According to AKD Securities, this implies that 5MFY11 average CPI will register at 11.2%, still about 75bps below the Discount Rate. As a result, AKD believes the SBP could reduce the DR by another 50bps to 11.5% in the Nov 30’11 monetary policy. In addition, while the last T-bill auction suggests there is a growing minority (12% of bids in 3m) that believes interest rates have already troughed, private sector credit off-take remains weak (growth C 5%YoY) which could lead force the SBP’s hand. However, risks remain on the external front where, the 4MFY12 Current Account (CA) deficit has widened by 187%YoV to US$1,555mn, and the DR is already at par with AKD’s full-year FY12F CPI forecast. Moreover, considering that inflation is shaping up for an increase in 1HCV12 and that Pakistan may not be able to remain outside a formal IMF program beyond the near-term, AKD believes the `window of opportunity’ for monetary easing may not extend beyond the next few monetary policies.
Inflation & DR Projections: Based on leading SPI AKD Securities project that Nov11 CPI will dock in at 1O.6%YoY/O.7%MoM. As a result, AKD believes the SBP could reduce the DR by 50bps to 11.5% on Nov 30’11. In this regard, while the CA has depicted weakness (deficit widened by 187%YoY in 4MFY12), the DR is at par with AKD’s projected FY12F CPI, and structural deficiencies remain, anaemic private sector credit off-take (still <5%YoY growth) could force the SBP’s hand in continuing with monetary easing.
T-bill auction: Bids of PkR185bn (realized value) were received in the Nov 16’11 T-bill auction (target: PkR110bn). While the majority of bids were received in the 6m and l2m maturities, the 3m paper did attract ~12% of total bids which suggests a section of the money market believes interest rates have already troughed. That said, more than 80% of bids in the 3m maturity were accepted (as opposed to accepted/bid ratio of 55% for the 6m and 12m papers). AKD takes this as a signal for continuing DR cuts.
Verdict: Although the SBF has reduced the DR by a cumulative 2OObpsFYTD, underlying economic activity remains sluggish. Considering that inflation s shaping up for an increase in 1HCY12 and that Pakistan may not be able to remain outside a formal IMF program beyond the near-term, AKD Securities believes the SBF will avail this window of opportunity’ and cut the DR by 50bps to 115% on Nov 30’11. Banks (particularly MCB) will likely face steep NIM compression in CY12F but AKD believes BAFL, UBL and NBP (trading view only) offer value. BAFL in particular has started to move recently with strong volumes where AKD’s target price is PkR1 3.75/share.