Karachi, November 23, 2021 (PPI-OT): Earlier Policy Rate hike bodes well for banks

The State Bank of Pakistan (SBP) has announced another 150bps hike in the Policy Rate, bringing the cumulative increase to 175bps and taking the Policy Rate up to 8.75%. This would result in the Minimum Deposit Rate (MDR) to go up to 7.25% w.e.f. 1st December.

While key reasons cited for the jump were (1) mounting Current Account Deficit and (2) rising inflation, the SBP simultaneously highlighted maintaining the end goal of mildly positive Real Interest Rate (RIR).

Hence, we maintain our Policy Rate assumption for CY22 at 9.75%, expecting another 100bps hike in Policy Rate in the coming quarters. Another 75bps to 100bps hike expectation is also reflected in the prevailing KIBOR where 6M KIBOR has now touched 10.03%, taking the 6M KIBOR to Policy Rate spread to 128bps.

We re-iterate the early movement in KIBOR would support asset re-pricing beforehand as 1QCY22 would witness a partial impact of more than 200bps increase in asset prices as compared to PR rate hike of 175bps so far.

The sooner than expected interest rate increase revises our earnings estimate for the sector. However, the coinciding drag in bond yields is expected to limit the impact on the sector’s book value with trimmed unrealized gains and/or increase in unrealized losses on the balance sheet.

While all banks would benefit from the ongoing monetary tightening, banks with a higher ratio of loan to deposits, zero-cost deposit mix, leverage and contribution from core income to bottom line would witness a higher impact than peers.

We highlight Meezan Bank (MEBL), Bank Alfalah Ltd (BAFL) and Bank Al Habib (BAHL) as some of the key outperformers; reiterating these stocks among our top picks from the sector. We re-iterate our Outperformance stance on the sector.