Karachi, November 09, 2021 (PPI-OT): KIBOR – Policy Rate spread touches 162bps

Following the commencement of monetary tightening in Sep-2021 and higher inflation readings, the market is now anticipating a larger quantum of Policy Rate increase in the upcoming Monetary Policy announcement that is scheduled this month.

Where recent auctions of shorter and longer tenor papers witnessed partial rejection over higher yields, the secondary market already reflects prospects of 50-100bps increase in the upcoming Monetary Policy announcement. A similar view is also shared by the treasury desks of many banks.

Simultaneously, KIBOR rates have also witnessed a sharp rise in the past one month, where the spread between the 6M KIBOR and the Policy Rate has touched a high of 162bps, increasing from its average spread of ~50bps.

For the banking sector, the steep escalation in KIBOR signals an earlier loan re-pricing scenario as loans of 3M tenors that are scheduled to be re-priced in 1QCY22 will be done so with a hike of ~150bps.

Hence, our previous forecast of NIMs contraction in the initial quarters of the monetary tightening cycle now changes to sequential rise in core income from here onward.

While all banks would benefit by this (refer to slide 2 for asset and deposit break-up), we highlight Meezan Bank (MEBL), Bank Alfalah Ltd (BAFL) and Habib Metropolitan Bank (HMB) as some of the key outperformers as they exhibit higher sensitivity from movement in KIBOR; reiterating these stocks as our top picks from the sector.