Karachi, December 03, 2021 (PPI-OT): Higher yields to pinch adequacy ratios – final dividends may be influenced

Secondary market yields have increased by 180bps-335bps since Sep-2021, led by 150bps rise in interest rates, higher CPI reading of 11.5% for Nov-2021 and anticipation of another 100bps-150bps hike in Policy Rate on Dec 14, 2021.

While higher yields improve revenue streams of the banking sector, especially at the time when Investment portfolios are tilted towards floating instruments and shorter tenor government securities (T Bills and Floater PIBs: ~65% of Investment book), there is the other side to this coin as well.

With yields inching upwards, mark-to-market of the banking sector’s ‘Available-for-sale’ securities as at Dec-2021 end will result in a one-time dent on its unrealized gain or increase in its unrealized losses.

To recall, yields during 3QCY21 moved upwards by 30bps-90bps, where decline in Surplus on Revaluation of banks trimmed respective book values by 1%-3%. In the recent times, the last time the sector witnessed a similar quantum of spike in yields to 4QCY21 was during 4QCY18.

While magnitude of the impact on individual banks would depend on moving parts such as maturity of short-term investments and shift in investment avenues during the quarter, the general direction for the sector is likely to be similar.

The negative impact by mark-to-market would also likely trim adequacy ratios of the sector as at CY21 end. We believe banks with lower buffer to the minimum required ratios would once again re-evaluate the prospective cash dividend announcements for CY21, as witnessed during CY18-CY19.