Banks may witness decline in PIBs' margin in 2016
A majority of commercial banks having posted a handsome growth in capital gains the outgoing year of 2015 may see variant drop in unrealized capital gains subsequently significant maturity of long-term Pakistan Investment Bonds (PIBs) in 2016.
According to statistics, PIBs worth of Rs 1.2 trillion are due to mature in July 2016 as against total outstanding PIBs of Rs4.3 trillion hence the contribution of their margins are likely to slash after second half of 2016.
It is worth mentioning here that PIB holdings by listed banks increased to Rs3 trillion in 2015 constituting overall 48% of investments of banks versus Rs2.4 trillion (50% of investment) in 2014 and Rs704 million ( 18% of investments) in 2013.
Accordingly, the unrealized gains (revaluation surplus) increased to Rs206 billion at the end of 2015 from Rs121 billion in 2013 (Rs208 billion in 2014) as banks started accumulating PIBs since then and interest rates were reduced by 400bps during last 4-year to 6 percent. Consequently, banks realized total capital gains worth of Rs56 billion mainly from PIBs, which were up 85% YoY in 2015. This coupled with higher Net Interest Income (NII) drove profitability of listed banks in 2015, up 14% YoY to Rs175 billion. Since bond prices converge to its face value approaching its maturity, it is estimated that unrealized gains to go down sharply in 2016, assuming State Bank of Pakistan (SBP) maintains its policy rate at 6% in upcoming monetary policy.
However, big banks such as Habib Bank (HBL) and United Bank (UBL) are anticipated to be lower affected from upcoming maturity as around 15-17% of their outstanding PIB holdings will mature in 2016, significantly lower than 28% of total PIBs maturing in 2016 for the industry.
For HBL, total worth of around Rs63 billion which is 15 percent of PIBs are anticipated to mature in 2016. On the other hand, around Rs82 billion of 17% of PIBs are expected to mature for UBL. UBL also has one of the highest unrealized gains to market capitalization ratio in the industry.
Whereas, National Bank (NBP) and MCB bank (MCB), maturities of PIB in 2016 are around 30% and 36% of their total PIB portfolio, which may impact on their margins of PIBs in the second half.
In 2015, HBL and UBL booked capital gains of Rs11 billion and Rs3 billion in 2015 whereas MCB Bank realized Rs3.6 billion capital gains in 2015 whereas NBP reported capital gains of Rs12.2 billion.
Different banks having investments in PIBs may also face decline in capital gains including Allied Bank (ABL), Bank Alfalah (BAFL) and Bank Al Habib (BAHL).
With expected fall in capital gains and reinvestment risk once high yielding PIBs mature, earnings of banks during 2016 are anticipated to remain under pressure which may push banks to find out alternative avenues of investments to maintain their bottomline towards upward trajectory.
Despite this one off hit on bank's earnings, it is forecast that banks may manage to tap on opportunities of cheap multiples in the local market with strong fundamentals and improved macro outlook will keep investor's confidence in Pakistan banks intact. Furthermore, volumetric deposit growth and improving deposit mix are expected to compensate an expected hit on banks' earnings which may help maintain growth in the profitability of commercial banks in 2016.