Karachi, May 02, 2011 (PPI): Latest credit off-take data does not indicate any discernable improvement in private sector lending despite the FYTD cumulative 200bps cut in the Discount Rate.
According to AKD Securities, white scheduled banks’ credit to the public sector (excluding quasi-sovereign entities) has grown by 93%YoY/33%FYTD on Nov 30′ 11, loans to the private sector have increased by just 3%YoY and are flat over the last five months. While this data suggests that the SBP could prioritize growth over inflation should the opportunity arise, higher required yields in the Dec 14,’ll T-bill auction (scrapped) and the 20bps-40bps increase in cut off yields in yesterday’s PIB auction indicate the money market believes interest rates have already bottomed.
This shift in sentiment has cemented post the Nov’11 monetary policy whereby the Discount Rate was kept unchanged at 12%. While AKD Securities believes a narrow window of opportunity to cut interest rates will arise in 2HFY12, emergent risks to Balance of Payments (PkR/US$ parity has crossed the 90 mark) suggest the SBP may now adopt a more cautious stance going forward.
Credit Off-take Trends (Nov’11)
|SBP credit to Public Sector||-1%||-14%||6%|
|Banks’ credit to Public Sector||19%||93%||33%|
|Credit to PSEs||-63%||-59%||-60%|
|Credit to Private Sector||2%||3.2%||0.0%|
|Credit to Agriculture||1%||10%||5%|
|Credit to Manufacturing||4%||4%||-1%|
|Credit to Utilities||4%||32%||8%|
Conversion of circular debt exposure into GoP securities
Crowding out to continue: Although the FYTD cumulative 200bps cuts in the DR were designed to spur private sector credit off-take, there has been so discernable improvement in the latter. Besides continuing energy shortages, AKD Securities believes expectations that the interest rate downcycle is over are leading to a continued risk-averse stance by banks.
While a narrow window of opportunity exists to cut interest rates in 2HFY12 (by 100bps at best), nascent pressures on the Balance of Payments front and a potential return to a formal IMF program may lead to a more hawkish stance by the SBP over the intermediate term.
MCB looking good: If interest rates cut are ruled out, the SBP could potentially look to enhance the floor on savings deposits so as to crimp banks’ margins and force greater volumetric credit growth. That said, considering the SBPs recent supportive stance (e.g. enhanced FSV benefit), AKD Securities attaches low probability to materialization of regulatory risks, at least in the near-to-medium term. Assuming interest rates have bottomed out, AKD Securities flags margin-focused MCB (CY12F P/B: 1.13x, PER: 5.3x, D/Y: 10%) as a key beneficiary where AKD Securities’ target price of PkR180/share offers upside of 29%. Buy!