Karachi: In a surprise development, yesterday’s T-bill auction was scrapped after 1) bids were priced up to 23bps above the previous auction’s weighted-average yields and 2) realized bids clocked in at just PkR42.6bn against the target of PkR100bn.
The last time a T-bill auction was completely scrapped was back in Jul’10. In AKD Securities’ view, yesterday’s auction result emits mixed signals where banks appear to believe interest rates have bottomed but are not yet loading up on short-term maturities (3m).
In this regard, AKD Securities believes systemic liquidity remains ample in view of sizeable maturities, continuing strong sequential remittances and seasonally high deposit growth (cotton harvest).
A change in strategy for increased private sector lending offers an explanation for low bids, but channel checks lead us to believe meaningful credit off-take is unlikely in a double-digit interest rate environment and continuing energy shortages. Going forward, AKD Securities believes a swift decline in interest rates is unlikely in the near-to- medium term which eases margin compression concerns for Banks.
In this regard, the recent sell-off has opened up attractive investment opportunities in MCB (TP: PkR180/share; D/Y: 9.7%) and NBP (TP: PkR54/share; D/Y: 16.1%).
|Previous Weighted||Offered Yields|
|Term||Realized Bids (PKR bn)||Avg Yield (%)||(%)|
Mixed signals: Low participation in T-bills (even in the 3m maturity) within the backdrop of lackluster private sector credit off-take sends mixed signals, particularly as liquidity shortage appears unlikely (stable O/N rates).
Considering a stubborn high fiscal deficit (>5.5% of GDP), AKD Securities believes the GoP will continue to remain the largest incremental borrower with meaningful private sector credit off-take unlikely in a double-digit interest rate environment and continuing energy shortages.
In this regard, while AKD Securities believes the SBP will have a narrow window to cut interest rates by up to 100bps in 2HFY12 (currency depreciation is a key risk), further cuts in the DR beyond 11% appear unlikely in the near-to-medium term, particularly if Pakistan re-enters a formal IMF program. As such, monetary tightening in late 2012/early 2013 cannot be ruled out.
Margins stability & Attractive valuations: AKD Securities sees Banks primarily focusing on public sector lending in 2012, which should continue to alleviate asset quality metrics, while managing to stave off pressure on margins. Top picks at current levels include MOB (TP: PkR180/share; D/Y: 9.7%) and NBP (TP: PkR54/share; D/Y: 14.8%) while UBL (TP: PkR70/share) and BAFL (IP: PkR13.75/share) also appear attractive.