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AKD Quotidian about —: Lower bond yields despite above-expected CPI

Karachi: Oct’11 CPI registered at 10.96%YoY/1.44%MoM, slightly higher than AKD’s expectations of 10.5%YoY/1.0%MoM. As a result, 4MFY12 avg.

According to AKD Securities, CPI has registered at 11.34%.YoY which is more than 50bps lower than the Discount Rate. Core inflation for Oct’11 was recorded at 10.4%YoY. In connection to this, yesterday’s T-bill auction attracted bids of PkR42lbn (realized value) out of which bids of PkR268bn were accepted (target: PkR215bn). As with previous auctions, the bid pattern remained concentrated in the 12m maturity (59% of bids) and the 6m maturity (37% of bids). Weighted average yields across the 3m-12m maturities were recorded at 11.78%, 11.79% and 11.84%, down 9bps, 11bps and 8bps respectively. Considering that 1) real interest rates are still +ve, 2) primary dealers continue to favour longer term maturities, 3) private sector credit off take remains anaemic and 4) bond yields continue to ease despite imminent conversion of circular debt exposure, AKD Securities believes monetary easing will continue and that the SBP will reduce the DR by 50bps to 11.5% in the Nov’11 MPS. That said, AKD flags this month’s Pakistan-IMF talks as the key event to track in the near-term.

 

Nov 02 T-Bill Auction Result
Realized
PKRbn  Bids Accepted  Weighted Avg Yield  Chg (bps)
3M  16.0  7.5  11.78% -9
6M 155.9  84.1 11.79% -11
12M 249.2 176.3 11.85%  -8
Total 421.1  267.9
Source: Bloomberg & SBP

 

Lower bond yields: AKD Securities understands that banks have received instructions from the MoE to convert outstanding circular debt/commodity exposure (-PkR380bn) into GoP bonds (50% in byr PIBs and 50% in 1yr T-bills). Barring unforeseen delays, this transaction could take place tomorrow. In this regard, AKD understands that T-bill pricing will be based on yesterday’s yields. Within this backdrop, AKD views declining T-bill yields as strong money market expectations of continued monetary easing, particularly in the near- term. While the yield on converted circular debt will be lower (earlier pricing up to 6M KIBOR +20%), banks will benefit in terms of recognition of suspended mark-up where the larger banks should be key beneficiaries. In their last analyst calls, NBP indicated suspended mark-up of PkR2bn (EPS impact: PkR0.77) while MCB has indicated suspended mark-up amounts of PkR700mn (EPS impact: PkR0.54). In addition, banks will benefit from a reduction in their Non Performing Loans and consequent improvement in asset quality ratios. Moreover, the energy chain will benefit through enhanced liquidity. This is because banks’ exposure will now be classified as lending to GoP instead of lending to power sector. As such, banking credit lines to the power/energy sector, which had earlier been filled, may now be reopened for fresh lending. Within banks, AKD Securities reiterates its liking for NBP, MCB, UBL and BAFL while PSO is AKD’s top pick among OMCs.

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