Monetary Policy Statement: Surprising 25 bps hike

Transcription

1 REP-300 Monetary Policy Statement: Surprising 25 bps hike 31-Jan-2019 AHL Research D: UAN: , Ext: 322 F: E: Best Domestic Equity House Top 25 Companies Corporate Finance House of the Year Best Equity Research Analyst 1

2 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 SBP Increases Policy Rate by 25bps to 10.25% The State Bank of Pakistan (SBP) increased the policy rate by 25 basis points (bps) from 10% to 10.25% in its latest Monetary Policy Statement (MPS) announced today. Moreover, the Reverse Repo (ceiling) and Repo rates have been effectively set at 10.75% and 8.75%, respectively. Key Takeaways from the Monetary Policy Statement Stabilization measures implemented during past 12 months are taking hold Visible signs of deceleration in domestic demand Increase in financial inflows from friendly countries reducing pressures on country s external accounts CPI inflation for 1HFY19 at 6% is much higher than 3.8% observed for the same period last year. Inflation moderated during past two months due to sharp fall in prices of perishable food items and downward adjustment of petroleum prices Core inflation registered an increase of 8.4% YoY (54-month high) in Dec-18 (5.5% in Dec-17, 12 Month Average 7.1%), showing broad based inflation in the economy Fiscal Deficit for 1HFY19 is expected to be higher than last year, Fiscal consolidation remains a challenge The Current Account Deficit recorded a muted 4% YoY reduction to USD 8 billion during 1HFY19 SBP s projected headline inflation for FY19 is expected to remain between %, which is above the govt. annual target of 6%, whereas GDP growth rate is projected at 4% for FY19 Lower output from agriculture and Large Scale Manufacturing is expected to contribute to the slowdown in GDP growth The increase in the policy rate by 25bps is attributable primarily to the following factors: Persistently high fiscal deficit (1.4% of GDP for 1QFY19, highest in past 7 years) Stubbornly high Current Account deficit (USD8 bn or 5.4% of GDP for 1HFY19) Government s increased reliance on SBP for budgetary borrowing (PKR3.7 trn for 1 st Jul- 18 th Jan 2019, up by 4.3x) Presence of underlying inflationary pressures (Core inflation at 8.4% for Dec-18) Exhibit: Historical Real Interest Rate Real Interest Rate (RHS) Policy Rate CPI 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Source: SBP, AHL Research 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2

3 Beneficial for Banks Earnings We view that the banking sector earnings will benefit from the latest 25bps hike in the policy rate. We reiterate that banks with a low PIB base and high Current Accounts proportion are to be amongst the major beneficiaries. Banks topline with greater exposure towards advances would also benefit more from higher rates on lending. Low PIB base and higher exposure towards short-term securities i.e., MTBs is helpful for banks as repricing of assets would fuel investment yields. We also highlight that banks with a high PIB exposure may see unrealized marked-to-market losses, which will affect book values. A high current accounts base would mute the impact of rising rates on cost of deposits. We highlight BOP to benefit the most from rising rates owing to a very healthy exposure towards advances coupled with the fact that there are negligible PIBs on its investment book. We also highlight BAFL to be a major beneficiary from the AHL banking universe, with higher than average universe current accounts proportion (43% against 39%), lower than average PIB proportions (10.2% against 11.4%) and stellar ADR of 70%, second only to FABL in the industry (AHL universe average of 53.7%). Exhibit: Current Accounts/Total Deposits and PIBs/Total Assets (%) Current Accounts Proportion PIB / Total Assets ADR (net) BOP AKBL MCB HBL UBL BAFL ABL NBP Average Source: Company Financials, AHL Research Exhibit: Impact of 25bps Increase in Policy Rate Company Impact on 2019 EPS % of 2019 Earnings BOP % MCB % BAFL % ABL % HBL % AKBL % UBL % Source: PSX, AHL Research 3

