REP-300 Monetary Policy Statement: Surprising 25 bps hike 31-Jan-2019 AHL Research D: +92 21 32462742 UAN: +92 21 111 245 111, Ext: 322 F: +92 21 32420742 E: research@arifhabibltd.com Best Domestic Equity House Top 25 Companies Corporate Finance House of the Year Best Equity Research Analyst 1 www.jamapunji.pk
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 6.5-7.5%, 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
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 24.5-65.5 AKBL 27.5 15.7 56.2 MCB 37.1 9.8 49.7 HBL 38.0 15.6 46.6 UBL 39.6 20.5 50.3 BAFL 42.8 10.2 69.5 ABL 51.4 5.3 45.5 NBP 53.5 14.2 46.1 Average 39.3 11.4 53.7 Source: Company Financials, AHL Research Exhibit: Impact of 25bps Increase in Policy Rate Company Impact on 2019 EPS % of 2019 Earnings BOP 0.19 4.8% MCB 0.62 2.7% BAFL 0.21 2.3% ABL 0.31 2.1% HBL 0.28 1.7% AKBL 0.05 1.1% UBL 0.20 1.0% Source: PSX, AHL Research 3
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
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 (%) 7.0 6.0 5.3 5.8 5.0 4.0 3.6 3.8 3.7 4.1 4.1 4.5 4.0 3.0 2.6 2.0 1.0 - Source: MoF, AHL Research 5
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