SBP increased the policy rate by 150bps to 12.25% from 10.75% in the MPS announced on Monday.
1. Higher recent MoM core and head line inflation,
2. Recent Exchange Rate Depreciation,
3. Elevated fiscal deficit and increased monetization and,
4. Potential adjustments in utility (gas and electricity) tariffs.
Pakistan has reached a staff level agreement with the IMF for a 39 month EFF worth USD 6 billion, with an intention to restore macroeconomic stability and is expected to unlock additional financing
· PKR has depreciated by 5.9% since last MPC meeting to close at PKR 149.65/USD.
· GDP growth is expected to slow down during FY19, improvement expected during FY20
· CA Deficit reduced by 29% during 9MFY19 to reach USD 9.6bn primarily driven by import compression and improvement in remittances. Non-oil trade deficit declined from USD 13.7 billion to USD 11.0 billion during the same period.
· SBP reserves are still at an inadequate level USD 8.8 billion which is below 3 month import cover
· Recent movement in exchange rate reflects continuing resolution of accumulated imbalances and some role of demand and supply factors
· SBP would continue to monitor exchange rate movement and would act to reduce unwarranted volatility in the exchange rate
· Fiscal Deficit is expected to remain higher than last year. Government has borrowed PKR 4.8 trn from SBP. Monetisation of the deficit is high
· Inflation for 10MFY19 has remained 7%, and is expected to remain in the range of 6.5-7.5% for FY19. FY20 inflation is expected to be considerably higher than this range.
· Upside risks to inflation continue to be posed from increase in taxes in the upcoming budget, higher utility tariffs and higher international oil prices
Beneficial for Banks Earnings
· Analysts view that the banking sector earnings will benefit from the latest 150 bps 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 re-pricing 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.
· Analysts highlight BAFL and BOP to be the prime beneficiaries from the rate hike owing to a low PIB base and healthy deposit mobilization towards advances. Amongst large banks we highlight HBL as a major beneficiary as it has aggressively increased its exposure towards advances throughout CY18 with ADR settling at 51% at the end of the year vis-à-vis 43% as at CY17.
Negative bearings in general
Levered companies to face the incremental financial cost
· Interest rate hike has negative bearings for companies with outstanding debt balances.
· 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, analysts highlight DGKC, MLCF, FFBL, PSO, NCL, PSMC, NML and ACPL, 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.