Banks may wit­ness de­cline in PIBs' mar­gin in 2016

The Pak Banker - - COM­PA­NIES/BOSS - Muham­mad Yasir

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.

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