4 Negative bearings for others Levered companies to face the incremental financial cost Interest rate hike has negative bearings for companies with outstanding debt balances (short and / or long). Post the latest monetary policy decision, earnings of companies with higher financial leverage positions will become subject to rise in finance costs. As per recent accounts, we highlight DGKC, FFBL, PSO, MLCF, ENGRO, ASTL, NCL and NML to be major losers given the higher quantum of debt in their capital structure. Moreover, companies with high dividend yield (DY) may also struggle in the rising interest rate scenario amid lower relative appeal as compared to return on bank deposits. Exhibit: Impact of 25bps Increase in Policy Rate Company D/E (x) Impact on 2019 EPS % of 2019 Earnings DGKC 0.46 (0.14) -1.95% FFBL 2.73 (0.06) -1.73% PSO 1.03 (0.54) -1.72% MLCF 0.73 (0.07) -1.51% ENGRO 0.67 (0.41) -1.10% ASTL 0.82 (0.07) -1.09% NCL 1.52 (0.06) -0.53% NML 0.30 (0.08) -0.49% ACPL 0.29 (0.06) -0.42% EFERT 0.62 (0.04) -0.30% FFC 0.81 (0.03) -0.28% Source: Company Financials, AHL Research 4

5 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19F Outlook We believe the SBP might increase the policy rate by another 25bps during CY19 contingent to finalization of the IMF program in next couple of months. The contractionary monetary policy is required to curb growing inflationary pressure and imports via compression of domestic demand. Moreover, international oil and commodity prices are expected to play a vital role as stabilizing/increasing int l oil prices are expected to be negative for inflation and balance of payment. Exhibit: Historical GDP Growth (%) Source: MoF, AHL Research 5

6 Analyst Certification: The research analyst(s) is (are) principally responsible for preparation of this report. The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject security (ies) or sector (or economy), and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. In addition, we currently do not have any interest (financial or otherwise) in the subject security (ies). Furthermore, compensation of the Analyst(s) is not determined nor based on any other service(s) that AHL is offering. Analyst(s) are not subject to the supervision or control of any employee of AHL s non-research departments, and no personal engaged in providing non-research services have any influence or control over the compensatory evaluation of the Analyst(s). Equity Research Ratings Arif Habib Limited (AHL) uses three rating categories, depending upon return form current market price, with Target period as December 2018 for Target Price. In addition, return excludes all type of taxes. For more details kindly refer the following table; Rating BUY HOLD SELL Description Upside* of subject security(ies) is more than +10% from last closing of market price(s) Upside* of subject security(ies) is between -10% and +10% from last closing of market price(s) Upside* of subject security(ies) is less than -10% from last closing of market price(s) * Upside for Power Generation Companies (Ex. KEL) is upside plus dividend yield. Equity Valuation Methodology AHL Research uses the following valuation technique(s) to arrive at the period end target prices; Discounted Cash Flow (DCF) Dividend Discount Model (DDM) Sum of the Parts (SoTP) Justified Price to Book (JPTB) Reserved Base Valuation (RBV) Risks The following risks may potentially impact our valuations of subject security (ies); Market risk Interest Rate Risk Exchange Rate (Currency) Risk Disclaimer: This document has been prepared by Research analysts at Arif Habib Limited (AHL). This document does not constitute an offer or solicitation for the purchase or sale of any security. This publication is intended only for distribution to the clients of the Company who are assumed to be reasonably sophisticated investors that understand the risks involved in investing in equity securities. The information contained herein is based upon publicly available data and sources believed to be reliable. While every care was taken to ensure accuracy and objectivity, AHL does not represent that it is accurate or complete and it should not be relied on as such. In particular, the report takes no account of the investment objectives, financial situation and particular needs of investors. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. AHL reserves the right to make modifications and alterations to this statement as may be required from time to time. However, AHL is under no obligation to update or keep the information current. AHL is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Past performance is not necessarily a guide to future performance. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for any investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his or her own advisors to determine the merits and risks of such investment. AHL or any of its affiliates shall not be in any way responsible for any loss or damage that may be arise to any person from any inadvertent error in the information contained in this report. Disclosure required under Research Analyst Regulations, 2015: In order to avoid any conflict of interest, we hereby disclosed that; Arif Habib Limited (AHL) has shareholding in EFERT, NBP, NCL, SNGP, and BOP 6