The allure of Pakistani investment bonds – Journal


THE banking sector, which has faced tight regulations in an environment of falling interest rates, has found a new way to strengthen its profitability in the form of large investments in Pakistani investment bonds.

Like the huge turnout at the last GDP auction, banks have maintained their stance to lock in higher yields on these bonds – significantly higher than Treasury bill yields and average lending rates – when the last auction last week.

Against the revised target of 100 billion rupees, the government managed to raise 425 billion rupees. Three-year GDPs saw the biggest turnout, wiping out Rs245bn at a cutoff yield of 12.09bp. The five-year and 10-year GDPs also managed to outperform their targets, increasing by 80 billion rupees and 99 billion rupees respectively, with cut-off yields of 12.55 bp and 12.90 bp.

At the end of the third quarter of this fiscal year, total investments in BIPs and Treasury bills amounted to 2.4 trillion rupees and 2.8 trillion rupees, respectively. Of this amount, the banking sector held 1.5 trillion rupees and 2.3 trillion rupees respectively.

Potential for profit growth: the weighted average return on GDP has not changed much since the last auction and stands at 12.37 pc. Nonetheless, it is much higher than the average lending rate, which stood at 11.18% for January and February of this calendar year, and the offered rate on treasury bills, which often mimics the deposit rate.

We believe that the positive impact of this on the industry’s annualized profits during CY14 would be in the order of 6pc. This is in addition to the impact of the previous auction, at around 7-8pc.

And the extent of banks’ participation in GDPs will not only determine their profitability. Banks with high investment-to-deposit ratios (IDRs) and a lower GDP composition indicate greater leeway for reprofiling investments.

Our analysis suggests that in the traditional listed banking sector, Samba Bank, Faysal Bank and Bank Al Habib are the most advantageous in terms of percentage change in earnings per share, provided they move to GDP after reaching their liquidity ratios. statutory (SLR) by holding at least 15 pc of treasury bills.

Other banks such as Standard Chartered, UBL and NIB, which have lower IDRs or already have a higher proportion of GDP, offer much lower profit growth potential in this scenario.

Slowdown in SBP credit to government and private sector: According to the latest figures released by the SBP, the government continues to look to the banking system for credit. During January-March 2014, SBP’s net lending to government declined from Rs 388 billion to Rs 2.26 billion.

On the other hand, the credit of the banking sector increased by 303 billion rupees during the period to reach 3.8 trillion rupees. This jump is mainly due to an increased appetite for government securities, ie GDPs. With the government undergoing another successful GDP auction, this tilt in public funding is expected to continue.

Meanwhile, private sector borrowing, which once rose at the expense of the optimism of the newly elected government, has recently slowed. After increasing by 299 billion rupees in the first half of this fiscal year, the second half has so far seen a 32 million rupee reversal in credit to the private sector.

But it’s important to note that this reversal is only cyclical, as the private sector typically withdraws funds from banks between September and December, while loan repayments begin at the start of the new calendar year.

During the month of March, loans to the private sector increased by 17 billion rupees, mainly owed to the food and drink sector, despite a large withdrawal of loans of 19 billion rupees by the textile industry.

—Ameet Daulat and Hassan Raza, Taurus Securities


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